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ECON 111 Macroeconomic Notes Chapter 2

by: Lauren Heller

ECON 111 Macroeconomic Notes Chapter 2 Econ 111

Marketplace > University of Alabama - Tuscaloosa > Econ 111 > ECON 111 Macroeconomic Notes Chapter 2
Lauren Heller
GPA 4.0

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About this Document

Notes were taken in class given from the professor
Kent 0. Zirlott
Class Notes
Econ, EC111, Economics, Macro, Macroeconomics, chapter 2
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This 4 page Class Notes was uploaded by Lauren Heller on Wednesday January 20, 2016. The Class Notes belongs to Econ 111 at University of Alabama - Tuscaloosa taught by Kent 0. Zirlott in Fall 2016. Since its upload, it has received 21 views.


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Date Created: 01/20/16
Macro- Chapter 2: Assumptions and Models  Assumptions simplify the complex world, make it easier to understand  Model- a highly simplified representation of a more complicated reality  Economics use models to study economic issues  Circular-Flow Diagram- a visual model of the economy, shows how dollars’ flow through market among households and firms  Two types of “actors”  Households (consumers)  Firms  Two markets  The market for goods and services  The market for “factors of production”  Break down of Circular Flow Diagram  Factors of Production- the resources the economy uses to produce goods and services including:  Labor  Land (raw materials)  Capital (buildings and machines used in production)  Entrepreneurship (idea)  Households  Own the factors of production, sell/ rent to firms for income  Buy and consume goods and services  Firms  Buy/hire factors of production use them to produce goods and services  Sell goods and services  Production Possibilities Frontier (PPF) – a graph that shows the combination of two goods the economy can possibly produce given the available recourses and the available technology  model of opportunity cost  opportunity cost- what must be given up to obtain that item  moving along the PPF involves shifting resources from the production of one good to the other  society faces a tradeoff: getting more of one good requires sacrificing some of the other  the slope of the PPF tells you the opportunity cost of one good in terms of the other  The Shape of the PPF  The PPF could be a straight line, or bow-shaped  it depends on what happens to the opportunity cost as the economy shifts resources from one industry to the other  if opportunity cost remains constant, PPF is a straight line  essentially, the same resources are equally useful for producing in either industry  if opportunity cost of a good rises as the economy produces more of the good, PPF is bow-shaped  essentially, the resources are specialized and not easily adaptable for producing in either industry  Examples of the two PPF:  Economics growth and the PPF  With additional resources or an improvement in technology, the economy can produce more  Economic growth shifts the PPF outward (to the right)  Why the PPF might be bow-shaped  As the economy shifts resources from Good 1 to Good 2  PPF becomes steeper  Opportunity cost of Good 2 increases  When different workers have different skills, different opportunity costs of producing one good in terms of the other  When there is some other resource, or mix of resources with varying opportunity costs (different types of land suited for different uses)  Points on the PPF  Possible  Efficient, all resources are fully utilized  Points under the PPF  Possible  Not efficient, some resources underutilized  Points above the PPF  Currently unobtainable  Microeconomics- is the stud of how households and firms make decisions and how they interact in markets  Macroeconomics- the study of economy-wide phenomena, including inflation, unemployment and economic growth  As scientist, economists make positive statement, which attempts to describes the world as it is  As scientist, economists make normative statement, which attempts to prescribe how the would should be  Examples of positive and normative statements:  Prices rise when government increases the quantity of money  Positive  The government should print less money  Normative (key word should)


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