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by: Paige Evans

Macroeconomics Econ 205

Paige Evans


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Notes from the first four weeks of class
Principles of Macroeconomics
John Schultz
Class Notes
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This 7 page Class Notes was uploaded by Paige Evans on Tuesday September 20, 2016. The Class Notes belongs to Econ 205 at Shepherd University taught by John Schultz in Fall 2016. Since its upload, it has received 3 views. For similar materials see Principles of Macroeconomics in Economics at Shepherd University.


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Date Created: 09/20/16
Chapter 1  Scarcity: The condition that arises because wants exceed the ability of resources to satisfy them.  The ability of each of us to satisfy our wants is limited by the time we have, the incomes we earn, and the prices we pay for the things we buy o Everyone has unsatisfied wants  The ability to satisfy our wants as a society is limited by productive resources o Gifts of nature, labor and ingenuity, and the tools and equipment that we have made  Example of scarcity: Someone wants concert tickets and a book but only has $10.  When faced with scarcity we must make choices, we must make a choice among our available alternatives.  Economics: The social science that studies the choices that individuals, businesses governments, and entire societies make as they cope with scarcity, the influences on those choices, and the arrangements that coordinate them. o 2 Parts:  -Microeconomics  -Macroeconomics  Macroeconomics: The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make o Example Questions: o -Why did production and jobs expand slowly in the United States during 2012 and 2013? o -Why are incomes growing must faster in China and India than in the United States? o -Why is unemployment in Europe so high? o -Why are Americans borrowing more than $1 billion a day from the rest of the world?  Two focus questions to define the scope of economics: o -How do choices end up determining what, how, and for whom goods and services get produced? o -When do choices made in the pursuit of self-interest also promote the social interest?  Goods and Services: The objects (goods) and the actions (services) that people value and produce to satisfy human wants  Goods are the objects that satisfy the people’s wants  Services are the actions that satisfy people’s wants  The question what determines the quantities we produce  How-self explanatory- vineyard=wine  For whom- dependent upon the incomes that people earn and the prices that they pay for the goods and services they buy o -A person who earns a higher salary has the ability to buy more goods and services then someone who has a lower income  Self-Interest: The choices that are best for the individual who makes them  Social Interest: The choices that are best for the society as a whole o -Efficiency: Think of as being achieved by baking the biggest possible pie o -Equity: Think of as being achieved by sharing the pie in the fairest way possible  We tend to (unintentionally) make social interest choices when we make self-interest choices o Self-interest promotes social interest  Globalization: The expansion of international trade and the production of components and services by firms in other countries  Globalization has been occurring for centuries, but only recently has accelerated o -Bring rapid income growth o -Jobs in manufacturing and routine services are shrinking in the United States while nations such as Africa and South America are not allowing the prosperity in other parts of the world  We are currently living in a time that has been labeled “The Information Revolution” o -Parallels with the Industrial Revolution o -The changes that have occurred over the last 30 years alone have been based off of two parts of technology: microprocessor and/or the computer chip Six Economic Ideas: The Economic way of Thinking  -A choice is a tradeoff  -Cost is what you must give up to get something  -Benefit is what you gain from something  -People make rational choices by comparing benefits and costs  -Most choices are “how much” choices made at the margin  -Choices respond to incentives  Tradeoff: An exchange—giving up one thing to get something else o Think of choices as tradeoffsWhen you choose one thing, you give up something else that you could have chosen  Opportunity Cost: The opportunity cost of something is the best thing you must give up to get it o Example: If you spend $10 on a movie ticket, you can’t spend it on a sandwich. The movie ticket really costs a sandwich.  The cost of something is what must be given up to get it, not the money spent on it.  The word opportunity cost is an economic term to emphasize the view of cost  Benefit: The benefit from something is the gain or pleasure that brings it, measured by what you are willing to give up to get it o Determined by personal preferences  Economists measure benefit as the most that a person is willing to give up to get somethingYou are willing to give up a lot for something that brings a large benefit, but you are willing to give up very little for something that brings little benefit  Rational Choice: A choice that uses the available resources to best achieve the objective of the person making the choice o How to people choose rationally?  