Popular in Macroeconomics
Popular in Economcs
This 9 page Study Guide was uploaded by Teena Pandey on Saturday February 7, 2015. The Study Guide belongs to ECON 0110 at University of Pittsburgh taught by Dr. El-Hamidi in Fall. Since its upload, it has received 257 views. For similar materials see Macroeconomics in Economcs at University of Pittsburgh.
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Amazing. Wouldn't have passed this test without these notes. Hoping this notetaker will be around for the final!
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Date Created: 02/07/15
Macroeconomics 0110 Chapter 1 Economics Foundations and Models 0 Basic fact of life People must make CHOICES to attain their goals 0 Scarcity wants are unlimited but the resources available to fulfill those wants are limited 0 Economics study of the choices consumers business managers and government officials make to attain their goals given scarce resources 0 Important economics ideas 1 people are rational 2 people respond to incentives 3 optimal decisions are made at the margin 0 Fundamental questions 1 What goods will be produced 2 how will the goods and services be produced 3 who will receive the goods and services 0 Economic models simplified versions of reality used to analyze realworld economic situations 11 Three Key Economic Ideas 0 Market a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade 0 People Are Rational O This does not mean that everyone makes the best decision 0 It means that it is assumed that consumers and firms use all available information as they act to achieve their goals 0 Weight the benefits and costs of each action and choose an action only if the benefits outweigh the costs 0 People Respond to Economic Incentives 0 Consumers and firms consistently respond to economic incentives 0 FBI officials advise banks to install bulletresistant plastic amp10000 and well trained security guard 50000 Banks don t follow advice because average lost in bank robbery is only 1200 0 Economic incentive to banks is clear It is less costly to put up with bank robberies than to take additional security measures 0 Does Health Insurance Give People an Incentive to Become Obese 0 Optimal Decisions Are Made at the Margin O Marginal extra or additional 0 Watch another hour of TV or spend that hour studying Marginal benefit of watching more TV is additional enjoyment Marginal cost is the lower grade you receive from studying a little less 0 Firms receive revenue from selling goods 0 Economists reason that the optimal decision is to continue any activity up the point where the marginal benefit equals the marginal cost MBMC 0 Marginal Analysis comparing marginal benefits and marginal costs 12 The Economic Problem That Every Society 0 Only limited amount of economic resources workers machines raw materials etc 0 Tradeoffs producing more of one good or service means producing less of another good or service 0 Opportunity cost the highestvalued alterative that must be given up to engage in that activity 0 What Goods and Services Will Be Produced 0 You help decide which goods and services firms will produce when you choose to buy IPhone instead of BlackB erry or cafe mocha rather than a chai tea Similarly Apple must choose to devote scarce resources to produce more IPhone or iPads 0 Consumers firms and the government face problem of scarcity by trading off one good or service for another 0 Each choice comes with an opportunity cost measured by the value of the best alternative given up 0 How Will the Goods and Services Be Produced 0 Firms face a tradeoff between using more workers or using more machines 0 Who Will Receive the Goods and Services Produced 0 Who receives goods and services produced depends largely on how income is distributed 0 Important policy question should the government intervene to make the distribution of income more equal 0 People with higher incomes pay a larger fraction of their incomes in taxes and because the government makes payments to people with low incomes 0 Centrally Planned Economies versus Market Economies O Centrally planned economy the government decides how economic resources will be allocated 0 Market economy the decisions of households and firms interacting in markets allocate economic resources 0 The most important centrally planned economy in the world was Soviet Union 0 In Soviet Union government decided what goods to produce how the goods would be produced and who received it 0 Centrally planned economies are not successful in producing low cost high quality goods and services Al have been political dictatorships 0 All high income democracies have market economies O Rely on privately owned firms Markets determine who receives the goods and services 0 Firms produce goods and services that meet the wants of consumers or the firms will go out of business 0 Due to competition firms in market offer highestquality lowest price products 0 Income of an individual determined by payments he receives for what he has to sell 0 Who receives goods and services Those most willing and able to buy them 0 The Modern Mixed Economy 0 In middle of 20th century government intervention in economy increased dramatically 0 Mixed market economy primarily a market economy because most economic decisions result from interaction of buyers and sellers in markets however gov plays a significant role in allocation of resources 0 Efficiency and Equity 0 Market economies more efficient O Productive efficiency when a good or service is produced at the lowest possible cost Competition among firms forces them to produce goods at lowest cost 0 Allocative efficiency production is in accordance with consumer preferences Combination of competition among firms and voluntary exchange between firms and consumers results in production of mix goods that consumers prefer most Every good is produced up to the point where the last unit provides a marginal benefit to society equal to marginal cost of producing it 0 Efficiency occurs because markets promote competition and facilitate voluntary exchange 0 Voluntary exchange both buyer and seller are both made better off by transaction 0 Sometimes things can be inefficient 0 Equity fair distribution of economic 13 Economics Models 0 Economists rely on theories and models to analyze real world issues 0 Purpose of