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Macroeconomics Chapter 1, Week 1 Notes

by: AngelicaDeMario

Macroeconomics Chapter 1, Week 1 Notes Econ 104

Marketplace > University of Wisconsin - Milwaukee > Macro Economics > Econ 104 > Macroeconomics Chapter 1 Week 1 Notes
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About this Document

These notes go over the 10 principles of Macroeconomics.
Principles of Macroeconomics
G. Richard Meadows
Class Notes
Macroeconomics, macro 104




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This 4 page Class Notes was uploaded by AngelicaDeMario on Wednesday August 24, 2016. The Class Notes belongs to Econ 104 at University of Wisconsin - Milwaukee taught by G. Richard Meadows in Fall 2016. Since its upload, it has received 4 views. For similar materials see Principles of Macroeconomics in Macro Economics at University of Wisconsin - Milwaukee.


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Date Created: 08/24/16
Brief Principles of Macroeconomics Chapter 1: 10 Principles of Economics Vocab  Scarcity: the limited nature of resources.  Economics: The study of how society manages its resources. How People Make Decisions Principle #1: People Face Tradeoffs - Examples- 1. Going to a party before a test disallows time to study. 2. Wanting to purchase something requires one to work to get the purchasing money. - Society follows EFFICIENCY VS EQUALITY.  Efficiency: When society gets the most from its scarce resources.  Equality: When prosperity is distributed uniformly among society’s members. What is the tradeoff? To achieve greater equality, one could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.” Principle #2: The Cost of Something Is What You Give Up to Get It - Decisions are based off comparison and the benefits of alternative choices. - Opportunity cost of any object is whatever has to be given up to obtain the object. (Most relevant cost for decision making) - Examples: 1. Going to college for a year isn’t just the tuition, for the foregone wages. 2. Seeing a movie is not just the price of the ticket, the the value of the time spent at the theater. Principle #3: Rational People Think at the Margin  Rational People: systematically and purposefully do their best to achieve their desired objective. Make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan. - Examples: 1. When a student considers whether to go to college for an additional year, he compares fees and foregone wages to the extra income he could earn with another year of education. 2. When a manager considers whether to increase output, she compares the cost of the needed labor and the materials to the extra revenue. Principle #4: People Respond to Incentives  Incentive: Something that induces a person to act in a way that they are in return rewards or punishment. (Rational people respond to incentives) - Examples: 1. When gas prices rise, consumers buy hybrid cars and fewer gas guzzling SUV’s. 2. When cigarette taxes increase, teen smoking falls. How People Interact Principle #5: Trade Can Make Everyone Better Off - 1. Rather than being self-sufficient, people can specialize in producing one service and exchange it for other goods. 2. Countries also benefit from trade and specialization (Get a better price abroad for goods they produce, buy other goods more cheaply from abroad than could be produced at home.) Principle #6: Markets Are Usually A Good Way to Organize Economic Activity  Market: a group of buyers and sellers (need not be in a single location) - “Organize economic activity” means determining 1. what goods to produce 2. how to produce them 3. how much of each to produce 4. who gets them  Market Economy: allocates resources through the decentralized decisions of many household and firms as they interact in markets. 1. Famous insight by Adam Smith in The Wealth of Nations- Each of these households and firms acts as if “led by an invisible hand” to promote general economic well-being. - The invisible hand works through the price system: 1. The interaction of buyers and sellers determines prices. 2. Each price reflects the good’s value to buyers and the cost of producing the good. 3. Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well- being. Principle #7: Governments Can Sometimes Improve Market Outcomes  Important role for government: enforce property rights (with police, courts)  People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen.  Market Failure: When the market fails to allocate society’s resources efficiently. Causes of Market Failure: 1. Externalities: When the production or consumption of a good affects bystanders (pollution) 2. Market Power: A single buyer or seller has substantial influence on market price. (monopoly) - Public policy may promote efficiency and government may alter market outcome to promote equity. - If the market’s distribution of economic well-being isn’t desirable, the tax or welfare policies can change how the economic “pie” is divided. How The Economy As A Whole Works Principle #8: A Country’s Standard of Living Depends on the Ability to Produce Goods and Services. - Huge variation in living standards across countries and over time: 1. Average income in rich countries is more than ten times average income in poor countries. 2. The U.S. standard of living today is about eight times larger than 100 years ago. - The most important determinant of living standards: Productivity: the amount of goods and services produced per unit of labor. - Productivity depends on the equipment, skill level, and technology available to workers. - Other factors (labor unions, competition from abroad) have far less impact on living standards. Principle #9: Prices Rise When the Government Prints Too Much Money  Inflation: increases in the general level of prices. - In the long run, inflation is almost always cause by excessive grown in the quantity of money, which causes the value of money to fall. - The fast the government creates money, the greater the inflation rate. Principle #10: Society Faces a Short-run Tradeoff Between Inflation and Unemployment. - In the short-run (1-2 years), many economic policies push inflation and unemployment in opposite directions. - Other factors can make this tradeoff more or less favorable, but the tradeoff is always present. Summary  The principles of decision making are: 1. People face tradeoffs. 2. The cost of any action is measured in terms of foregone opportunities. 3. Rational people make decisions by comparing marginal costs and marginal benefits. 4. People respond to incentives.  The principles of interactions among people are 1. Trade can be mutually beneficial. 2. Markets are usually a good way of coordinating trade. 3. Government can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable.  The principles of the economy as a whole are: 1. Productivity is the ultimate source of living standards. 2. Money growth is the ultimate source of inflation. 3. Society faces a short-run tradeoff between inflation and unemployment.


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