Principles of Macroeconomics
Principles of Macroeconomics ECON 2105
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This 19 page Class Notes was uploaded by Howard Tillman on Wednesday October 28, 2015. The Class Notes belongs to ECON 2105 at Valdosta State University taught by Ellis Heath in Fall. Since its upload, it has received 33 views. For similar materials see /class/230530/econ-2105-valdosta-state-university in Economcs at Valdosta State University.
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Date Created: 10/28/15
Chapter Outline and Learning Objectives 11 Three Key Economic Ideas d Explain these three key economic ideas People are Foun atlons rational People respond to incentives Optimal decisions are made at the mar in and Models g 12 The Economic Problem That Every SOCIety Must Solve Discuss how an economy answers these questions What goods and services will be produced How will the goods and services be produced Who will receive the goods and services produced 13 Economic Models Understand the role of models in economic analysis 14 Microeconomics and Macroeconomics Distinguish between microeconomics and macroeconomics 15 A Preview of Important Economic Terms Become familiar with important economic terms APPENDIX Using Graphs and Formulas Review the use of graphs and formulas Economics Foundations and Models Scarcity A situation in which unlimited wants exceed the limited resources available to fulfill those wants Economics The study of the choices people make to attain their goals given their scarce resources Economic model A simplified version of reality used to analyze realworld economic situations Three Key Economic Ideas Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade Throughout this book as we study how people make choices and interact in markets we will return to three important ideas 1 People are rational 2 People respond to economic incentives 3 Optimal decisions are made at the margin Marginal analysis Analysis that involves comparing marginal benefits and marginal costs The Economic Problem That Every Society Must Solve Tradeoff The idea that because of scarcity producing more of one good or service means producing less of another good or service Opportunity cost The highestvalued alternative that must be given up to engage in an activity Tradeoffs force society to make choices when answering the following three fundamental questions 1 What goods and services will be produced 2 How will the goods and services be produced 3 Who will receive the goods and services produced The Economic Problem That Every Society Must Solve Centrally Planned Economies versus Market 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 The Economic Problem That Ever Society Must Solve The Modern quot ixedquot Economy 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 The Economic Problem That Every Society Must Solve Efficiency and Equity Productive efficiency A situation in which a good or service is produced at the lowest possible cost Allocative efficiency A state of the economy in which production is in accordance with consumer preferences in particular every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it The Economic Problem That Every Society Must Solve Efficiency and Equity Voluntary exchange A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction Equity The fair distribution of economic benefits Economic Models Normative and Positive Analysis Positive analysis Analysis concerned with what is Normative analysis Analysis concerned with what ought to be Economic Models Economics as a Social Science Because economics studies the actions of individuals it is a social science Economics is therefore similar to other social science disciplines such as psychology political science and sociology As a social science economics considers human behavior particularly decisionmaking behavior in every context not just in the context of business Microeconomics and Macroeconomics Microeconomics The study of how households and firms make choices how they interact in markets and how the government attempts to influence their choices Macroeconomics The study of the economy as a whole including topics such as inflation unemployment and economic growth Allocative efficiency Microeconomics Centrally planned economy Mixed economy Economic model Normative analysis Economic variable Opportunity cost Economics Positive analysis Equity Productive ef ciency Macroeconomics Scarcity Marginal analysis Tradeoff Market Voluntary exchange Market economy LEARNING OBJECTIVE Reviewthe use ofgraphs and formulas Using Graphs and Formulas A graph is like a street map it is a simplified version of reality Appendix Review the use of graphs and formulas Graphs of One Variable FIGURE 1A 1 Bar Graphs and Pie Charts Shares 01 the US aulomoblle market Korean fl rms 50 V 15 443 European rms 88 Japanese firms Big Three 393 443 Big Japanese