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Macroeconomics Week 1

by: Adriana Gomez

Macroeconomics Week 1 Econ 1202

Adriana Gomez
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Foundations and Models
Principles of Macroeconomics
Owen Svalestad
Class Notes




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This 4 page Class Notes was uploaded by Adriana Gomez on Tuesday September 6, 2016. The Class Notes belongs to Econ 1202 at University of Connecticut taught by Owen Svalestad in Fall 2016. Since its upload, it has received 7 views. For similar materials see Principles of Macroeconomics in Economics at University of Connecticut.


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Date Created: 09/06/16
Chapter 1: Foundations and Models  Scarcity – Unlimited wants exceeds limited resources available to fulfill those wants o What to produce?  Individuals, firms, & governments decide on goods and services to produce  Increase in production of one thing cause decrease in production of another, the trade of  Opportunity Cost, the highest valued alternative given up in order to engage in some activity o How to produce it?  There may be several diferent methods for producing such goods and services o Who will get it?  In the United States, those with higher incomes obtain more goods and services  Taxes and welfare policy changes change the distribution of income  Economics – study of choices people make to attain goals given scarce resources o Economics use economic models, simplified versions of reality to analyze economic applications to the real world o Building an economic model often follows these steps:  Decide on the assumptions to use in developing the model.  Formulate a testable hypothesis.  Use economic data to test the hypothesis.  Revise the model if it fails to explain the economic data well.  Retain the revised model to help answer similar economic questions in the future. o Models need assumptions and simplifications to be useful o Testability (generate testable predictions, verified or proven with data) o Economic variables, something measureable that can have diferent values, such as the incomes of doctors  3 key economic ideas o People are rational  Using all available information to achieve goals  Weighing benefits and costs of actions o People respond to economic incentives  as incentives change, so do the actions people take o Optimal decisions are made at the margin  Most decisions involve doing a little more or less of something  In terms of marginal cost and benefit (MC and MB) Marginal analysis  THE ECONOMIC PROBLEM every society must solve o The wants are greater than resources therefore scarcity exists causing constant tradeof o Trade of – the idea that, due to scarcity’s existence, producing more of one good or service means producing less of another good or service  Ways to overcome the economic problem: Types of economies  Centrally planned economy: An economy in which the government decides how economic resources will be allocated.  Market economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources.  Tend to be more efficient than centrally  People might not immediately do things in planned economies the most efficient way  This promotes Productive efficiency, where Governments might interfere with market goods or services are produced at the outcomes lowest possible cost because of  Market outcomes might ignore the desires competition of people who aren’t involved in  Allocative Efficiency, where production is transactions (pollution) in accordance with consumer  Economically efficient outcomes may not preferences, in particular, every good or be the most desirable. Markets result in service is produced up to the point where high inequality; some people prefer more the last unit provides a marginal benefit equity, i.e. fairer distribution of economic to society equal to the marginal cost of benefits. producing it,caused by voluntary exchange  Equity vs efficiency in market economies o Equity: The fair distribution of economic benefits. o An important trade-of for a government is that between efficiency and equity.  Mixed economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. o Economists try to mimic natural scientists by suing the scientific method o Positive analysis: analysis concerned with what is o Negative analysis: analysis concerned with what ought t 3 Key Economic Ideas o People are rational  Positive and normative analysis o Economists try to mimic natural scientists by suing the scientific method 2 o Positive analysis: analysis concerned with what is o Negative analysis: analysis concerned with what ought to be o Most economists use POSITIVE analysis  Microeconomics is the study of o how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.  Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.  Most graphs will measure two things, LOOK AT THE GRAPHS!!! o Truncated Scale, larger fluctuations in comparison to a more spread out scale o Connecting points with lines helps better illustrate relationships o Slope of the line: ∆ Y/ ∆ X o Positive Relationship: One economic variable increases, and so does the other o Negative Relationship: As one economic variable increases, the other decreases o We can approximate its slope over a section by measuring the slope as if that section were linear. o Another way to measure the slope of a non-linear curve is to measure the slope of a tangent line to the curve, at the point we want to know the slope. o Percentage Change, which is the change in some economic variable, usually from one period to the next, expressed as a percentage o Total revenue is equal to quantity multiplied by price o The area of a triangle is equal to ½ multiplied by its base multiplied by its height  Technology: the processes a firm uses to produce goods and services 3  Capital: manufactured goods that are used to produce other goods and services 4


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