Macroeconomics Test 1 Notes
Macroeconomics Test 1 Notes EC 111
Popular in Principles of Macroeconomics
verified elite notetaker
Popular in Economcs
This 15 page Bundle was uploaded by Leslie Anne Mall on Sunday September 27, 2015. The Bundle belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 27 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
Reviews for Macroeconomics Test 1 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 09/27/15
Macroeconomics Chapter 1 Notes Scarcity the limited nature of society s resources Economics the study of how society manages its scarce How people decide what to buy how much to work save and How rms decide how much to produce how many workers to What Economics Is All About 0 0 resources eg gt spend gt hire gt How society decides how to divide its resources between national defense consumer goods protecting the environment and other needs How People Make Decisions E gt All decisions involve tradeoffs Examples Going to a party the night before your midterm leaves less time for studying Having more money to buy stuff requires working longer hours which leaves less time for leisure Protecting the environment requires resources that could otherwise be used to produce consumer goods Society faces an important tradeoff Efficiency vs equality Ef ciency when society gets the most from its scarce resources Equality when prosperity is distributed uniformly among society s members Tradeoff to achieve greater equality could redistribute income from wealthy to poor Making decisions requires comparing the costs and bene ts of alternative choices The opportunity cost of any item is whatever must be given up to obtain it It is the relevant cost for decision making Rational people systematically and purposefully do the best they can to achieve their objectives Make decisions by evaluation costs and bene ts of marginal changes incremental adjustments to an existing plan Incentive Something that induces a person to act ie the prospect of a reward or punishment How People Interact gt gt gt gt gt O gt gt gt gt Rather than being selfsuf cient people can specialize in producing one food or service and exchange if for other goods Countries also bene t from trade and specialization Get a better price abroad for goods the produce Market a group of buyers and sellers need not be in a single location quotOrganize economic activityquot means determining What goods to produce How to produce them How much of each to produce Who gets them A market economy allocates resources through the decision of many households and rms as they interact in markets The invisible hand works through the price system The interaction of buyers and sellers determines prices Each price re ects the good s value to buyers and the price of producing the good Prices guide selfinterested households and rms to make decisions that in many cases maximize society s economic well being Important role for government enforce property rights with police courts People are less inclined to work produce invest or purchase if there is a large risk of their property being stolen Market failure when the market fails to allocate the society s resources ef ciently Causes Externalities when the production or consumption of a good affects bystanders eg pollution Market power a single buyer or seller has substantial in uence on market price eg monopoly In such cases public policy may promote ef ciency How The Economy As A Whole Works The most important determinant of living standards productivity the amount of goods and services produced per unit of labor Productivity depends on the equipment skills and technology available to workers Other factors eg labor unions competition from abroad have far less impact on living standards Prices rise when the government prints too much money In ation increases in the general level of prices In the long run in ation is almost always caused by excessive growth in the quantity of money which causes the value of money to fall The faster the government creates money the greater the in ation rate Society faces a shortrun tradeoff between in ation and unemployment In the short run 12 years many economic policies push in ation and unemployment in opposite directions Other factors can make this tradeoff more or less favorable but the tradeoff is always present Macroconomics Chapter 2 Assumptions amp Models The C gt 0 0 gt 0 0 Assumptions simplify the complex world make it easier to understand Example To study international trade assume two countries and two goods Unrealistic but simple to learn and gives useful insights about the real world Model a highly simpli ed representation of a more complicated reality Economists use models to study economic issues ircular Flow Diagram The Circular Flow Diagram a visual model of the economy shows how dollars ow through markets among households and rms Two types of quotactorsquot Households Own the factors of production sellrent them to rms for income Buy and consume goods and services Firms Produce and sell goods and services Hire and use factors of production Two markets gt gt The market for goods and services The market for quotfactors of productionquot Factors of Production Factors of Production the resources the economy uses to produce goods and services including gtLabor Land Capital buildings amp machines used in production Entrepreneurship IV IV IV The Production Possibilities Frontier The Production Possibilities Frontier PPF a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology The PPF and Opportunity Cost 0 Recall the opportunity cost of an item is what must be given up to obtain that item oMoving along the PPF