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Macro Economics, Exam 1 Study Guide

by: Johanna Glaser

Macro Economics, Exam 1 Study Guide ECON 2220-004

Marketplace > University of Nebraska at Omaha > ECON 2220-004 > Macro Economics Exam 1 Study Guide
Johanna Glaser
GPA 3.717

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About this Document

Here are all of the notes and vocabulary that needs to be known for the test. Especially focus on the vocabulary and terms.....he mentioned those would be a majority of the test. Good Luck!
Principles of Economics-Macro
R. Metz
Study Guide
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This 6 page Study Guide was uploaded by Johanna Glaser on Saturday September 17, 2016. The Study Guide belongs to ECON 2220-004 at University of Nebraska at Omaha taught by R. Metz in Fall 2016. Since its upload, it has received 86 views.


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Date Created: 09/17/16
Exam 1 Study Guide Chapter 1,2,4,6 Highlight= Important Terms Highlight= Important Concept Chapter 1: Scarcity- the limited nature of society’s resources Economics- the study of how society manages its scarce resources 10 Principles of Economics Principles about Individual Decision Making Principle 1: People Face Trade-offs  Resources are scarce- therefore can’t have everything  Making decisions requires trading one thing for another  Ex. Work/Study  Efficiency- the property of society getting the most it can from its scarce resources  Equality- the property of distributing economic prosperity uniformly among the members of society Principle 2: The Cost of Something Is What You Give Up to Get It  Requires comparing the costs and benefits of alternative courses of action  What is given up to gain something else  Ex. Going to college  Opportunity Cost- whatever must be given up to obtain some item Principle 3: Rational People Think at the Margin  Rational People- people who systematically and purposefully do the best they can to achieve their objectives  Attempt to maximize utility o Utility- pleasure, happiness, satisfaction, benefit  Assumed that decisions are purposeful, not randomly made  Marginal Change- a small incremental adjustment to a plan of action  Rational decision makers take an action only if the marginal benefit of the action exceeds the marginal cost Principle 4: People Respond to Incentives  Incentive- something that induces a person to act  High gas prices cause people to buy more fuel efficient cars  Low price induces people to buy more Principles about how people interact with one another Principle 5: Trade Can Make Everyone Better Off  Comparative Advantage: goods produced where the opportunity cost is least  Beef in Nebraska- suited to cow/calf operations  Corn in Iowa- best corn growing state Principle 6: Markets are Usually a Good Way to Organize Economic Activity  Markets- any institution that brings buyers & sellers together  Market Economy- an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services  Firms decide who to hire and what to make  Households decide who to work for and what goods and services to buy Principle 7: Governments Can Sometimes Improve Market Outcomes  Property Rights- the ability of an individual to own and exercise control over scarce resources  Contracts, patents, copy right  Market Failure- a situation in which a market left on its own fails to allocate resources efficiently  Externality- the impact of one person’s actions on the well-being of a bystander  Market Power- the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices Principles about the workings of the economy as a whole Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services  Productivity- the quantity of goods and services produced from each unit of labor input  Nations where workers produce large quantities of goods and services- people enjoy a high standard of living  Nations with less productive workers- people tolerate a smaller way of living Principle 9: Prices Rise When the Government Prints Too Much Money  Inflation- an increase in the overall level of prices in the economy Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment  Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services  Higher demand caused them to hire more workers to produce a larger quantity of goods and services  Over time may cause prices to rise  More hiring means lower unemployment  Business Cycle- fluctuations in economic activity, such as employment and production Chapter 2: Thinking Like an Economist Economics as a Science  Assumptions: can simplify the complex world  Make it easier to understand  Focus our thinking- essence of the problem  Different assumptions  To answer different questions  Short-run or long-run effects  Economic Models  Simplification of the Real World o Diagrams & equations o Omit many details o Allow us to