Exam 1 Study GuideIntroduction : Macroeconomics vs. Microeconomics:Macroeconomics: Relevant to an “average” American family or all American families Aggregate statistics  total statistics Examples: An average American exercises 20 minutes every day An average household in the US has 2.6 members Microeconomics: Relevant to a specific family or families (used for comparisons)The family economy: A unit of economically interdependent individuals whose goal is to attain their desired level of living Macro or Micro?1) To have or not to have a child2) US fertility Rate3) Homeownership / Foreclosure Rates4) To borrow money or not5) Labor force participation rates6) To buy or rent housing7) To get a paid job or not Answers:1) Micro2) Macro3) Macro4) Micro5) Macro6) Micro7) Micro Micro Decision Making: (for a “specific” family)Economist’s Principle: Assumes that decision makers are “rational”Cost-benefit Principle  you are always rational you can make poor decisions, but still be rational If Benefits > Costs = take If Costs > Benefits = don’t take Two types of Costs:Objective  easier to measureSubjective  harder to measure Traditional Measures of Well Being:Gross Domestic Product (GDP): total market value of all final goods and services produced in an economy during a given period Given period  usually a yearFinal goods  sold to the final consumers Formula: GDP(2011) – GDP(2010) / GDP(2011) = 3.97% Between 2010-2011GDP Examples: Housewives taking care of their children are NOT apart of GDP If you sell your used car it is NOT apart of GDP, it was counted in GDP in the year that it was made If you buy a meal (at a restaurant) the vegetables that the restaurant bought to make the meal is NOT apart of US GDP Gross National Product (GNP): total market value of all final goods and services produced by an economy’s factors of production (irrespective of where it was produced) during a given period Factors of Production  Land, Labor, and Capital GNP Example: Wages paid to Japanese citizens working in the USUS  wages are apart of GDP, not GNPJapan  wages are apart of GNP, not GDP Difference between GDP and GNP GDP  Gross Domestic Product: the market value of everything produced within a countryGNP  Gross National Product: the value of what’s produced by a country’s citizens, no matter where they live Income: Personal Income: your earnings from all sourcesWhat you earn, not just wages from ALL sourcesIncome = $10,000Personal Income = $10,000 Disposable Income: money you have after tax incomeIncome = $10,000; Income taxes = $1,000Disposable Income = $9,000Discretionary Income: money you have after tax income and after you spend on necessities (bills, ect.)Income = $10,000; Income taxes = $1,000; Necessities = $8,000Discretionary Income = $1,000Per Capita Income  per person personal incomeIncome divided by the number of people in a household Income = $10,000; Number of people in household = 4Per capita Income = $2,500Median Household Income: Amount that divides the distribution into two equal parts One having income above the median The other having income below the medianExample 1: Incomes for 5 households are as follows: $10,000; $12,000; $15,000; $20,000; $25,000 Median Household Income = $15,000 (middle number)Example 2: Incomes for 4 households are as follows: $10,000; $12,000; $15,000; $20,000 Median Household Income = $13,500 (average of the middle two)Median Real Household Income: Median household income that has been adjusted for inflationExample: from 2011-201213,299.1 - 13,063.0 / 13,063.0 = 1.81% Inflation: Inflation definition: rate at which prices of goods and services rise Always a percentage Your purchasing power fails Percentage change in CPI over the previous yearCPI  Consumer Price Index Index of prices of goods and services used by a typical household Inflation Rate = new – initial / initial Non-traditional Measures of Well Being:Considers what makes people happy Index of economic wellbeingBased of 4 Components:Consumption Flow  how much people are consuming (public (government) / private)Wealth Stock  Housing, Human capital (education)Income Distribution  equality and inequality Economic Security  Health, money Human Development Index (United Nations) & Consumer ConfidenceHDI  Life expectancy Consumer Sentiment Index: (aka the Consumer Confidence Index / CCI) an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending CCI is not measured globally; it is measured country by country Decision-Making:Economic Perspective: Scarcity is THE economic problem Scarcity requires that decisions/choices/trade-offs must be madeEconomists assume that decision makers are rational Identify all alternativesRank alternatives in order of tastes/preferencesCosts vs. BenefitsSelect alternative that furthers one’s goalsChoose the best decision for you Cost-Benefit Analysis: Should I do activity x? If B(x) > C(x); then you should do activity xIf B(x) < C(x); then you should NOT do activity xB(x)  benefits of activity x C(x)  costs of activity xEconomists include opportunity costs in C(x)Opportunity Costs: the value of the next best alternative that is forgone when you decide to undertake a particular action Example: You attended class today instead of doing something else, such as: Sleeping - $20Working - $12 Homework for another class - $8Going to the gym - $7 The opportunity cost of attending today’s class is $20, because you could have taken a napThere is no clear right or wrong answer Decision Making:Levels of Economic Decisions: there are five levels of economic decisions StrategicTactical *Steve Took Polly’s Coral PursePolicyControl ProgramStrategic  crucial, long-lasting, and have widespread effects made infrequently Examples: Whether to go to college or go straight into the work force To buy or to rent a house & to have a child or notDecision Making: “Decisions are conclusions or judgments about some issue or matter” quotes “Decision making, the process of making a choice between two or more alternatives…”Decision Making Model: 5 steps1) Deciding to Act 2) Identifying Alternatives3) Evaluating