Comparing the benefits and costs of the alternative choices and choosing the alternative that makes net benefit—benefit minus cost—as large as possible  Example: You have chosen to be a student. If that choice is rational, your benefit from being in school exceeds the cost, so being in school maximizes your net benefit  Margin: A choice on the margin is a choice that is made by comparing all the relevant alternatives systematically and incrementally  Marginal Cost: The opportunity cost that arises from a one-unit increase in an activity. The marginal cost of something is what you must give up to get one additional unit of it o Example: Think about going to the movies for the third time in the same week—your marginal cost of seeing the movie is what you must give up to see that one additional movie. It is not what you give up to see all three movies, so you don’t count that cost as resulting from the decision to see the third movie  The marginal cost of any activity increases as you do more of it  Marginal Benefit: The benefit that arises from a one-unit increase in an activity. The marginal benefit of something is measured by what you are willing to give up to get one additional unit of it o A fundamental feature of marginal benefit is that it diminishes o Example: You know that going to the movies decreases your study time and lowers your grade. You pay for seeing a movie with a lower grade. You might be willing to give up ten percentage points to see your first movie in a week, but you won’t be willing to take such a big hit on your grade to see a second movie in a week. Your willingness to pay to see a movie decreases as the number of movies increases  Incentive: A reward or a penalty—a “carrot” or a “stick”—that encourages or discourages an action o We respond positively to “carrots” and negatively to “sticks”  Carrots are marginal benefits  Sticks are marginal costs  A change in marginal benefit or change in marginal cost changes the incentives that we have leads us to change out actions  A central idea of economics is that by observing changes in incentives, we can predict how choices change  Economist Model: A description of the economy or a part of the economy that includes only those features assumed necessary to explain the observed facts o Analogous to a map if you want to know about valleys and mountains you use a physical map; if you are studying nations you use a political map; and if you are a telephone engineer who is wanting to fix a broken connection you use a map of the cables and conduit under the streets o To check an economic model against the facts, economists use natural experiments, statistical investigations, and laboratory experiments  -Natural Experiments: A situation that arises in the ordinary course of economic life in which one factor of interest is different and other things are equal or similar  -Statistical Investigation: Looks for a correlation—a tendency for the values of two variables to move together (either in the same direction or in opposite directions) in a predictable and related way  Economists sometimes disagree about assumptions and models —sometimes disagree about what policy should be followed o Some can be settled by appealing to future facts  Disagreements that can’t be settled by facts are normative statements (statements about what ought to be), they depend on values and cannot be tested.  Disagreements that can be settled by facts are positive statements (statements about what is)  Might be right or wrong and you can discover which by careful observation of facts  September 9, 2016  Demand and Supply  Law of demand*  Demand schedule—list of demand  Quantity Demand—function of price  Non-price determinate demand  Increase in demandshift to the right  Decrease in demandShift to the left  Change in demand v. Change in quantity demand o Change in demand=change in the curve o Happens in one or more items that were being held constant  When price goes up, quantity demanded goes down  Normal Good—Good that when incomes go up in market, demand goes up (most goods)  Inferior Good—When income goes up, demand goes down  Law of Supply: Ceteris Paribus, there is a direct relationship between the price of a product and the quantity supply of that product o Price goes up, quantity supply goes up September 14, 2016  Demand curve increaseshift right, Price and quantity increase  GDP—Gross Domestic Productmeasure of overall production o Where production takes place (within United States)  Labor Markets—Unemployment rate4.9%  Consumer Price Index o All statistical measurements  Improvement—more data collection, increase sample size  GDP number going downeconomy not producing as much as it was  GDP=Market Value ($) of all final goods and services produced within a nation’s boarders/boundaries in a given time period, expressed as an annual rate o Final product is ultimate product that goes to the user of said product o Intermediate goods are what makes up final good o Official statistic is quarterly (every 3 months)  GNP—Gross National Product o Nationality of Producer o Example: American company producing something over in Japan  Durable goodlasts a long time (Refrigerator)  NondurableDoes not last a long time (Food)  Income approach  Expenditure approach September 16, 2016 GDP=C (70%)+I (15%)+G(20%)+NX (-5%) Expenditure approach Consumption: Durables Non-Durables Services (Largest), service economy, information economy—most jobs are service type jobs Gross Private Domestic Investment: Fixed—Purchase of capital goods Residential Housing Changes in Inventory—Can be either positive (increase) or negative (decrease), leading indicators Net Exports: Exports-Imports Underground Economy Illegal Production—production of illegal drugs, gambling, etc. Goods themselves are not illegal, but not reported to the government—tax evasion Nonmarket production—produce something on your own but not to sell it Real GDP =Nominal GDP/Price Index x 100GDP Deflator


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