Chatper 1 Study Guide
Chatper 1 Study Guide Econ 2-01
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This 12 page Study Guide was uploaded by Nolan Shapiro on Sunday October 11, 2015. The Study Guide belongs to Econ 2-01 at University of California - Santa Cruz taught by Aaron Meininger in Summer 2015. Since its upload, it has received 64 views. For similar materials see Intro to Macroeconomic in Economcs at University of California - Santa Cruz.
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Date Created: 10/11/15
Chapter 1 Lecture Notes 925 TUTH office hours 1012 Office Engineering 2 403E Course id meininger66833 Chapter 1 Key Ideas 1 Economics is the study of people39s choices 2 The first principle of economics is that people try to optimize they try to choose the best available option 3 The second principle of economics is that economic systems tend to be in equilibrium a situation in which nobody would benefit changing his or her own behavior 4 The third principle of economics is empiricism analysis that uses data Economists use data to test theories and to determine what is causing things to happen in the real world Economic agent any group or individual that makes choices such as consumers firms etc Positive economists tells us how it is Normative economists should or shouldn39t Efficiency marginal benefit marginal cost Chapter 1 Book Noes 11 The Scope of Economics Choices is the unifying feature of all the things economists study 0 An economic agent is an individual or a group that makes choices 0 Consumer 0 Parent 0 Worker 0 Criminal o Etc Economic agent can also be a group 0 Allocation of scarce resources 0 Scarce resources are things that people want where the quantity that people want exceeds the quantity that is available 0 Scarcity exists because people have unlimited wants in a world of limited resources 0 Economics is the study of how agents choose to allocate scarce resources and how those choices affect society 0 Economic analysis 0 Describes what people actually do positive economics 0 Recommends what people ought to do normative economics 12 Three Principles of Economics Economists emphasize three key concepts 0 OptimizationOne such insight is that all choices are tied together by optimization people decide what to do by consciously or unconsciously weighing all of the known pros and cons of the different available options and trying to pick the best feasible option 0 Equilibrium a situation in which no agent would benefit personally by changing his or her own behavior everyone is simultaneously optimizing o Empiricism analysis that uses data or analysis that is evidence based 13 First Principle of Economics Optimization Optimization means that we weigh the potential risks in a decision not that we perfectly foresee the future Tradeoff arise when some benefits must be given up in order to gain other Budget constraint is the set of the things that a person can choose to do or buy without breaking her budget Opportunity cost best alternative activity Cost benefit analysis is a calculation that adds up costs and benefits using a common unit of measurement 0 Used to identify the alternative that has the greatest net benefit which is equivalent to benefits minus costs 14 Second principle of Economics Equilibrium Ex going to shortest super market line For a market price to be in equilibrium 0 The amount produced will equal the amount purchased 0 Producers will only produce goods at a cost that is less than market price 0 Buyers will only use product on activities that is worth the price Free rider problem want someone to do the dirty work 15 Third Principal of Economics Empiricism Economists use data to determine whether our theories about human behavior match up with actual human behavior Lecture Notes from Chapter 4 Chapter 4 Key Ideas 1 IN a perfectly competitive market 1 sellers all sell an identical good or service and 2 any individual buyer or any individual seller isn39t powerful enough on his or her own to affect the market price of that good or service price takers 2 The demand curve plots the relationship between the market price and the quantity of a good demanded by buyers 3 The supply curve plots the relationship between the market price and the quantity of a good supplied by sellers 4 The competitive equilibrium price equates the quantity demanded and the quantity supplied 5 When prices are not free to fluctuate markets fail to equate quantity demanded and quantity supplied The market price is the price at which buyers and sellers conduct transactions IN a perfectly competitive market every buyer pays and every seller charges the same price Quantity demanded amount of a good that buyers are willing to purchase at a given price Demand schedule a table that reports the quantity demanded at different prices holding all else equal Demand curve plots the quantity demanded at different prices Market demand curve sum of the individual demand curves Shifts on the demand curve Tastes and preferences 0 Income and wealth availability and prices of related goods 0 number and scale of buyers 0 buyers expectations about the future Only price changes move you along the demand curve and changes the QD Shifts in curve changes Quantity quantity supplied amount of a good that buyers are willing to sell at a given price supply schedule a table that reports the quantity supplied at different prices holding all else equal supply curve plots the quantity supplied at different prices Shifts of the supply