involves shifting resources eg labor from the production of one good to the other Society faces a tradeoff getting more of one good requires sacri cing some of the other 0 The slope of the PPF tells you the opportunity cost of one good to the other The Shape of the PPF The PPF could be a straight line or bowshaped Depends on what happens to the opportunity cost as economy shifts resources from one industry to the other gt If opportunity cost remains constant PPF is a straight line Essentially the same resources are equally useful for producing in either industry gt If opportunity cost of a good rises as the economy produces more of the good PPF is bowshaped Essentially the resources are specialized and not easily adaptable for producing in either industry Economic Growth and the PPF oWith additional resources or an improvement in technology the economy can produce more barely more wheat or any combination in between oEconomic growth shifts the PPF outward Why the PPF Might Be BowShaped As the economy shifts resources from beer to mountain bikes gtThe PPF becomes steeper gtOpportunity cost of mountain bikes increases 0 So PPF is bowshaped when different workers have different skills different opportunity costs of producing one good in terms of the other 0 The PPF would also be bowshaped when there is some other resource or mix of resources with varying opportunity costs eg different types of land suited for different uses The PPF Important Notes 0 The PPF shows all combinations of two goods that an economy can possibly produce given its resources and technology 0 The PPF illustrates the concepts of tradeoff and opportunity cost efficiency and inefficiency unemployment and economic growth A bowshaped PPF illustrates the concept of increasing opportunity cost A straight line PPF illustrates constant opportunity costs Microeconomics and Macroeconomics Microeconomics is the study of how households and rms make decisions and how they interact in markets Macroeconomics is the study of economywide phenomena including in ation unemployment and economic growth 0 These two branches of economics are closely intertwined yet distinct they address different questions The Economist as Policy Advisor As scientists economists make positive statements which attempt to describe the world as it is 0 As policy advisors economists make normative statements which attempt to prescribe how the world should be Examples of Positive and Normative Statements oPrices rise when the government increases the quantity of money gt Positive 0 A tax cut is needed to stimulate the economy gt Normative An increase in the price of burritos will cause an increase in consumer demand for tacos gt Positive The PPF What We Know So Far 0 Points on the PPF gtPossible gt Ef cient all resources are fully utilized 0 Points under the PPF gt Possible gtNot ef cient some resources underutilized eg workers unemployed factories idle Points above the PPF gt Currently unobtainable Macroeconomics Chapter 4 Notes Markets and Competition 0 A market is a group of buyers and sellers of a particular product A competitive market is one with many buyers and sellers each has a negligible effect on price There are several different types of markets such as perfect competition monopoly monopolistic competition each wit their own unique characteristics that we will explore later in the semester Demand The quantity demanded QD of any good is the amount of the good that buyers are willing and able to purchase at a speci c price 00 is a point on the demand curve The demand curve is a set of various quantities demanded QD at corresponding prices It is the curve itself 0 Law of Demand the claim that the quantity demanded of a good fails when the price of the good rises other things equal The Demand Schedule 0 Demand schedule a table that shows the relationship between the price of a good and the quantity demanded Market Demand vs Individual Demand 0 The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price Shifts in the Demand Curve 0 Increase in demand shifts to the right Decrease in demand shifts to the left Any change that raises the quantity that buyers wish to purchase at any given price shifts the demand curve to the right Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left Demand Curve Shifters The demand curve shows how much price affects quantity demanded other things being equal A change in the price of the good changes OD and results in a movement along the Dcurve oThese quotother thingsquot are nonprice determinants of demand ie things that determine buyers demand for a good other than the good s prices 0 Changes in them shift the D curve Demand Curve Shifters of Buvers Increase in of buyers Increases quantity demanded at each price shifts D curve to the right Demand Curve Shifters Income 0 Demand for a normal good is positively related to income gt Increase in income causes increase in quantity demanded at each price shifts D curve to the right 0 Demand for an inferior good is negatively related to income gt An increase in income shifts D curves to the left Demand Curve Shifters Prices of Related Goods oTwo goods are substitutes if an increase in the price of one causes an increase in the demand for the other gtExample Crest and Colgate An increase in the price of Crest toothpaste increases demand for Colgate toothpaste shifting the Colgate demand curve to the right gtOther examples Coke and Pepsi laptops and tablets butter and margarine Nike and New Balance oTwo goods are complements if an increase in the price of one causes a fall in demand for the other gt Example computers and software If price of computer rises people