1. Basic Concepts and Defintions

1. What amounts of which goods should be produced?

2. How should they be produced and by whom?

3. How are the goods distributed to the members of society?

Arbeit Labor

Kapital Capital

Boden Land

Bildung Human Capital

occurs when we make a choice that benefits us, but to acquire that benefit, we have to give up something of value.

Equity = fair distribution of goods in a society

Efficiency= Maximization of output from limited ressources

Government

Producers

Household

Microeconomics:

Microeconomics is the study of decisions of individual economic subjects (household, firms) and their interactions in the marketplace.

e.g.: Which combination of products maximizes profits?

What is the impact o a tax increase on consumption of an individual?

Macroeconomics:

Macroeconomics is the study of economic phenomena in the economy as a whole on an aggreggrate level of many economic subjects (unemployment, inflation and economic growth)

e.g.: What is the impact of globalization on economic growth?

What is the impact of a tax increase on the unemployment rate?

Economic activity - how much buying and selling goes on in the economy over a period of time

Economy - All the production and exchange activities that take place

Economic Growth - the increase in the amount of goods and services in an economy over a period of time

GDP per capita - the market value of all goods and services produced within a country in a given period of time divided by the population of a country to give a per capita figure

Inflation - an increase in the overall level of prices in the economy

Positive Analysis - tries to describe and explain observed economic phenomena without recourse to values. It describes how the world is and lays the foundation for economic theory by developing cause-effect relations

Normative Analysis - tries to develop optimal solutions for economic problems starting with given objectives based on values. It describes how the world ought to be and lays the foundation for a rational economic policy by developing relations between means and targets.

Causalty or Cause and effect?

• it´s not always obvious if a change of one variable (e.g., fuel price) caused a change of another variable (e.g., driving habits) or the other way around, or they just happened at the same time.

Endogenous Variable or Exogenous Variable?

• Endogenous Variable, which value is determined by the model, and Exogenous Variable, which value is determined outside the model

Ceteris Paribus

• = other things equal - an analysis method in this which only one variable in the model is changed at a time

Falsifiability

• the possibility to reject a hypothesis/theory based on empirical data

1. People face tradeoffs

1. There is an opportunity cost to every decision

2. Rational people think at the margin

   rational if: MU > MC + superior to any other alternative

   Thinking at the margin: actions taken aslong Benefit > Cost

3. People respond to incentives

4. Trade can make everyone better off

5. Markets are usually a good way to organize economic activity

6. Sometimes governments can improve market outcomes.

Market is a place in which supply and demand for a good meet.

Market represents a group of buyers and sellers of the good or service in question.