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Week Two Lecture Notes

by: Samantha Pruser

Week Two Lecture Notes ECON 222 001

Samantha Pruser
GPA 3.8
Principles of Macroeconomics
Chandini Sankaran

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About this Document

Lecture Three- Tuesday, September 1, 2015 and Lecture Four- Thursday, September 3, 2015
Principles of Macroeconomics
Chandini Sankaran
Class Notes
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This 5 page Class Notes was uploaded by Samantha Pruser on Thursday September 3, 2015. The Class Notes belongs to ECON 222 001 at University of South Carolina taught by Chandini Sankaran in Summer 2015. Since its upload, it has received 44 views. For similar materials see Principles of Macroeconomics in Economcs at University of South Carolina.


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Date Created: 09/03/15
Tuesday September 1 2015 Macroeconomics Notes Lecture Three Adam Smith and Market Economies capitalists Property is privately owned and markets determine what quantities of goods and resources are sold quotWealth of nations 1776 Markets reach most efficient outcome Government intervention leads to less efficient market Thousands of household buyers and sellers who interact in markets 0 Each one pursuing their own quotself interest 0 Are guided by an quotinvisible hand 0 To reach the most efficient outcome possible Prices and income allocate resources 0 Whoever can afford to buy will purchase 0 We USA are a market economy Market economies promote Productive Efficiency where goods or services are produced at the lowest possible cost Allocative Efficiency Where production is consistent with consumer preferences the marginal benefit of production is equal to its marginal cost Producing the right amount that consumers want to buy 0 Marginal Cost how much firms are currently spending producing the good 0 Marginal Benefit how much competitors value the good Productive and Allocative Efficiencies as well as Marginal Cost and Benefit only in competitive markets 0 Not in monopolies one provider I No competition I Higher prices I Under allocate resources I Example utility companies ie electricity Market Failure Market does not reach the best outcome on its own government intervention can improve a market s outcomes 1 Externality the impact of one person s actions on the wellbeing of a bystander 0 Positive Externality Impose external benefits Example Finding a lottery ticket on street it wins jackpot 0 Negative Externality Impose external costs Example Dumping toxic waste into a public river smoking in a crowded classroom 2 Excessive Market Power 0 Monopoly One seller of a good or service Price maker o Oligopoly a few large firms 0 Natural Monopoly electricity very high startup costs all houses need wires and cables Example utility companies electricity 3 Equity Free markets are efficient but not equitable 4 Government Provides goods and services that a private market will not provide called public goods 0 Public good Nonexcludable Cannot prevent a person from using and Nonrival One person s using will not diminish another person s use 0 Private Good excludable Can prevent a person from using and rivalOne person s use will diminish another person s use I For a private market to produce a good it needs to be excludable 5 Enforce Laws Contracts and Property Rights The rights individuals or firms have to the exclusive use of their property Scientific Nature of Economics Economists mimic natural scientists by using the scientific method Positive Analysis the study of quotwhat is Factual and can be supported by evidence describes world as it is Example Clothes protect humans from the cold Normative Analysis Study of quotwhat ought to be How you think the world should be prescriptive personal values views and judgements cannot be tested in order to be proven true or false Example Everyone should be clothed The word quotshouldquot is a dead giveaway that the statement is normative Examples 1 War is bad Normative 2 Barack Obama is better looking than Donald Trump Normative 3 Spending on national defense has increased since September 2001 Positive Thursday September 3 2015 Macroeconomics Notes Lecture Four Review from last lecture Free market one with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed Entrepreneur Someone who brings together the factors of production land labor and capital to produce goods and services Create products that consumers did not even know they wanted Entrepreneurs are a virtual part of economy because 1 Respond to consumer demand 2 Introduce new products Circular Flow Diagram Simplified Model Assumptions 1 Two economic Agents Households and firms Does not factor in the government 2 No savings 3 Closed Economy no foreign trade No imports goods produced abroad and sold domestically No exports goods produced domestically and sold abroad 4 Households own all resources factors of production and inputs Factors of Production Land Labor Physical Capital Entrepreneurs 1T Rent Wages l T Loans l T Profit Interest Firms Firms Firms Firms gt Blue arrow Input to firms gt Red Arrow Output of firms Back to householdconsumer 5 Firms employ resources in the production of output good or service a Market for goods and services or b Market for output product market Two key groups in a modern economy Households consists of individuals who provide the factors of production all types of work Firms Product Market markets where goods like computers and services such as medical treatment are offered Firms are sellers and households are buyers Factor Markets Markets where Factors of Production such as land labor capital etc are traded Circular Flow Diagram CFD Model that illustrates how participants in markets are linked Markets for goods and services Product Market Market for Output Households s Flow of Dollars N Flow of Goods and Services Firms Supported by Buyer money and expenditure Households Supported by income Could be Walmart as a firm in example above fits the description


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