Macroeconomics Chapter 2 Notes
Macroeconomics Chapter 2 Notes EC 111
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This 4 page Class Notes was uploaded by Carter Cox on Monday January 25, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 35 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 01/25/16
Macro Chapter 2 Notes Assumptions and Models Assumptions simplify the complex world and make it easier to understand a highly simpli ed representation of a more complicated reality 0 Economists use these models to study economic issues 0 Used to make something easier to understand and comprehend The Circular Flow Diagram The a visual model of the economy 0 Shows how dollars ow through markets among households and rms Two types of quotactors o Households which are the consumers 0 Firms which are the businesses Two markets 0 The market for goods and services 0 The market for quotfactors of productionquot 0 Own the factors of production They sell rent them to rms for income 0 Buy and consume goods and services 0 Buy hire factors of production and use them to produce goods and services 0 The rms sell the goods and services to consumers Factors of Production o The resources the economy uses to produce goods and services including inputs 0 Put into three categories 1 Labor the people 2 Land the raw materials or natural resources 0 Example If you are producing coke the water caffeine corn syrup etc are all considered land 3 Capital the buildings and machines used in production 4 Entrepreneurship the ideas Apple the company The Productions Possibilities Frontier PPF The a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology 0 Maximum we can get from what is given 0 Always has tradeoffs The opportunity cost of an item is what must be given up to obtain that item Moving along the PPF involves shifting resources labor from the production of one good to the other Society faces a tradeoff Getting more of one good requires sacri cing 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 bowed shaped bow outward Depends on what happens to the opportunity cost as the economy shifts its resources from one industry to another o If the Opportunity cost remains constant a straight line essentially the same resources are equally useful for producing in either industry 1 Example Coke and Pepsi they have tradeoffs o If the opportunity cost of a good rises as the economy produces more of the good the PPF is bow shaped Rounded Essentially the resources are specialized and not easily adaptable for producing in either industry 1 This is the majority of all PPF s Slope if a line equals rise over run With additional resources or an improvement in technology the economy can produce more of Le computers or wheat or any combination in between Why the PPF might be Bow Shaped As the economy shifts resources from beer to mountain bikes 0 The PPF becomes steeper o Opportunity cost of mountain bikes increases 0 As you move down the curve the more money The PPF is bowed shaped when different workers have different skills different opportunity costs of producing one good in terks of the other The PPF would also be bowed shaped when there is some other resource or mix of resources with varying opportunity costs 0 Different type of land suited for different uses The PPF Important Notes The PPF shows all combinations of two goods that an economy can possibly produce given its resources and technology The PPF illustrates the concepts of tradeoff and opportunity cost efficiency and inefficiency unemployment and economic growth A bow shaped PPF illustrated the concept of increasing opportunity cost A straight line PPF illustrates constant opportunity costs is the study of how households and rms make decisions and how they interact in markets is the study of economy wide phenomena including in ation unemployment and economic growth These two branches of economics are closely intertwined yet distinct they address different questions The Economist as Policy Advisor As scientists economists make 0 Positive Statements fact or description of a relationship that is true 1 It attempts to describe the world as it is As policy advisors economists make 0 Normative statement 1 Opinion or valued judgment 2 They attempt to prescribe how the world should be Examples Prices rises when the government increases the quantity Positive The Government should print less money Normative A tax cut is needed to stimulate the economy Normative An increase in the price of burritos will cause an increase in consumer demand for taco Positive Points PPF Possible Ef cient all resources are fully utilized Points Under Possible Not ef cient some resources underutilized workers unemployed Points Above Currently unattainable
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