ECON 0110 1st Edition Exam #2 Study GuideSection 1-32：Lecture1:MICROECONOMICS:Examines the behavior of individual consumers, workers, firms and industriesMACROECONOMICSExamines the behavior of the overall US economyMAJOR MACROECONOMIC POLICY GOALS1. Promote maximum production (Economic growth)2. Promote maximum purchasing power (Stable prices)3. Promote maximum employment4. Smooth out business cycle fluctuationsECONOMIC POLICY: Government actions to influence the economy1. FISCAL POLICY:a. Tax lawsb. Government spendingDetermined by Congress and the President2. MONETARY POLICY:a. Influence the money supplyb. Influence interest ratesConducted by the Federal Reserve SystemLecture2:COMMAND, OR PLANNED, ECONOMYThe central government owns many of the factors of productionExamples: government might own the railroads, the oil fields, the iron mines, the banks, the hospitals, the schools, etc.Government planners often decide what will be produced and who gets the outputExamples: The Soviet Union had “five Year Plans” whereby the central government decided how much agricultural output would be produced. The governments of the OPEC oil countries decided how much oil would be produced and exported to the rest of the world.1CAPITALISM:Emphasis on the free market systemProducers and consumers are free to make their own choicesCHARACTERISTICS OF CAPITALISMPRIVATE OWNERSHIP of property and means of productionPROFIT MOTIVE gives producers incentive to produce what people wantPRICES are free to move up and down and provide signals about when to increase or decrease productionFACTORS OF PRODUCTION:WHEN WE PRODUCE SOMETHING, WE USE VARIOUS FACTORS OF PRODUCTION1. LAND (all the natural resources)2. LABOR3. CAPITAL (tools, equipment, factories, etc.)4. ENTREPRENEURSHIP (risk taking by and leadership of the business owners)WHY PROFITS ARE GOODWE HAVE INCREASED THE VALUE OF THE FACTORS OF PRODUCTIONWe earn a profit when we produce and sell a good or service at a price that exceeds the cost of the factors used to produce it.Lecture3:EXTERNALITYA cost or benefit that affects people not involved in an activity or market transaction and is therefore ignored by the individuals involved in the activity or market transactionNEGATIVE externalities impose costs on third parties:noise, polluted air, litter, auto emissions, polluted water, unkempt yards, bright headlights, bald tires on snowy mountain roadsGovernment uses laws, regulations, fines and taxes to limit negative externalitiesPOSITIVE externalities confer benefits on third parties:Good schools, educated citizens, medical improvements2Governments promote positive externalities through subsidies and tax reductionsMAJOR MACROECONOMIC GOALS(EMPLOYMENT ACT OR 1946)Full employmentPrice stabilityEconomic growthAdditional major goal: smooth out the business cycleGrowth rate = (New – Old)/Old x 100%Example:New value = 2,200Old value = 2,000Growth rate = (2200 – 2000)/2000 x 100%= .10 x 100% = 10%PRICE INDEXThe index for Year n is equal to:(PnQ0/P0Q0) x 100Lecture 4-6:PRODUCTION POSSIBILITY FRONTIERA two dimensional graph that shows all COMBINATIONS of TWO goods or services that can be produced if all of society’s resources are used efficientlyThe PPF illustrates the TRADE OFFS facing an economy that produces only two goods.Alternatively, it shows the MAXIMUM quantity of one good that can be produced for any GIVEN quantity of the other.PPF shows maximum output possibilities that are availablePoints outside the PPF are not possible given current resources and technologyPoints inside the PPF are inefficientBy better utilization of resources, we could achieve points on the PPFPPF ILLUSTRATES 1. Efficiency and full employment2. Choice3. Economic growthLecture7:3SECTION 6: THEORY OF COMPARATIVE ADVANTAGE Specialization and free trade benefit all trading parties Two producers can both gain by specializing in the production of the item in which they have a comparative advantage and then trading with each other ABSOLUTE ADVANTAGE Producer A has an absolute advantage over Producer B in the production of a given item if, by using a given amount of resources, Producer A can produce more of the given item than Producer B Alternatively, absolute advantage is the ability to make something using fewer resources than other producers use. If A has absolute advantage over B, then A is “better” at producing the item. COMPARATIVE ADVANTAGE Comparative advantage is the ability to produce something at a lower opportunity cost than other producers Is there any reason for these two to trade? Assume that the US and China both produce efficiently. Thus, each country is ON its PPF, rather than inside its PPF. Now pick a point on each country’s PPF to illustrate each country’s preferred output selection. Suppose China produces 500 cell phones and 6,000 calculators. Note that this is a point on the For China, it is possible that consuming 500 cell phones and 6,000 calculators is preferred to some points that are outside the PPF. But any point OUTSIDE its PPF whereChina has at least 500 cell phones and at least 6,000 calculators is definitely preferred to the original point. For the US, it is possible that consuming 800 cell phones and 1,000 calculators is preferred to some points that are outside the PPF. But any point OUTSIDE its PPF wherethe US has at least 800 cell phones and at least 1,000 calculators is definitely preferred to the original point Let us calculate the opportunity cost of producing extra cell phones or extra calculators ineach country. Suppose that, after specializing, the US trades (“sells”) 800 cell phones to China. In return, the US would receive 2.50 x 800 = 2,000 calculators. After trading, the number ofcell phones in the US would decline by 800 from 1600 to 800 and the number of calculators would increase from 0 to 2,000. After trading, the number of cell phones in China would increase from 0 to 800 and the number of calculators would decrease by 2,000 from 8,000 to 6,000. The results are as follows: DISTRIBUTION OF OUTPUT ORIGINAL POSITION Country Cell phones Calculators US 800 1,000 China 500 6,000 Total 1,300 7,000 DISTRIBUTION OF OUTPUT AFTER SPECIALIZATION Country Cell phones Calculators US 1,600 0 China 0 8,000 Total 1,600 8,000 4DISTRIBUTION OF OUTPUT AFTER TRADE Country Cell phones Calculators US 800 2,000 China 800 6,000 Total