buy fewer computers and therefore less software Software demand curve shifts left gtOther examples college tuition and textbooks bagels and cream cheese peanut butter and jelly hot dogs and hot dog buns Demand Curve Shifters Tastes Anything that causes a shift in tastes towarda good will increase demand for that good and shift its D curve to the right 0 Example The Atkins diet became popular in the 39905 caused an increase in demand for eggs shifted the egg demand curve to the right Also tablet computers such as the iPad are currently very popular so the demand curve for these computers has shifted to the right as well Demand Curve Shifters Expectations Expectations affect consumers buying decisions 0 Examples gt If people expect their incomes to rise their demand for meals at expensive restaurants may increase now gt If the economy sours and people worry about their future job security demand for new autos may fall now Summary Variables That In uence Buyers 0 Price movement along D curve 0 of Buyers shifts the D curve 0 Income shifts the D curve 0 Price of Related Goods shifts the D curve Tastes shifts the D curve 0 Expectations shifts the D curve Supply 0 The quantity supplied 05 of any good is the amount that sellers are willing and able to sell at a speci c price 05 is a point on the supply curve The supply curve is a set of various quantities supplied 05 at corresponding prices 0 Law of supply the claim that the quantity supplied of a good rises when the price of the good rises other things being equal The Suoplv Schedule 0 Supply schedule A table that shows the relationship between the price of a good and the quantity supplied Market Suoplv versus Individual Suoplv o The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price Supply Curve Shifters The supply curve shows how price affects quantity supplied other things being equal A change in the price of the good changes 05 and results in a movement along the 5 curve 0 These quotother thingsquot are nonprice determinants of supply 0 Changes in them shift the 5 curve Shifts in the Supply Curve 0 Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right 0 Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left 0 Increase in supply shifts to the right Decrease in supply shifts to the left Supply Curve Shifters lnput Prices 0 Examples of input prices gt Wages prices of raw materials 0 A fall in input prices makes production more pro table at each output price so rms supply a larger quantity at each price and the 5 curve shifts to the right Supply Curve Shifters Technology 0 Technology determines how much inputs are required to produce a unit of output 0 A costsaving technological improvement has the same effect as a fall in input prices shifts 5 curve to the right Supply Curve Shifters of Sellers 0 An increase in the number of sellers increases the quantity supplied at each price shifts 5 curve to the right Supply Curve Shifters Expectations 0 Example gt Events in the Middle East lead to expectations of higher oil pdces gtln response owners of Texas oil elds reduce supply now save some inventory to sell later at the higher price gt 5 curve shifts left 0 In general sellers may adjust supply when their expectations of future prices change if the good is not perishable Summary Variables that In uence Sellers 0 Price movement along the 5 curve 0 Input Prices shifts the 5 curve 0 Technology shifts the 5 curve 0 of Sellers shifts the 5 curve 0 Expectations shifts the 5 curve Supply and Demand Together gt gt gt Three 1 2 3 Terms 0 Equilibrium Price has reached the level where quantity supplied equals quantity demanded Equilibrium price the price that equates quantity supplied with quantity demanded Equilibrium quantity the quantity supplied and quantity demanded at the equilibrium price Surplus excess supply when quantity supplied is greater than quantity demanded Shortage excess demand when quantity demanded is greater than quantity supplied sellers raise the price When supply and demand both shift in the same direction quantity has to change To the right quantity increases To the left quantity decreases However price will be unknown Steps to Analyzing Changes in Equilibrium To determine the effects of any event Decide whether event shifts 5 curve D curve or both Decide in which direction curve shifts Use supplydemand diagram to see how shift changes equilibrium Pand Q for Shift vs Movement Along Curve Change in supply a shift in the 5 curve occurs when a non priced determinant of supply changes like technology or costs Change in the quantity supplied a movement along a xed 5 curve occurs when price changes Change in demand a shift in the D curve occurs when a non price determinant of demand changes like income or of buyers Change in the quantity demanded a movement along a xed D curve occurs when price changes Conclusion How Prices Allocate Resources One of the Ten Principles from Chapter 1 Markets are usually a good way to organize economic activity In market economies prices adjust to balance supply and demand These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources Macroeconomics Chapter 5 Notes Elasticity Basic idea Elasticity measures how much one variable responds to changes in another variable gtOne type of elasticity measures how much demand for your websites will fall if you raise your price Elasticity is a numerical measure of the responsiveness of 00 or OS to one of its determinants Price Elasticitv of Demand Price elasticity of demand percentage change in OD percentage change in P 0Price elasticity of demand measures how much 00 responds to the change in P Loosey speaking it measures the