curve 0 input prices 0 technology 0 number and scale of sellers seller39s expectations about the future Good changes prices will cause an initial change along the curve Competitive Equilibrium point at which the market comes to an agreement about what the price will be competitive equilibrium price and how much will be exchanged competitive equilibrium quantity at that price Excess demand occurs when consumers want more than suppliers provide at a given price This situation results in a shortage Excess supply occurs when suppliers provide more than consumers want at a given price this is surplus 0le thing that changes quantity supplied and or demanded is price everything else changes the curve if the market doesn39t control the price there will be shortages and surplusss Book Notes from Chapter 4 41 Markets 0 A market is a group of economic agents who are training a good or service and the rules and arrangements for trading 0 ln markets all exchanges occur voluntarily at flexible prices o If all sellers and all buyers face the same price it is referred to as the market price 0 In a perfectly competitive market sellers all sell an identical good or service and any individual buyer or any individual seller isn t powerful enough on his or her own to affect the market price of that good or service 0 A price taker is a buyer or seller who accepts the market price buyers can t bargain for a lower price and sellers can t bargain for a higher price 0 Although many markets aren t perfectly competitive many of them are nearly perfect 42 How do markets behave 0 Quantity demanded is the amount of a good that buyers are willing to purchase at a given price 0 A demand schedule is a table that reports the quantity demanded at different prices holding all else equal 0 Holding all else equal implies that everything else in the economy is held constant The latin phrase ceteris paribus means with other things the same and is sometimes used in economic writing to mean the same thing 0 The demand curve plots the quantity demanded at different prices A demand curve plots the demand schedule 0 Two variables are negatively related if the variables move in the opposite directions 0 Law of demand In almost all cases the quantity demanded rises then the price falls holding all else equal Willingness to pay is the highest price that a buyer is willing to pay for an extra unit of a good Diminishing marginal benefit As you consume more of a good your willingness to pay for an additional unit declines To study the behavior of the worldwide energy market economists study the aggregate demand curves The market demand curve is the sum of the individual demand curves of all the potential buyers lt plots the relationship between the total quantity demanded and the market price holding all else equal 5 shifts in the demand curve 0 changing tastes and preferences ex demand for oil prices would fall if you become convinced global warming is bad 0 The demand curve shifts only when the quantity demanded changes at a given price o If a good s own price changes and its demand curve hasn t shifted the own price change produces a movement along the demand curve 0 changing income or changing wealthex getting a job right out of college 0 For a normal good an increase in income causes the demand curve to shift to the right 0 For an inferior good an increase in income causes the demand curve to shift to the left 0 Changing availability and prices of related goods exif a city cuts the price of public transportation gt less demand for gas 0 Two goods are substitutes when the fall in the price of one leads to a left shift in the demand curve for the other 0 Two goods are complements when the fall in the price of one leads a right shift in the demand curve for the other 0 Changing number and scale of buyers ex small company slashing prices compared to apple 0 Changing buyer39s beliefs about the future ex fear of a recession would cause a decrease in demand for everything 43 How do sellers behave Quantity supplied is the amount of a good or service that sellers are willing to sell at a given price The supply curve plots the quantity supplied at different prices A supply curve plots the supply schedule Two variables are positively related if the variables move in the same direction Law of supply In almost all cases the quantity supplied rises when the price rises holding all else equal As long as an oil producer is paid at least its marginal cost per barrel it should be willing to supply another barrel of oil Willingness to accept is the lowest price that a seller is willing to get paid to sell an extra unit of a good willingness to accepts is the same as the marginal cost of production For an optimizing firm willingness to accept is the same as the marginal cost of production The market supply curve is the sum of the individual supply curves of all the potential sellers it plots the relationship between the total quantity supplied and the market price holding all else equal Shifting the supply curve 0 Changing the prices of inputs used to produce the goods ex if the price of steel goes up car makers will produce less An input is a good or service used to produce another good or service The supply curve shifts only when the quantity supplied changes at a given price If a good s own price changes and its supply curve hasn t shifted the own price change produces a movement along the supply curve Changes in technology used to produce the good ex fracking has caused an increased