Macroeconomics Study Guide Test 1
Macroeconomics Study Guide Test 1 ECON 2133
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This 7 page Study Guide was uploaded by Henry Notetaker on Thursday February 11, 2016. The Study Guide belongs to ECON 2133 at East Carolina University taught by Nehad Elsawaf in Spring 2016. Since its upload, it has received 122 views. For similar materials see Macroeconomics in Economcs at East Carolina University.
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Date Created: 02/11/16
Study Guide Macroeconomics (Chapter’s 1-‐3) Chapter 1 I) What is Economics? Micro-‐? Macro-‐? a) Economics: The study of how people allocate their limited (scarce) resources to satisfy their nearly unlimited wants. i) Macro-‐: The study of the overall aspects and workings of an economy. (1) Unemployment/GDP ii) Micro-‐: The study of the individual units that make up the economy. (1) Demand/Supply curves, taxes. II) Five Foundations of Economics a) Incentives i) Incentives: Can be both positive and negative factors that motivate a person (directly or indirectly) to act or exert effort. b) Trade-‐Offs i) Efficiency vs. Equity (1) Study for a test and get good grades or go to the party? (2) All trade-‐offs are based on preference. c) Opportunity Cost i) Opportunity Costs: The highest valued alternative that must be sacrificed in order to get something else. (1) Could I have made more profit doing something else? d) Marginal Thinking i) Marginal Thinking: Requires decision makers to evaluate whether the benefit of one more unit of something is greater than the cost. ii) Economic Thinking: A purposeful evaluation of the available opportunities to make the best decision possible. (1) i.e. working/school time= either make more money; study less or make less money; study more. e) Trade i) Trade: is the voluntary exchange of goods/services between two or more parties. (1) Trade is done within markets. Markets bring buyers and sellers together to exchange goods/services between them. Chapter 2A I) Positive and Normative Analysis a) Positive Statement: Can be tested and validated. “What is” i) “the unemployment rate is 7.0%”-‐ can be tested. b) Normative Statement: An opinion that cannot be tested or validated. “what ought to be” i) “An unemployed worker should receive financial assistance to help make ends meet.” c) Economists should be concerned with positive statements d) Normative statements are the realm of policy-‐makers, voters, and philosophers. II) Economic Models a) Models must account for factors we can and cannot control. b) Endogenous Factors: The variables that can be controlled for in a model. c) Exogenous Factors: The variables that cannot be controlled for in a model. d) Business models should be careful to be critical of 3 things: i) What we include ii) The assumptions we make when choosing what to include. iii) The outside conditions that can effect our models performance. III) Danger of Faulty Assumptions a) No matter what we include, using a model that contains faulty assumptions can lead to spectacular policy failures. i) Great Recession of 2007 b) Because a model is so simple, decision makers must be careful about assuming a model can present a solution for complex problems. Chapter 2B: Production Possibilities Frontier I) Production Possibilities Frontier: A model that illustrates the combination of outputs that a society can produce if all of its resources are being used efficiently. i) Model for trade-‐offs ii) Holding technology for production and quantity of resources constant. b) All points lying on the PPF line are using all of their resources in the most productive way. i) Any points below the line is inefficient but feasible ii) Any points above the line is not feasible and impossible II) The PPF and Opportunity Cost a) The trade-‐offs that occur along the PPF represents the opportunity lost. b) Not all resources are perfectly adaptable for use in one good over another. i) Some workers may be more skilled at one good than another. ii) This makes the PPF curved shaped c) The curve represents the increasing opportunity cost of production. d) Law of Increasing Relative Cost: The opportunity cost of a good rises a society produces more of it. III) The PPF and Economic Growth a) Economic Growth: The process that enables a society to produce more output in the future. i) A new technology increasing production of a good with the same number of workers will see an increase on that goods end of the PPF while the other good remains the same. ii) Say the population grows, increasing the number of workers in the workforce. This would cause an increase on both ends of the PPF. Chapter 2C: Specialization and Trade Benefits I) Gains from Trade a) In simple terms, 2people, 2 goods: one specializes in which ever they are best at producing and use it to trade with the other person for the good they are not as skilled in producing. i) One person may be able to produce over all more numbers of both goods but specializing and trading gives each party more to consume. b) Someone with the ability of one producer to make more than another producer with same quantity of resources is to have absolute advantage. c) When one producer can give up less of 1 good to make another that producer has comparative advantage. i) Cannot have comparative advantage with both goods like absolute advantage. II) Finding the Right Price to Facilitate Trade a) Similar to the trading done at school lunches i) If you agreed to trade an apple for 3 Oreo’s that apple is worth 3 Oreo’s. b) For any trade to beneficial the exchange price has to fall between the the ratio’s of the producers OP’s. c) Trade creates Value Chapter 2D: Trade-‐Off’s from Having Some Now or Later • Consumer Goods: Produced for present consumption. • Capital Goods: Help produce other valuable goods and services in the future. • Investment: The process of using resources to create or buy