ECON201 Macroeconomics Professor Sarna University of Maryland Final Exam Study Guide Economics the study of how best to allocate scarce resources among competing uses Micro vs Macro Microeconomics study of how households and firms make decisions and how they interact in the market Macroeconomics study of economics phenomena including inflation unemployment and economic growth Assumptions and Models Assumptions simplify the complex world make it easier to understand o Ex studying international trade we assume the world consists of 2 countries 2 goods Economists use models to study economic issues o Model a highly simplified representation of a more complicated reality Scientist try to explain the world Policy advisor try to improve the world The Economist as a Scientist Use the scientific method The dispassionate development and testing of theories The Economist as a Policy Advisor Economists make normative statements subjective which attempt to Positive statements prescribe how the world should be statements cannot also describe a relationship can be proven can be confirmed or refuted normative First Model The Circular Flow Diagram A visual model of the economy shows how dollars flow through markets among households and firms 2 actors households and firms Includes 2 markets o The market for goods and services o The market for factors of production Capital land materials workers tools Factors of Production the resources that the economy uses to produce g s Land labor capital buildings machines used in production Circular Flow 2nd Model Production Possibilities Frontier A graph that shows the combinations of two goods the economy can possibly produce given the available resources and technology Ex 2 goods computers wheat 1 resource labor measured in hrs Economy has 50 000 labor hrs per month available for production Ex Producing 1 computer requires 100 labor hrs producing 1 ton of wheat requires 10 labor hrs Employment of labor hrs Computers 50 000 40 000 25 000 Wheat 0 10 000 25 000 Production Computers 500 400 250 Wheat 0 1 000 2 500 Unemployment resource is when the point pies under the PPF The PPF Opportunity Cost Opportunity cost what must be given up to obtain an item Moving along the PPF involves shifting resources ex Labor from the production of one good to another Society faces a tradeoff getting more of one good requires sacrificing some of the other The slope of the PPF tells you the opportunity cost of an item Why is PPF bow shaped Higher slope higher opportunity cost Demand comes from the behavior of buyers Quantity demanded the amount of the good that buyers are willing and able to purchase at alternative prices Law of demand the claim that the quantity demanded of a good falls when the price of the good rises other things equal The Demand Schedule A table that shows the relationship b w the price of a good and quantity demanded Ex Helen s demand for lattes o Quantity is always on the x axis Demand Curve Shifters Number of buyers Income o An increase in the of buyers causes an increase in quantity demanded at each price which shifts the D curve to the right Price of related goods o Demand for a normal good is positively related to income o An increase in income causes increase in quantity demanded at each price shifting the D curve to the right o Demand for an inferior good is negatively related to income An increase in income shifts the D curve to the left o Two goods are substitutes if an increase in price of one good causes an increase in demand of another good Ex Pizza hamburgers An increase in the price of pizza increases demand for hamburgers shifting the hamburger demand curve to the right o Two goods are compliments if an increase in price of one causes a fall Other ex Coke Pepsi in demand for the other Ex Computers software An increase in price of computers causes a decrease in demand for software Software demand curve shifts left Other ex College tuition textbooks bagels cream cheese o Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right Ex The Atkins diet caused increase in demand for eggs shifted Tastes Expectations D curve right o Affect consumers buying decisions o Ex If people expect their income to rise their demand for meals at expensive restaurants may increase o If the economy turns bad and people worry about their future job Variable Price of buyers Income Price of related goods Tastes Expectations security demand for new cars may fall Change in this variable Movement along the curve Shift Shift Shift Shift Shift Demand function Qx d f Px Py M H Equilibrium P has reached equilibrium level when quantity supplied quantity demanded Surplus when quantity supplied is greater than quantity demanded o Facing a surplus sellers try to increase sales by cutting the price This causes Qd to rise and Qs to fall thus reducing surplus o Price continues to fall until market reaches equilibrium Shortage when quantity demanded is greater than quantity supplied o Facing shortage sellers raise the price and Qd falls and Qs rises thus reducing shortage o Prices continue to rise until market reaches equilibrium 3 Steps to Analyzing Changes in Equilibrium 1 Decide whether even shift S curve D curve or both 2 Decide in which direction curve shifts 3 Use supply demand diagram to see how the shift changes equilibrium P Q A change in both S D Price of gas rises AND new technology reduces production costs Supply comes from the behavior of sellers able to sell at alternative prices Law of supply The quantity supplied of any good is the amount that sellers are willing and o The claim that the quantity supplied of a good rises when the prices of the good rises other things are equal Supply schedule a table that shows the relationship b w the price of the good and Qs Market Supply vs Individual Supply The quantity supplied in the market is the sum of the quantities supplied by sellers at each price Ex Starbucks Jitters are the only 2 sellers in the market Supply Curve Shifters Input prices Technology of Sellers Expectations future o Ex wages prices of raw materials o A fall in input prices make production profitable at each output price o Technology determines how much inputs are required to produce a unit of output o A cost saving technological improvement has the same effect as a fall in input prices shift the S curve to the right o An increase in the number of sellers increases the quantity supplied at
View Full Document
Unlocking...