Macro notes A Is life getting better or worse CH1 Economic approach i Life expectancy Health Income Education Entertainment B What is economics The study of how we make choices under scarcity i Choice act of selecting among alternatives ii Scarcity concept that there is less of a good freely available in nature than people would like of that good Scarcity necessitates rationing 1 Ex time money textbooks iii Rationing is allocating goods to those that want them 1 A market economy rations goods by price C 8 Guideposts to economic thinking i Resources are scarce so decision makers must make trade offs no such thing as a free lunch 1 Opportunity cost the highest valued alternative that must be sacrificed when choosing an option ii Individuals are rational they try to get the most from their limited resources iii Incentives matter choice is influenced in a predictable way by changing incentives a Ex an hour of your time b Ex guns or butter a Ex red wine vs spiced rum b Ex welfare vs education a Ex money game macro style b Ex economic lesson from father c Ex Prices iv Individuals make decisions at the margin 1 Marginal describes the effect of a change in the current situation a Ex olive garden b Ex trip to taco bell 2 Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs a Ex airport security vs lead cleanup v Information helps us make better choices but it is costly a Ex new house vs new notebook vi Beware of secondary effects economic actions generate both direct and indirect effects 1 Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable a Ex fuel efficiency regulations b Ex trade restrictions vii The value of a good or service is subjective because goods are subjective voluntary trade creates value a Ex pack of gum b Moving goods and services to those who value them most is a primary source of economic progress viii The test of a theory is its ability to predict a If real world events are consistent with a theory then that theory is valid D More on economics i Positive economics the scientific or testable study of what is ii Normative economics judgments about what ought to be not testable E 4 Pitfalls i Violation of ceteris paribus 1 Ceteris paribus other things constant ii Good intentions do not guarantee desirable outcomes a Ex suicide warnings on antidepressants iii Association is not causation a Ex superstitions or sunspots iv Fallacy of composition belief that what is true for one might not be true for all a Ex when you get a raise vs everyone getting a raise Ch 2 Tools of the economist value A Trade creates value because the value of goods is subjective voluntary trade creates a Ex the candy game b Creation of wealth B Property rights a Ex Henry ford i Process by which some people become rich will make everyone richer i The right to exclusive use of the property ii Legal protection against invasion from other individuals iii The right to sell transfer exchange or mortgage the property b 4 incentives of property rights i Incentive to use resources in a ways that are considered beneficial to others a Ex South Park Cartmen s amusement park b Reselling your textbook ii Private owners have an incentive to care for and manage what they own a Ex communal refrigerator vs your own refrigerator iii Private owners have incentive to conserve for the future a Tragedy of the commons b Endangered species pg 27 iv Private owners have an incentive to make sure their property does not damage your property c Lack of property rights lack of economic progress C Production possibilities curve a Outlines all possible combinations of total output that could be produced i Assumes ii Know 1 Fixed amount of productive resources 2 Given amount of technical knowledge 3 Full and efficient use of resources 1 Efficient Points along the curve 2 Inefficient points inside the curve 3 Unattainable points outside the curve 4 How much is produced at a certain point 5 What is given up when moving from one point to another b 4 factors that shift the PPC i A change in the Economy s resource base 1 Investment the purchase construction or development of resoures that requires us to give up consumption goods a Two PPCS pg 31 ii Changes in Technology 1 Technology the knowledge available in an economy at any given time a Determines the amount of output we can generate with our limited resoursces b Ex tanks and buses iii A change in the rules under which the economy functions a Ex imposing trade barriers b Eliminate the business franchise tax in WV pics of cities around river iv Changes in work habbits a Working harder can shift curve outward b Working less can shift curve inward c Law of comparative advantage i The total output of a group of individuals an entire economy or a group of nations will be the greatest when the output of each good is produced by whoever has the lowest opportunity cost 1 Ex should mike tyson be his own body guard 2 Jersey shore who should hang the shirts D Economic Organization i What will be produced ii How will it be produced iii For who will it be produced b Capitalism a system of economic organization where i Productive resources are owned privately ii Goods and resources are allocated through market prices c Market organization i A method of organization in which private parties make their own plans and decisions with the guidance of market prices d Socialism a system of economic organization where i Ownership and control of the means of production rest with the state ii Resource allocation is determined by centralized planning iii Collective decision making the method of organization that relies on public sector decision making to resolve basic economic questions e Why capitalism tends to work and socialism does not i Capitalism is similar to natural selection It uses the idea of market efficiency ii Socialism suffers from an information problem E Review i What are the 4 incentives of property rights ii Indentify the points on the PPC curve iii What are the four factors that shift the PPC curve iv What is the law of comparative advantage v What are the three questions every economy faces vi Know the difference between capitalism and socialism 1 Also know why capitalism works Ch 3 Supply Demand and the Market Process A Demand a Law of Demand there is an inverse negative relationship between the price of a good and the quantity that buyers are willing to purchase i Results in a
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