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Pitt ECON 0100 - Macro and Microeconomics
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ECON 100 1st Edition Lecture 11Outline of Last Lecture I. A Labor Market with a Minimum Wage A. UnemploymentB. FairnessC. Efficiency II. TaxesA. Tax Incidence1. Elasticity of Demand2. Elasticity of SupplyB. EfficiencyC. Fairness1. Benefits2. Ability-to-PayIII. Production Quotas and SubsidiesIV. Market for Illegal Goods Outline of Current Lecture I. Review of Chapters 1-5A. Important Concepts and Terms Current Lecture- Macro and Microeconomics?- What is each about?- Search for examples of studies that fall in each field (review the corresponding, quiz # 3, Chapter 1)- What, How, and for whom?- “What is produced?” refers to the type of good or services that is produced: manufactured, agricultural, service- “How are the goods and services produced?” refers to the factors of production:Land, labor, capital, and entrepreneurship- “For whom are the goods and services produced?” refers to who consumes the goods and services produced - A relevant question is which factor of production earns what Land earns rent Labor earn wage Capital earns interestThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Entrepreneurship earns profit- Opportunity cost of a good- The highest valued alternative that must be given up to get it- Question to ask yourself: Among the alternatives that I am giving up, which one has the highest value to me? This alternative is my opportunity cost- Choosing at the Margin- Marginal benefit: the benefit that arises from an increase in activity For example, the benefit from the consumption of an additional unit a good- Marginal cost: the opportunity cost of an increase in an activity For example, the cost of making an additional unit of a good- Rational decisions involve making choices at the margin, by comparing the marginal benefit to the marginal cost- Positive v Normative Statements- Positive statements: what is?- Normative statements: What ought to be?- A central task of economists is to test positive statements about how the economic world works- All the questions on which economists provide advices involve a blend of the positiveand the normative- Production Possibility Frontier (PPF)- What is that? The boundary between the combinations of goods and services that can be produced and the combinations of goods and services that cannot be produced- Say the current efficient combination of Goods A and B is (20 units of A , 20 units of B). If producing 2 more units of Good A means giving up 12 more units of Good B, then the opportunity cost of an additional unit of A is 6 units of B, at the considered combination- Interpret correctly the shape of a PPF: It usually is bowed outward, because resources are usually not equally suited for producing all goods. The opportunity cost of a good increases as more of the good is produced If resources are equally suited to producing the two goods, then, the opportunity cost of each good remains constant as more of it is produced andthe PPF has the shape of a single straight line Economic growth occurs when the PPF is shifted outward- Supply and Demand- Distinguish the quantity supplied from the supply- Distinguish the quantity demanded from the demand- Distinguish movements along the demand curve, or the supply curve, from the shifting of the curve- Substitute, complements, normal, inferiorgoods- Substitute and complement goods are defined with respect to the cross-price-elasticity of demand- Normal and inferior goods are defined with respect to the income-elasticity of demand- Absolute advantage and comparativeadvantage- A person who is more productive (of a good) than others has an absolute advantage in producing the good- A person who can produce a good at a lower opportunity cost than anyone else has acomparative advantage in producing that good- Differences in opportunity costs make specialization and trade profitable- Specialization and trade are mutually beneficial if the price (the terms of trade) is setbetween the two different opportunity costs (one opportunity cost for each producer)- Efficiency and Equity- Recall the interpretation of the demand as a marginal benefit curve- Recall the interpretation of the supply as a marginal cost curve- How do you compute consumer surplus? Producer surplus?- Why is the competitive market efficient?- What is market failure – what causes it?- What are the alternative methods of resource allocation? - What is a fair result? A fair rule? Relate these to


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