ECO2013 Macroeconomics Basic ingredients of any economic decision scarcity choice Scarce desire for good exceeds amount freely available Scarcity some wants remain unfulfilled issues of equity justice and fairness are a part of scarcity it s not fair she got that Mechanisms used to deal with scarcity 1 Force 2 Tradition inherited 3 Authority gov t and church 4 Market labor 5 Combinations of 1 4 8 Economic Guidelines 1 There s always tradeoffs a What you give up is opportunity cost e g no such thing as a free t shirt 2 Individuals choose purposefully a Get the most bang for your buck most benefits at the least cost 3 Incentives matter 4 Think on the margin a Marginal change or difference between two alternatives i Marginal benefit is additional benefit ii Marginal cost is additional cost iii Marginal utility is additional utility 1 Utility benefit you get out of consuming something e g football 5 More info leads to better decision making but costly 6 Many choices create a secondary effect 7 Value subjective 8 Economic thinking scientific thinking Positive Economics scientific study what is Normative Economics judgments what ought to be Errors 1 Violation of ceteris paribus other things constant isolate variables change one at a time 2 Good intentions don t always mean good outcomes 3 Association is not causation 4 Fallacy of Composition good for individual good for group false 2 opposing views of trade 1 One person gains other loses zero sum game 2 When people trade both parties gain wealth a Potential trades barter goods for goods money goods for money Transaction costs time effort and other resources used to exchange Voluntary trade when occurs both gain value 2 kinds of property rights 1 Common rights everyone owns it 2 Private rights only one person owns it 4th amendment Private property incentives 1 Give proper care 2 Conserve for future 3 Use resources in ways others value 4 Mitigate possible harm to others Shift out growth produce more Shift in shrink produce less outward shift Production possibilities curve all possible combinations of total output PPC PP Frontier o Technology advancement that increases amount of output for same amount of input Law of Comparative Advantage make good for which you have a low opportunity cost and trade for good which you have a high opportunity cost make something you re good at trade for something you re not Adam Smith Wealth of Nations effects of the division of labor Self sufficiency quickest and most absolute path to poverty do everything yourself build home build car etc Society s 3 Q s 1 What will be produced 2 How 3 For whom Law of Demand inverse relationship between price and quantity demanded Quantity demanded of units of a good you bought Price increases quantity demanded decreases Demand curve relationship between price of good and quantity consumers willing to buy at each price Other variables besides price determine what you buy 1 When price changes quantity demanded changes demand does NOT change a Movement along demand curve 2 When something else changes demand changes a Movement of the entire curve Typical something else changes Income Expectations of consumers Demographics Tastes and preferences Prices of related goods substitute and complements Decrease left increase right Q When economists say the quantity demanded of a product has increased they mean A Price has decreased consumers buying more Q Demand for product has decreased they mean A Demand curve shifted left Law of Supply positive relationship between price and quantity supplied Increase in price increase in quantity supplied Quantity supplied how many units of the good you made Other variables determine how much firms are willing to make 1 When price changes quantity supplied changes supply does NOT change a Movement along supply curve 2 When something else changes supply changes a Movement of entire curve Typical something else changes Resource prices Technology Nature Political Taxes Q When does a shortage occur A When price is less than equilibrium price Q Why is a company producing more when the price rises A Good for firm they ll profit more ceteris paribus Q According to law of supply A More of a good will be offered as price rises Q Ceteris paribus an increase in price of a good will cause A quantity supplied of the good increases Q When supply has increased they mean A supply curve shifts to the right Difference between supple and quantity supplied Quantity supplied price changes Supply quantity supplied changes How market prices are determined Supply Demand interact 1 Excess supply excess demand NOT unique points 2 Equilibrium IS a unique point QS QD surplus excess supply QD QS shortage excess demand Q When quantity demanded and quantity supplied are equal A equilibrium Supply and demand analysis 3 step procedure Identify the change 1 2 Determine if supply or demand is affected and how 3 Draw and read graph Price may stay the same may increase may decrease equilibrium quantity always decreases Shortage quantity demanded exceeds quantity supplied price will be pushed up Surplus quantity supplied exceeds quantity demanded price will be pushed down Q If there s a decrease in demand for laptops we d expect A both price and quantity sold decreases Q What would reduce price and increase quantity sold A increase in supply Supply and demand BOTH decrease Q If there s simultaneously an increase in demand and increase in supply we d expect A increase in equilibrium price and increase in equilibrium quantity decrease in equilibrium price and increase in equilibrium quantity Invisible Hand Adam Smith personal self interest Know and understand the definition for Gross Domestic Product GDP Gross Domestic Product GDP The market value of all final goods and services produced within a country during a specific period usually a year Understand what transactions get included into GDP and what transactions are left out Included Stresses competitive market process to direct self interest Final goods services goods and services purchased by their ultimate user Only goods and services that are produced are included in GDP GDP counts only goods and services produced within the geographic borders of a country ex Production of a Japanese car factory in the U S is included in U S GDP Only goods produced in 2008 are included in the figure for 2008 GDP Not included Intermediate goods services Goods purchased for resale or for use in producing another good or service transfers are
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