supply curve changes in the number and scale of seller39s ex war causes people to flee their homes causes a decrease in supply changes in seller s beliefs about the future ex natural gas prices sky rocket bc home heating 44 supply and demand in equilibrium Competitive markets converge to the price at which quantity supplied and quantity demanded are the same The competitive equilibrium is the crossing point of the supply curve and the demand curve When the market price is above the competitive equilibrium price quantity supplied exceeds quantity demanded creating surplus When the market price is below the price qdgtqs creating shortage Lecture Notes for Chapter 5 Chapter 5 THU MSI Crown 201 office hours 1012 TUTH KEY IDEAS 1 Macroeconomics is the study of aggregate economic activity 2 National income accounting is a framework for calculating GDp which is measure of aggregate economic output 3 GDP can be measure in three different ways and in principle these methods should all yield the same answer productionexpenditureincome 4 GDP has limitations as a measure of economic activity and as a measure of economic wellbeing 5 Economists use price indexes to measure the rate of inflation and to distinguish normal GDP from real GDP which holds prices fixed Macroecon is the study of economic aggregates and economywide phenomena In particular macroeconomics asks the following questions What is income per capita How do we measure the differences in income per capita How large are differences in income per capita What causes differences in income per capita Income per capita The average income per person Income per capita divide nations income by of people Income per capita in the United States Differences in income per capita are caused by institutional differences socalled economic rules of the game and political policies that impact them Differences in income per capita can either narrow or widen over time Why does economic growth sometimes slow or even go negative population loss natural disaster war etc What is a recession 2 quarters or more of negative economic growth gt causes stock and housing crash Great recession in 08 In the short run economic growth slows down or even becomes negative when aggregate spending decreases What is the unemployment rate and why does it rise during recessions Current 51 whether figure is good or bad depends on if you have a job but historically low 3 during Clinton is best we39ve had People start spending less and save more and a reaction from jobs cutting jobs cause this lack of demand gt business cycle Why were the Great Recession of 0709 and the Great Depression of 19291932 so severe lost of jobsgt lost of moneygt poverty Depression 2 continual Recession periods 1 year The unemployment rate is defined as the ratio of workers without a job who are actively seeking one divided by the labor force National income accounts A Measure of the level of aggregate economic activity in a country National lnoc Aggregate economic activity in a country can be measure in three ways 0 production expenditure 0 income Each are used to measure GDP GDP The market value of the final goods and services produced within the borders of a particular time period usually a year A foreign country39s company who produces in the US is also in the GDP GNP The market value of all final goods produced by American companies regardless of location of a particular time period usually a year Production Approach Productionbased accounting sums up each firm39s value added which is the firm39s sales revenue minus the firm39s purchases of intermediate products from other firm Expenditure Approach Expenditurebased accounting sums up the purchases of goods and services by different groups or categories There are five main categories 1 Consumption goods and consumption services bought by domestic households C New physical capital investment bought by domestic households and firms i Government expenditures on goods and services G Exports of goods and services produced domestically and sold abroad X lMports of goo 91 Income approach Incomebased accounting sums up payments or income received by labor and the owners of physical or financial capital Aggregate Accounting Identity Y GDP quotprod GDP Aexp GDP quotincome National Income Accounting Identity Y C I G X M Expenditure 0 consumption l Investment land labor capital G Government purchases X Exports MImports EvidenceBased Economics Example 0 IN the UNited States what is the total market value of annual economic production Answer The bureau of Economic Activity estimated in 2013 that US GDP wa 168 trillion or about 55000 per person 0 In 2013 how was the GDP divided into the expenditure components Gross domestic product 168 Consumption 115 Investment 27 Government Expenditure 31 Exports 23 Imports 28 0 Have US expenditure shares fluctuated or remained constant over time Answer Remain constant GDP and national income accounting is a useful system taking the temperature of the economy GDP omits depreciation of the physical capital stock and resources GDP excludes home production of cleaning cooking and child care done in the household nonprofessional services GDP does not capture transactions conducted in the underground economy GDP does not count negative externalities such as pollution noise and crime GDP does not include production by US workers and US capital abroad An increase in GDP will record both increases in actual production and income and increase in the price of those goods