pricesensitivity of buyers demand oAlong a D curve Pand 0 move in opposite directions which would make price elasticity negative We will drop the minus sign and report all price elasticities as positive numbers Calculating Percentage Changes Standard method of computing the percentage change end valuestart value x 100 start value 0 So instead we use the midpoint method end value start value x 100 midpoint The midpoint is the number halfway between the start and end values the average of those values 0 It doesn t matter which value you use as the start and which as the end you get the same answer either way The Variety of Demand Curves The price elasticity of demand is closely related to the slope of the demand curve but it is nor equal to the slope of the demand curve The reason for this is because slope is a ratio of two changes and elasticity is a ratio of two changes 0 Rule of thumb The atter the curve the bigger the elasticity The steeper the curve the smaller the elasticity quotElastic Demandquot 0 Price elasticity of demand change in O gt10 gt1 change in P 10 quotlnelastic Demand Price elasticity of demand change in 0 lt10 lt1 change in P 10 o D curve relatively steep Consumers price sensitivity relatively low Elasticity lt1 quotUnit Elastic Demand Price elasticity of demand change in 0 10 1 change in P 10 Elasticity 1 quotPerfectlv lnelastic Demand Price elasticity of demand change in 0 0 0 change in P 10 0 D curve vertical 0 Consumers price sensitivity none 0 Elasticity 0 oExample insulin to a diabetic or any prescription drug Something you will consume the exact same amount regardless of the price quotPerfectly Elastic Demand 0 Price elasticity of demand change in 0 any in nity change in P 0 Dcurve horizontal Consumers price sensitivity extreme oElasticity in nity What Determines Price Elasticitv 0 To determine the determinants of price elasticity we look at a series of examples Each compares two common goods 0 The more substitutes the greater the elasticity The Determinants of Price Elasticitv A Summarv The price elasticity of demand depends on gtThe extent to which close substitutes are available gt Whether the good is a necessity or a luxury gt How broadly or narrowly the good is de ned gtThe time horizon elasticity is higher in the long run than the short run Price Elasticity and Total Revenue A price increase has two effects on revenue gtHigher Pmeans more revenue on each unit you sell gtBut you sell fewer units lower 0 due to Law of Demand Revenue Px Q If demand is elastic then gt Price elasticity of demand gt 1 gt change in 0 gt change in P The fall in revenue from lower 0 is greater than the increase in revenue from higher P so revenue falls If demand is inelastic then gt Price elasticity of demand lt 1 gt change in Q lt change in P The fall in revenue from lower 0 is smaller than the increase in revenue from higher P so revenue rises Price Elasticity of Supply will not have to calculate on exam Price elasticity of supply change in OS change in P Price elasticity of supply measure how much 05 responds to a change in P Loosely speaking it measures sellers price sensitivity Again use the midpoint method to compute the percentage changes The Variety of Supply Curves The slope of the supply curve is closely related to price elasticity of supply Rule of thumb gtThe atter the curve the bigger the elasticity gtThe steeper the curve the smaller the elasticity Five different classi cations Inelastic Price elasticity of supply change in 0 lt10 lt1 change in P 10 o 5 curve relatively steep Sellers price sensitivity relatively low 0 Elasticity lt1 quotUnit Elasticity Price elasticity of supply change in 0 10 1 change in P 10 0 Elasticity 1 quotElastic Suoplvquot Price elasticity of supply change in 0 gt10 gt1 change in P 10 o 5 curve relatively at 0 Sellers price sensitivity relatively high Elasticity gt1 quotPerfectly Elastic Supply 0 Price elasticity of supply change in 0 any in nity change in P 0 o 5 curve horizontal Sellers price sensitivity extreme o Elasticity in nity quotPerfectly lnelastic Supply Price elasticity of supply change in 0 0 0 change in P 10 0 5 curve vertical 0 Sellers price sensitivity none 0 Elasticity 0 oExample Bryant Denny Stadium no matter what there are a certain about of seats amp that is xed Any situation where quantity is xed The Determinants of Supply Elasticity The more easily sellers can change the quantity they produce the greater the price elasticity of supply gt Other gt gt gt gt Example Supply of beachfront property is harder to vary and thus less elastic than supply of new cars For many goods price elasticity of supply is greater in the long run than in the short run because rms can build new factories or new rms may be able to enter the market Elasticities Income elasticity of demand measures the response of 00 to a change in consumer income will not have to calculate on exam Income elasticity of demand change in OD change in income Recall from chapter 4 an increase in income causes an increase in demand for a normal good Hence for normagoods income elasticity gt 0 For inferiorgoods income elasticity lt 0 Crossprice elasticity of demand measures the response of demand for one good to change in the price of another good will not have to calculate on exam Crossprice elasticity of demand change in 09 for good 1 change in price of good 2 For substitutes cross price elasticity gt 0 eg an increase in the price of beef causes an increase in the demand for chicken For complements crossprice elasticity lt 0 eg an increase in the price of computers causes decrease in demand for software
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'