economic models is to make economic ideas sufficiently explicit and concrete so that individuals firms or the government can use them to make decisions 0 Role of Assumptions in Economic Models 0 Models are based on making assumptions because they have to be simplified to be useful 0 Forming and Testing Hypotheses in Economic Models 0 Economic variable something measurable that can have different values such as the incomes of doctors O Hypothesis in an economic model is a statement that may either be correct or incorrect about an economic variable 0 Economists accept and use an economic model if it leads to hypotheses that are confirmed by statistical analysis 0 Normative and Positive Analysis 0 Positive analysis what is O Normative analysis what ought to be 0 Positive analysis of federal minimum wage law uses economic model to estimate how many workers lost their jobs because of law its effect on costs and profits of businesses and the gains to workers receiving the minimum wage O Normative analysis was the decision as to whether the minimum wage law is a good or bad idea 0 Economics as a Social Science 14 Microeconomics and Macroeconomics 0 Microeconomics the study of how households and firms make choices how they interact in markets and how the government attempts to in uence their choices EX consumers reactions to changes in product prices firms decisions on prices policy issues 0 Macroeconomics study of how economy as a whole including topics such as in ation unemployment and economic growth Ex why economics experience recession and increasing unemployment why economies have grown much faster than other policy issues 15 Preview of Important Economic Terms 0 Entrepreneur someone who operates a business They decide what goods and services to produce and how to produce them 0 Innovation practical application of an invention 0 Technology processes it uses to produce goods and services 0 Firm company business organization that produces a good or service 0 Goods tangible merchandise 0 Services activities done for others 0 Revenue total amount received for selling a good or service PXQ 0 Profit difference between revenue and its costs Economic profit includes opportunity cost 0 Household all persons occupying a home 0 Factors of production or economic resources labor capital and natural resources and entrepreneurial ability 0 Capital financial stocks and bonds issued by firms bank accounts and holdings of money Physical includes manufactured goods that are used to produce other goods and services 0 Human capital accumulated training and skills that workers possess Macroeconomics 0110 Chapter 2 Tradeoffs Comparative Advantage and the Market Svstem 21 Production Possibilities Frontiers and Opportunity Costs 0 Production possibilities frontier PPF curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology 0 Graphing the Production Possibilities Frontier O Combinations inside the graph are attainable but inefficient Combinations on the graph are efficient because all available resources are being fully utilized Combinations outside the line are inefficient and unattainable O Opportunity cost the highest valued alternative that must be given up to engage in an activity 0 Increasing Marginal Opportunity Costs 0 Increasing marginal opportunity costs as you move down a PPC O The more resources already devoted to an activity the smaller the payoff to devoting additional resources to that activity 0 Economic Growth 0 Total resources available to any economy are fixed 0 Over time resources may increase which shifts the PPC 0 Economic growth ability of economy to increase production of goods and services 22 Comparative Advantage and Trade 0 Markets are fundamentally about trade 0 Trade act of buying and selling 0 Trade makes it possible for people to become better off by increasing their production and consumption 0 Specialization and Gains from Trade 0 Absolute Advantage versus Comparative Advantage 0 Absolute advantage ability of an individual a firm or a country to produce more of a good or service than competitors using the same amount of resources 0 Comparative advantage ability of an individual firm or country to produce a good or service at a lower opportunity cost than competitors 0 Comparative Advantage and the Gains from Trade 0 The basis for trade is comparative advantage but not absolute advantage 0 Individuals firms and countries are better off if they specialize in producing goods and services for which they have a comparative advantage and obtain the other goods and services they need by trading 23 The Market System 0 Market a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade 0 Buyers are demanders of goods or services and sellers are suppliers of goods or services 0 Product markets markets for goodssuch as computers and service In product markets households are demanders and firms are suppliers 0 Factor markets market for the factors of production 0 Factors of production the inputs used to make goods and services Four categories Labor capital natural resources and entrepreneurial ability 0 1 Labor includes all types of work 2 Capital refers to what is used to produce other goods 3 Natural resources include land water oil etc 4 Entrepreneur is someone who operates a business 0 The Circular Flow of Income 0 Households are suppliers of factors of production Particularly labor employed by firms to make goods and services 0 In factor markets households are suppliers and firms are demanders 0 Firms are suppliers of goods and services They use funds from selling goods and services to buy factors of production needed to make those goods and services 0 The Gains from Free Markets 0 Free market exists when the government places few restrictions on how goods and services can be produced or sold or on how factors of production can be employed 0 The Market Mechanism 0 The Role of the Entrepreneur 0 Entrepreneurs put their own funds at risk when they start businesses 0 The Legal Basis of a Successful Market System 0 Protection of Private Property gt Property rights are the rights individuals or firms have to be exclusive use of their property including the right to buy or sell it 0 Enforcement of Contracts and Property Rights Macroeconomics 0110 Chapter 3 Where Prices Come From The Interaction of Demand and Supply 0 Perfectly competitive