and services We therefore need to distinguish between nominal GDP and real GDP Nominal GDP The total value of production using current market prices to determine the value of each unit that is produced Real GDP GDp deflator one way we measure inflation Divide real GDP for two different years and times by 100 Midterm Fri Simple calculators only MC matching and short answer Consumer Price Index CPI The price level of a particular basket of consumer goods and services CPI cost of consumer basket in current year cost of consumer basket in base year The GDP deflator includes things not purchaed by households The CPI includes imports Housingrelated expenditures like shelter and utility bills have a large weight in the CPI GDP and the price level are more often quoted in growth rates A growth rate is defined as a percentage change newoldold Inflation rate The percentage change in a price index We can use a price index 0 make meaningful comparisons across time in 1909 then US president William Howard Taft was paid 75000 In 2013 current US president Barack Obama was paid 400000 Book notes for Chapter 5 51 Macroeconomic Questions 0 Income per capita is the income per person Calculated by dividing a nation s aggregate income by the number of people in the country Recessions are periods at least 2 quarters in which aggregate economic output falls 0 A worker is officially unemployed if he or she does not have a job has actively looked for work in the prior four weeks and is currently available for work 0 The unemployment rate is the fraction of the labor force that is unemployed National income accounts measure the level of aggregate economic activity in a country 0 National Income and Product Accounts NIPA official name for the US 52 National Income Accounts ProductionExpenditurelncome Production 0 To determine the market value of production multiply the quantity produced by the market price 0 GDP is the market value of the final goods and services produced within the borders of a country during a particular period of time 0 GDP is a measure of production not a measure of sales to consumers Expenditure Including both household expenditures and firm inventory expenditures will equal the same as the production Income 0 Every dollar of revenue must either go to some worker or be retained by the firm 0 So the total value of revenue must equal the total value of income received by workers and owners 0 Two variables are related by an identity when the two variables are defined in a way that makes them mathematically identical 0 Productionexpenditureincome Factors of production are the inputs to the production process come in two key forms capital and labor Firmsgt households Production of goods and services and Income paid to factors of production Households gt Firms Expenditures on goods and services and factors of production Production represents the goods and services that are produced by firms Expenditure represents the payments for goods and services Income represents the payments that are mode from firms to households to compensate the households for the use of their physical capital and labor Factors of production represent the productive resources that are owned by households and used by firms in the production process Production based accounts sum up the market value that is added by each domestic firm in the production process Production based accounting measure each firm s value added which is the firm s sales revenue minus the firm s purchases of intermediate products from other firms Expenditure based national income account measure the purchases of goods and services produced in the domestic economy These purchases are five categories 0 Consumption is the market value of consumption goods and consumption services that are bought by domestic households ex frisbees 0 Investment is the market value of new physical capital that is bought by domestic households and domestic firms purchases of new physical capital not stocks and bonds ex tesla s new auto plant 0 Government expenditure is the market value of government purchases of goods and services excludes transfer payments social security and interest paid on government debt ex new road 0 Exports are the market value of all domestically produced goods and services that are purchased by households firms and governments in foreign countries 0 Imports are the market value of all foreignproduced goods and services that are sold to domestic households firms and government 0 National income accounting identity y cigxm 53 What isn t measured by GDP Physical capital depreciation Home production underground economy GNP Leisure 54 Real v Nominal Nominal GDP is the total value of production final goods and services using current market prices to determine the value of each unit that is produced Real GDP is the total value of production using market prices from a specific base year to determine the value of each unit that is produced Real GDP growth is the growth rate of real GDP GDP deflator is the ratio of nominal GDP to real GDP times 100 It is a measure of how prices of goods and services produced in the country have risen since the base year The consumer price index is the ratio of the cost of buying basket of goods in one year divided by the cost of the same basket of goods using base year prices times 100 The rate of increase in prices is the inflation rate It is calculated as the year overyear percentage increase in a price index
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