Macro Economics, Exam 1 Study Guide
Macro Economics, Exam 1 Study Guide ECON 2220-004
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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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