market many buyers and sellers all firms selling identical products and no barriers to new firms entering the market 1 The Demand Side of the Market 0 Main factor in making consumer decisions is price of product Demand what customer is willing and able to buy 0 Demand Schedules and Demand Curves VVVVOVVVO OVOVO OO Demand schedules table showing relationship between price of product and quantity of product demanded Quantity demanded amount of a good or service that a consumer is willing and able to purchase at a given price market demand demand by all the consumers of a given good or service The Law of Demand Law of demand holding everything else constant when the price of a product falls the quantity demanded of the product will increase and when the price of a product rises the quantity demanded of the product will decrease What Explains the Law of Demand Substitution Effect change in quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes Income effect the change in the quantity demanded of a good that results from the effect of a change in the good s price on consumers purchasing power They happen simultaneously Ex fall in price of tablet computers leads consumers to buy more able computers both because the tablets are now less expensive relative to substitute products and because the purchasing power of consumers incomes has increased Holding Everything Else Constant the Ceteris paribus Condition Ceteris paribus condition all else equal requirement that when analyzing the relationship between two variables such as price and quantity demanded other variables must be held constant Shift of a demand curve is an increase or decrease in demand Movement along the demand curve is an increase or decrease in the quantity demanded Variables That Shift Market Demand Income Income affects willingness and ability to buy a good Normal good demand increases as income rises and decreases as income falls Inferior good demand increases as income falls and decreases as income rises Prices of Related Goods Substitutes goods and services that can be used for the same purpose The more you buy of one the less you buy of the other Increase in price of substitute causes demand curve shift to the right Complements goods and services used together Decrease in complement causes shift in demand to the left Tastes Consumers can be in uenced by advertising campaign Population and Demographics Demographics characteristics of population with respect to age race and gender Expected Future Prices A Change in Demand versus a Change in Quantity Demanded A change in demand refers to shift in demand curve affected by variables Change in quantity demanded refers to movement along demand curve as result in change of price The Supply Side of the Market Quantity supplied amount of a good or service a firm is willing and able to supply at a given price Holding other variables constant when price of a good rises producing good is more profitable and quantity supplied will increase Supply Schedules and Supply Curves 0 Supply schedule table that shows the relationship between the price of a product and the quantity of the product supplied 0 Supply curve curve that shows the relationship between the price of a product and the quantity of the product supplied Law of Supply 0 Law of supply holding everything else constant increases in price cause increases in the quantity supplied and decreases in price cause decreases in quantity supplied 0 If only the price of the product changes there is movement along the supply curve which is an increase or decrease in the quantity supplied 0 Other variables cause supply curve to shift which is an increase or decrease in supply Variables That Shift Market Supply 0 Prices of Inputs gt Most likely to cause shift in supply curve gt If supply of an input declines supply of product will increase and supply curve will shift to right 0 Technological Change gt Technological Change positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs gt If you can produce more output with the same amount of inputs its costs will be lower and the good will be more profitable to produce at any given price 0 Prices of Substitutes in Production gt Substitutes in production alternative products a firm could produce 0 Number of Firms in the Market gt When firms enter a market the supply curve shifts to the right 0 Expected Future Prices gt If a firm expects price of its product will be higher in future than today it has incentive to decrease supply now and increase it in future A Change in Supply Versus a Change in Quantity Supplied 0 Change in supply refers to shift of supply curve caused by change in one of the variables 0 Change in quantity supplied refers to movement along supply curve as result of change in product s price Market Equilibrium Putting Demand and Supply Together Market equilibrium situation in which quantity demanded equals quantity supplied Competitive market equilibrium market equilibrium with many buyers and many sellers How Markets Eliminate Surpluses and Shortages 0 Market not in equilibrium moves toward equilibrium Once it is at equilibrium it remains at equilibrium 0 Surplus situation in which the quantity supplied is greater than the quantity demanded 0 When there is a surplus firms have incentive to increase their sales by cutting the price which will increase the quantity demanded and decrease quantity supplied O Shortage situation in which the quantity demanded is greater than the quantity supplied 0 When shortage occurs some consumers can t buy product and firms can raise price Without losing sales Higher price Will cause increase in quantity supplied and decrease quantity demanded reducing shortage 0 Demand And Supply Both Count 0 They decide equilibrium together The Effect of Demand and Supply Shifts on Equilibrium Effect of Shifts in Supply in Equilibrium Effect of Shifts in Demand on Equilibrium The Effect of Shifts in Demand and Supply Over Time Shifts in Curve Versus Movements Along a Curve 0 When a shift in a demand or supply curve causes a change in equilibrium price the change in price does not cause a further shift in demand or supply 0 For instance an increase in supply causes price of good to fall Result Will be an increase in quantity demanded but not an increase in demand
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