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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 value2 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 Production possibilities curve – all possible combinations of total output  PPC = PP Frontier - Shift out = growth, produce more - Shift in = shrink, produce less o Technology advancement that increases amount of output for same amount of input = outward shift 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) 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 Decrease = left; increase = right 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 interact1. 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: 1. Identify the change 2. Determine if supply or demand is affected and how 3. Draw and read graph 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 – Price may stay the same, may increase, may decrease – equilibrium quantity always decreases 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 Stresses competitive market process to direct 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


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FSU ECO 2013 - Lecture notes

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