see what’s truly important o Built with assumptions o Simplify reality to improve our understanding of it  Theorems, laws, principles, models- mean same thing in Economics Ceteris Parabus- everything else remaining the same or equal; also simplifying the real world Positive Statements- claims that attempt to describe the world as it is (“what is “Economics) Normative Statements- claims that attempt to prescribe how the world should be (“what should be “Economics) Fallacy of Compositions- what is true for the individual is not necessarily true for the group  The purpose of all economic activity is to satisfy 1. Land-Natural Resources- “Gifts of Nature”  Arable Land, Minerals, Water resources 2. Labor-Human Resources  Mental & Physical 3. Capital Resources- pre-manufactured aid to production 4. Real Capital- equipment, tools, factories, inventory  An output (capital goods) which then becomes an input (capital resources)  Derived Demand- the good is not directly wanted  Investment- the producing and purchasing of new capital goods Chapter 4: The Market Forces of Supply and Demand What is a Market?  Market: any place where buyers & sellers meet & interact  Types:  Goods & Services  Productive resources  Money & financial assets  Vocal, domestic, international  In person, electronic, etc.  Buyers determine demand for product  Sellers determine the supply for product  Competitive Marke :   Many buyers & sellers  Both has negligible impact on price  Price & quantity are determined by all buyers & sellers as they interact in the market  place Perfectly Competitive Market:  Goods offered for sale are exactly the same  Buyers & sellers are numerous o Price takers o No single person has influence  At Market Price o Buyers can buy all they want o Sellers can sell all they want Monopoly: only one seller who sets the price Demand: curve that shows the amount of product consumers are willing & able to purchase at possible prices Law of Demand: Decrease in price leads to increase in quantity demanded & vice versa Pri ce Demand Curve Qu anti ty Quantity Demanded­ the amount of a good that buyers are willing and able to  purchase Demand Schedule­ a table that shows the relationship between the price of a good and the  quantity demanded Demand Curve­ a graph of the relationship between the price of a good and the quantity  demanded Reasons for Inverse Relationships:  Substitution: buy cheaper goods over higher price goods  Income: decrease in price is tantamount (same as) to an increase in income  Marginal Utility Theory: as successive units of a product are consumed, the extra unit will yield diminishing amounts of extra satisfaction  Change in Quantity Demanded: a change in the price of that product   Change in Demand: moves the actual demand curve o Change in anything other than price o Income  Normal goods: as income increases, demand increases (clothing, steak)  Inferior goods: as income increases, demand decreases (goodwill clothes,  bus) Substitutes­two goods for which an increase in the price of one leads to an increase in the  demand for the other Complements­ two goods for which an increase in the price of one leads to a decrease in the  demand for the other Number of buyers­ as buyer’s increase, so does Demand Price of Related Goods: change in the price of related goods may increase or decrease Demand  for a Good depending if Good is a substitute  o Substitute: goods with the relationship that a decrease in the price of Good “A” results in  an increase in quantity of Good “B” Prices:  Signals that guide the allocation of resources  Mechanism for rationing scarce resources  Determine who produces each good & how much is produced Voluntary market transactions leave all participants better off Terms: Quantity supplied- the amount of a good that sellers are willing and able to sell Law of Supply- the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises Supply Schedule- a table that shows the relationship between the price of a good and the quantity supplies Supply Curve- a graph of the relationship between the price of a good and the quantity supplied Equilibrium- a situation in which the market price has reached the level at which quantity supplied equals quantity demanded Equilibrium Price- the price that balances quantity supplied and quantity demanded Equilibrium Quantity- the quantity supplied and the quantity demanded at the equilibrium price Surplus- a situation in which quantity supplied is greater than quantity demanded Shortage- a situation in which quantity demanded is greater than quantity supplied Price Ceiling- a legal maximum on the price at which a good can be sold Price Floor- a legal minimum on the price at which a good can be sold Tax Incidence- the manner in which the burden of a tax is shared among participants in the market


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