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Macroeconomics Study Guide Test 1

by: Henry Notetaker

Macroeconomics Study Guide Test 1 ECON 2133

Marketplace > East Carolina University > Economcs > ECON 2133 > Macroeconomics Study Guide Test 1
Henry Notetaker
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This is an overview of the previous 3 chapters both from the textbook and some of our in class slide shows. Hope this helps!
Nehad Elsawaf
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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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