Macroeconomics Test 1 Study Guide Chapter 1 Scarcity Objective Any good with a price You can t get enough in nature you can t get what you want Free Good Opposite of scarce Resources Anything used to produce other goods and services Natural human or physical Land Actual place and ingredients needed to make good Labor Time and work invested in good Capital Money or wealth needed to start process of making good Entrepreneurship Actually selling the good Poverty Subjective Personal opinion of whether someone meets an arbitrarily defined level of income Rationing Allocating a limited supply of a good or resource among people who would like to have more of it Best way to ration is using price It allows those to give up the most for the good Leads to a competitive behavior Economic Way of Thinking a set of postulates and principles which makes clear the cause and effect manner of economics 1 There is always a tradeoff a We call it Opportunity Cost b The one most highly valued alternative that you give up when you do one thing rather than the other 2 People choose purposefully therefore economically a If the cost is the same you choose the one that they like the best i Known as Utility b Lowest Cost c Highest Utility 3 Incentives matter a Choice is influence in a predictable manner because of incentives b Motivation is the key 4 Economic thinking is marginal thinking a People make decision at the margin b Take things day by day c People choose right before buying what they want d We don t buy in total amounts 5 Information is a costly good a We pick and choose what we want to learn b We remain Rational Ignorance i If the cost of getting info is greater than the benefit of information 6 Remember the secondary effects a The indirect impact of an event or policy They are most often unintended and b overlooked Increases in the money supply that give people more income but eventually result in higher inflation 7 The value of a good or service is subjective a What is something worth b Whatever someone is willing to pay 8 The test of a theory is its ability to predict a Economics is a science thus can be predicted Positive Economics attempts to determine what is It involves potentially verifiable or refutable propositions Simply must be testable Normative Economics attempts to determine what ought to be Cannot be proven false because they are value judgments What is desired Pitfalls to Avoid in Economic Thinking Violating the ceteris paribus condition C P All things equal A good is not only affecting by one thing Good intentions do not guarantee good outcomes Secondary effects are the main results Even though it s meant for good it actually does harm Statistical Murder Association is not causation Casual relationship exists simply because of the presence of statistical association cannot be considered automatically true The exists more reasoning than just statistics The fallacy of composition What is true for the individual is not necessarily true for the entire group This can be misleading when applied to the entire economy Chapter 2 Tools of the Economist 1 Opportunity Cost The choice do one thing is choice to not do something else Subjective because depends on values of decision maker a Time and Money b What could have been used to fund one thing instead goes somewhere else most of the time it goes to the wrong place 2 Trade Creates Value One man s garbage is another man s treasure Value of something depends on who is using it a Voluntary exchange i There is benefit being created ii Trade is not a zero sum game both parties are better made off iii Trades creates value b Transaction Costs Barrier to trade i Any cost that results from buying something 1 The time effort and other resources needed to search out negotiate and complete an exchange ii We spend less time exchanging iii Middleman reduces transaction costs 1 Reduces transaction costs 3 Property Rights a Assumes free trade b Three elements i Right to exclusive use to your property ii Legal protection against other s using your property without permission iii Right to transfer sell exchange or mortgage property c You can use property as long as you don t infringe on anyone s property rights d Good things that result from property rights i Property owners have the incentive to consider the desires of others and lose by not considering the rights of others if not increases OC ii Strong incentive to use property in a way that benefits society iii Incentive to take care of your property to protect the value iv Tragedy of the commons 1 People don t care about property if it s not theirs Incentive to conserve be careful with property and improve property 4 Production Possibilities Curve PPC Consumer Y Axis vs Investment X Axis v a Linear Equally well suited Curved Not equally well suited b Everything that can be produced in an economy i Amount of resources ii Always a trade off iii You can t get something for nothing c Shifting PPC i Outward means a greater amount of goods reduce leisure time 1 Increase Technology Innovation Entrepreneurship Investment ii Inward means a less amount of goods d Inefficiency Point i You could produce more with resources without trade off 5 Comparative Advantage a In the production of a good or service the producer who produces at the lowest OC has the comparative advantage b We want to TRADE at a HIGH OC c We want to GET at a LOW OC d Absolute Advantage the ability of a party to produce more of a good or service than competitors using the same amount of resources e Specialization Being good at one thing in order to produce the most of the good or service Example Chapter 3 OC Chicken SA 1 4 1 4 N 2 2 1 1 The one with the smaller ratio has the comparative advantage OC Corn SA 4 1 1 1 4 N 2 2 1 1 Demand a schedule of all the various quantities of a good or service that consumers are willing and able to buy at various prices Law of Demand inverse relationship between price and quantity demanded Law of Diminishing Marginal Utility as you get more units your marginal benefit price decreases Height of Demand shows how much buyers in the market value each unit of the good Consumer surplus difference between what you re willing to pay and what you actually pay Demand Elasticity the degree of responsiveness of quantity demanded to price changes is measured Elastic Those who respond more to price change Inelastic Those who respond less to price change Using slope you have a point of reference The flatter the slope the
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