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National Economy
• National Economy
An economy is a mechanism comprised of decision makers (such as households, firms & the government) and institutions (such as markets & a legal system with established property rights) that allocates scarce resources among alternative uses.
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NATIONAL ECONOMY
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National Economy
• Household
Any group of people living together as a decision making unit
Examples: Roommates ordering a pizza; a family at the grocery store
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National Economy
• Firm
An organization that uses resources to produce goods and services
Examples: Lemonade Stand Vs. IBM
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National Economy
• Government
An organization that establishes & maintains the institutions which enable the smooth functioning of the economy
Examples: Federal, State & Local governments
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National Economy
• Technology
A recipe or formula for combining raw materials and goods into other goods
Examples: Lemonade recipe Vs. Formula for the next generation chip
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National Economy
• Factors of production
Given a technology anything that can be used to produce a good is called a factor of production
Examples: Land, Labor, Capital & Entrepreneurial Ability
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National Economy• Types of Capital
Financial Capital Stocks, bonds, shares etc.
Physical Capital All the equipment, buildings & tools & goods used to produce other goods & services
Human Capital Education, on the job training etc.
Entrepreneurial Ability A human resource that organizes the other factors of production & bears the business risk
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National Economy
• Factors of Production & Compensation
Land, Capital Rental rate
Labor Wage rate
Entrepreneurs (Residual) Profits i.e the profits left after paying the other factors of production
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National Economy
• Market
A market refers to any situation in which the buyers & sellers can negotiate the exchange of some good or service.
Examples: Byerly’s Vs. International Stock Exchange
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Global Economy
• An economy composed of several national economies that trade amongst themselves.
• Trade Deficit: When Imports exceed exports there is said to be a trade deficit
• Financial Surplus: Since U.S. borrowing (via bonds) exceeds U.S. lending there tends to be a financial surplus.
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Carefully study it.Systematic Observation& Measurement
Confirm / Re-examineNotProve or Disprove
Observe a Phenomenon
Develop a theory to explain the data
Check the implications of your theory against new data from similar circumstances
Philosophy, Art or Science?
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Positive Vs. Normative Economics
• Positive Economics
Statements of fact & logical deductions
Ex: If it rains the football field will get wet.
• Normative Economics
Statements about what should be (value judgments)
Example: The football field is better when it is wet.
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