new capital. • Every investment in capital goods has an OP of forgone consumer goods. o Laptop for school? Or money for spring break? • When choosing to produce more consumer goods in the short-‐run, it increases slightly in the long-‐run • When choosing to produce more or equal capital goods in the short-‐run, it increases drastically in the long-‐run. • All societies face trade-‐offs between producing for today and investing for tomorrow. Chapter 3: The Market at Work (Textbook) I) Fundamentals of Markets a) Market Economy: Resources are allocated among households and firms with little or no gov’t interference. i) Invisible hand-‐ prices are guided by consumers and producers compromising over $ and #. b) Prices are set by the market i) Changes in price occur w/ changes in demand and supply. c) Competitive Market: Exists when there are so many buyers and sellers that each has only a small impact on the market price and output. i) If one seller runs out, it makes a small impact. d) Imperfect Market: One in which either the buyer or the seller has an influence on the market. i) The more unusual a product, the more control that producer has over price. (1) Monopoly: Exists when a single (1) company supplies the entire market for a particular good or service. (a) Carnegie Steel, Rockefeller Oil II) What Determines Demand? a) Quantity Demanded: The amount of a good or service that buyers are willing an able to purchase at the current price. b) When prices rise consumers purchase less or buy something else. c) Law of Demand: States that, all other things equal, quantity demanded falls when prices rise, and rises when prices fall. (1) The Demand Curve (a) Demand Curve: A graph of the relationship between the prices of the demand schedule and the quantity demanded at those prices. (b) Market Demand: The sum of all the individual quantities demanded by each buyer in the market at each price. (2) Shifts of the Demand Curve (a) News about possible risks or benefits associated with consumption of a good. (i) Government issues of health warnings (b) Price change causes movement along the line not a shift. (c) A change in overall demand causes a shift (i) Changes in buyers taste and preferences (ii) Changes in buyer’s income (iii) Changes in price of related goods (substitution) d) Normal Goods: As income rises, consumers buy more of the good. e) Inferior Goods: Purchased out of necessity rather choice. f) Compliments: Two goods used together. When price rises for one demand falls for both. g) Substitutions: Two goods used in place of each other. When prices rise for one demand rises for the other. III) What Determines Supply? a) Quantity Supplied: The amount of a good or service that producers are willing and able to sell at the current price. b) When price increases, produces often respond by offering more for sale. c) Law of Supply: Quantity supplied of a good will rise when the price of the good rises, and falls when the price of the good falls. (1) The Supply Curve (a) Supply Curve: A graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices. (b) Market Supply: The sum of the quantities supplied by each seller in the market at each price. (2) Shifts of the Demand Curve (a) When a variable other than the price changes, the entire supply curve shifts. (i) i.e. Starbucks designs a new way to brew a richer coffee at half the price. (b) Increase of supply shifts the curve to the right and visa versa. (c) Factors: (i) Cost of inputs (ii) Costs in technology (iii) Production process, taxes and subsidies (iv) Number of firms in the industry (d) Inputs: Resources used in the production process. Chapter 3B: How Do Supply and Demand Shifts Affect a Market? I) Supply, Demand, and Equilibrium a) Equilibrium: Occurs at the point where the demand curve and the supply curve intersect i) Equilibrium price is the price at which quantity supplied is equal to quantity demanded. (1) Also known as the market-‐clearing price b) Law of supply and demand: States that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance. 1) Shortages and Surpluses a. Shortages: A shortage occurs whenever the quantity supplied is less than the quantity demanded b. Surplus: A surplus occurs whenever supply is greater than demand. II) Changes to the Graphs and What They Mean a) Demand Increases; supply does not change. i) Impact-‐ The demand curve shifts to the right. As a result, the equilibrium price and the equilibrium quantity increase. b) Supply increases; demand does not i) Impact-‐ The supply curve shifts to the right. As a result, the equilibrium price decreases and the equilibrium quantity increases. c) Demand decreases; supply stays the same i) Impact-‐ the demand curve shifts left. The equilibrium price and quantity decrease d) Supply Decreases; demand does not i) Impact-‐ The supply curve shifts to the left. The equilibrium price increases and equilibrium quantity decreases. Answer the BIG Questions 1) What are the fundamentals of markets? 2) What determines demand? 3) What determines supply? 4) How do supply and demand shifts affect a market? Content Covered in our Professors Class Notes Chapter 2 Part 1 slide show: Our First Model • The Circular-‐ Flow Diagram: Is a visual model of the economy, shows how dollars flow through markets among households and firms. • Two types of “actors”: o Households o Firms • Two Markets: o The market for goods and services o The market for “factors of production” Factors of Production • Factors of production: The resources the economy uses to produce goods & services, including: o Labor o Land o Capital (buildings and machines used in production) The Circular-‐Flow Diagram • Households: o Own the factors of production, sell/rent them to firms for income o Buy and consume goods and services • Firms: o Buy/hire factors of production, use them to produce goods and services o Sell goods and services
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