Study Guide – Macroeconomics Exam IINOTE: All of the information on this study guide are NOT my personal words; this information all comes from the textbook, the lectures, and the PowerPoint slides presented by Dr. Corey. This study guide covers everything that you will need to know for Exam II (For Plagiarism Purposes).I. Chapter 1a. Economics i. The study of how we make choices under scarcity1. Scarcity – the idea that there is less of a good available from nature than the people would like to havea. Rationing – allocating scarce goods to those who want them2. Three types of resourcesa. Human capitalb. Physical Capitalc. Natural Resourcesi. Remember that capital are human made resources that are used to make other goods and servicesb. Eight Guideposts to Economic Thinkingi. Resources are scarce so decision makers must make trade offs1. Think opportunity costii. Individuals are rational, thus, they try to get the most of their limited resourcesiii. Incentives matter, thus, choice is influences in a predictable way by changing incentivesiv. Individuals make decisions at the margin1. Think about the cost-benefit analysisv. Information helps us make better choices, but this is costlyvi. Remember the secondary effects, when economic actions generate both direct and indirect effects1. Secondary effect – the indirect impact of an event or policythat may not be easily and immediately observablevii. The value of a good or service is subjectiveviii. The test of a theory is its ability to predictc. Positive vs. Normative Economicsi. Positive – the scientific study of what is, this is testableii. Normative – the judgments about what ought to be and this is not testabled. The Four Pitfalls to Avoid in Economic Thinkingi. Violating the ceteris paribus principle1. Ceteris paribus – means other things constantii. The thought that good intentions do not guarantee desirable outcomesiii. Association is not causationiv. The fallacy of composition1. The belief that what is true for one might not be true for allII. Chapter 2a. Trade creates valuei. This is because the value of goods is subjective, thus, voluntary trade creates valueb. Private property rightsi. The right to exclusive use of the propertyii. Legal protection against invasion from other individualsiii. The right to sell, transfer, exchange or mortgage the propertyc. Four incentives to property rightsi. Incentive to use resources in ways that are considered beneficial to othersii. Owners have an incentive to care for and manage what they owniii. Private owners have an incentive to conserve for the futureiv. Private owners have an incentive to make sure their property does no damage your property1. The lack of property rights leads to the lack of economic progressd. PPC – Productions Possibilities Curvei. It outlines all possible combinations of total output that could be produced assuming1. A fixed amount of productive resources2. A given amount of technical knowledge3. A full and efficient use of resourcesii. Four factors that shift the PPC1. A change in the economy’s resource base2. Changes in technology3. A change in the ruler in which the economy functions4. A change in the work habitse. The Law of Comparative Advantagei. This is the total output of a group of people that the entire economy, or a group of nations will be largest when the output of each item is produced by whoever has the lowest opportunity costf. Three Economic Questionsi. What will be produced?ii. How will it be produced?iii. For whom will it be produced?g. Economic Organizationi. Capitalism – a system of economic organizations in which:1. Productive resources are owned privately2. Good and resources are allocated through market pricesa. In this we see market organization, this is a method in which an organization with private parties maketheir own plans and decisions with the guidance of market pricesii. Socialism – a system of economic organization where:1. Ownership and control of the means of production rest withthe state2. Resource allocation is determined by centralized planninga. In this we see collective decision making, which is the method of organization that relies on public sector decision making to resolve basic economic questionsiii. Between the two, Capitalism works better1. It uses the idea of market efficiency2. Socialism suffers from an information problemIII. Chapter 3a. The Law of Demandi. There is an inverse relationship between the price of a good and the quantity that buyers are willing to purchase1. This is downward sloping, as the price goes up, the quantitydemanded goes downb. Consumer Surplusi. The difference between the maximum amount consumers would bewilling to pay and the amount they actually pay1. The area below the demand curve but above the priceii. Demand vs. Quantity Demanded1. A change in the quantity demanded is a movement along the demand curve, this is caused because of a change in the PRICEa. When the quantity demanded increases, there is a movement down the curveb. When the quantity demanded decreases, here is a movement up the curve2. A change in demand is a shift of the entire demand curve, this is caused by anything BUT the pricea. When there is an increase in the demand, the curve shifts to the rightb. When there is a decrease in demand, the curve shiftsto the leftiii. Shifters of Demand1. A change in the consumer incomea. For normal goods, as the income rises the demand risesb. For inferior goods, as the income falls the demand falls2. A change in the number of consumersa. When the number of consumers goes up, the demand goes upb. When the number of consumers goes down, the demand goes down3. Change in the price of a related gooda. Substitutes, as the prices goes up, the demand of theother good goes upb. Compliments, as the price goes up, the demand of the other good goes down4. Change in expectationsa. Expected price changei. If price is expected to go up, the demand right now will go upii. If the price is expected to go down, the demand right now will go downb. Expected income changei. If the income is expected to go up, the demand will go upii. If the income is expected to go down, the demand will go down5. Change in consumer tastes and preferencesiv. The Law of Supply1. There is a direct relationship between the price of a good or service and the amount that suppliers are willing to producea. The curve is upward sloping, as the price goes up, the quantity supplied goes upv. Producer
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