Eu I39OpQ J39l Korean Three iirms firms flrms a Bar graph b Pie chart Values for an economic variable are often displayed as a bar graph or as a pie chart In this case panel a shows market share data for the US automobile industry as a bar graph where the market share of each group of firms is represented by the height of its bar Panel b displays the same information as a pie chart with the market share of each group offirms represented by the size of its slice of the pie LEARNING OBJECTIVE Reviewthe use ofgraphs and formulas Graphs of One Variable FIGURE 1A 2 TimeSeries Graphs Sales 7 5 Sales 80 r millions of millions cl automobiles automobiles 70 7 O 60 S 5 50 40 5 0 30 5 5 20 10 r 5 0 I 070 a I l l l l DD 2001 2002 2003 2004 2005 2006 200 2008 2001 2002 2003 2004 2005 2006 2007 2008 a Timeserles graph with truncated scale b Timeseries graph where the scale is Tfhe slashes 7 lndlcale nal the scale on he 7 01 mncawd venical axis Is truncated which means that some Hunters are omitted The numth on le vertical axis jump from 0 lo 50 Both panels present time series graphs of Ford Motor Company39s worldwide sales during each year from 2001 to 2008 Panel a has a truncated scale on the vertical axis and panel b does not As a result the fluctuations in Ford s sales appear smaller in panel b than in panel a Appendix Revtew the use etgrephs and rerrhutes Graphs of Two Variables FIGURE 1A3 duHarnlzza ptugzteekt Pmnls Plotting Price and Quantity 5 2 3 Points in 5 Graph 3 m C The gure shews e wurdt39menst39una 2 65 D grm eh wht39eh we measure the prt39ee H 70 E emu etehg th vertreet xrs a yr ads and the querrtt39ty of pt39zze sum Priw 16 per week e Ung the herrzehtet exts ne fgl gquot 5 r A mxraxts Each perhch the grid represents 14 5 uheutthe price and querrtt39ty C m anaU39 sh39sted Try the EMS B 13 mrrrrectt39rrg the pm39nt wt39th e h39rre we D Eh better THustrate the retetrehshrp I2 between the two vertehtes E quot Demand L curva 0 50 55 60 55 70 75 Ouanmy PRES Derweek As yet teemea h gure mg the eteehee tth mmulamal ma seetee eh the axes ete tmnc ed when hem thet numbers ave nmtuea ott ma hnnzunw exte numbevSJump mm a m an and ah the ventm ax s mutter lump mm mm tt LEARNING OBJECTIVE Reviewthe use ofgraphs and formulas Graphs of Two Variables Taking into Account More Than Two Variables on a Graph FIGU RE 1A395 Quantity pizzas per week h h bl Price When the Price of When the Price oi When the Price of s owmg T ree Var39a es on a dollars per pizza Hamburgers 100 Hamburgers 8150 Hamburgers 8200 Graph 15 45 50 55 The demand curve for pizza shows the T4 50 55 60 13 55 60 65 relationship between the price of plzzas d the uantit of izzas demanded 12 60 55 70 a q y p 11 65 to 75 holding constant otherfactors that might affect the willingness of consumers to buy prlce 16 pizza dollars Ifthe price of pizza is 14 point A an per mm 15 quot quot quot increase in the price of hamburgers from 150 to 200 increases the quantity of pizzas demanded from 55 to 60 per week 18 point B and shifts us to Demand curvez Or if we start on Demand curve1 and the 12 739 price of pizza is 12 point C a decrease in 11 V 2 Demand DemEAd Demam the price Of hamburgers from 150 to WEE ECF WBI 9 92 V 100 decreases the quantity of pizza 10 I demanded from 65 to 60 per week point 9 i D and shifts us to Demand curve3 39 l l l l l l D 45 50 55 60 65 7D 75 50 Quantity pizzas per week Appendix Graphs of Two Variables Pos ve and Negative Relations FIGURE 1A6 Graphingthe Positive in a pusitive reiatiunship between we ecuriumi39c variabieS as a cansumptiun spending As dispusabie persuriai inmme 39n the United States nas inoeased 5L7 nas cansumptiun spending Consumpxion s nunis an ni dollan LEARNING OBJHTIVE Review the use mgraphs and fumiuias aiswsame Persuuai income iuiiiims a dciials Consumvkim suenumu hiiimns ai dulim 5831 a mm mm 3500 9000 aim mm a 4 52mm 2005 2005 9500 1mm mm niepmnie ibmmns a dolly Appendix Graphs of Two Variables Determining Cause and Effect FIGURE 1A 7 Determining Cause and Effect Number of leaves on trees 0 Number 0 llres ln replaces a Problem of omitted variables Using graphs to draw conclusions about cause and effect can be hazardous In panel a we see that there are fewer leaves on the trees in a neighborhood when many homes have fires burning in their fire places We cannot draw the conclusion that the fires cause the leaves to fall because we have an omitted variable the season of the year LEARNING OBJECTIVE Review the use of graphs and formulas Rate a which grass W5 0 Number oi lawn mowers alng used b Problem ol39 reverse causallty In panel b we see that more lawn mowers are used in a neighborhood during times when the grass grows rapidly and fewer lawn mowers are used when the grass grows slowly Concluding that using lawn mowers causes the grass to grow faster would be making the error of reverse causality
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