MACRO ECONOMICS FINAL STUDY GUIDE Chapter 1 Know that Economics is the study of how we make choices under scarcity Scarcity concept that there is less of a good freely available from nature than people Know the difference between the different kinds of resources that we use to produce would like economic goods Resources input used to produce an economic good Know the 8 guideposts to economic thinking human resources human capital physical resources physical capital natural resources come from nature 1 Resources are scarce so decision makers must make tradeoffs Know the concept of opportunity cost Individuals are rational They try to get the most from their limited resources Incentives matter Individuals make decisions at the margin Information helps us make better choices but is costly 2 3 4 5 6 Beware of secondary effects 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Know the difference between positive and normative economic statements positive economic statements are testable normative economic statements are not Know the four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus principle 2 The belief that good intentions equal desirable outcomes The Nirvana Fallacy The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative 3 The belief that association is causation 4 The fallacy of composition the fallacious belief that what is true for one is true for all ex standing at a football game Chapter 2 Understand how voluntary trade creates value and leads to economic progress The Candy Game Voluntary trade creates value both parties are made better off Channeling goods resources to those who value them most trade creates value and increases the wealth created by a society s resources Gains from specialization and division of labor Gains from mass production methods Gains from innovation Know what transaction costs are and understand the importance of middlemen 1 Transaction Costs the time effort and other resources needed to search out and Middleman person who buys and sells goods or services or arranges trades A middle complete and exchange man reduces transaction costs Know the characteristics and 4 incentives of private property rights PRIVATE PROPERTY RIGHTS Understand the concept of the Production Possibilities Curve PPC The PPC Exclusive use of the property Legal protection against invasion from other individuals Right to sell transfer exchange or mortgage the property INCENTIVES Use resources in ways that are considered beneficial to others ex empty lot Owners bear the cost of ignoring the wishes of others ex neutral colors Have an incentive to care for and manage what they own Conserve for the future Make sure their property does not damage your property outlines all possible combinations of total output that could be produced assuming a 1 fixed amount of productive resources 2 given amount of technical knowledge 3 full and efficient use of resources Be able to read a production possibilities curve and identify efficient inefficient and unattainable points as well as what is produced at each point and what is given up and gained from moving from one point to another 2 Know the four factors that shift the production possibilities curve inward and outward 1 Change in the economy s resource base investment purchase construction or development of resources requires us to give up consumption goods 2 Changes in technology the knowledge available in an economy at any given time Technology determines the amount of output we can generate with our limited resources 3 A change in the rules under which the economy functions ex reducing trade barriers Jim Crow Laws 4 Change in work habits ex working harder can shift curve outward working less can shift curve inward Understand the law of comparative advantage Comparative Advantage total output of a group of individuals in the entire economy group of nations will be greatest when output of each good is produced by whoever has the lowest opportunity cost 1 What will be produced 2 How will it be produced Know the 3 questions that every economy faces 3 For whom will it be produced Understand the difference between socialism and capitalism and know why capitalism tends to work better 1 ownership and control of the means of production rest with the state Socialism system of economic organization where 2 resource allocation is determined by centralized planning collective decision making method of organization that relies on public sector decision making to resolve basic economic questions Capitalism system of economic organization where 2 goods and resources are allocated through market prices market organization method of organization in which private parties make their own plans and decision with the guidance of market prices Capitalism tends to work and Socialism does not because 1 similar to natural selection uses idea of market efficiency 2 socialism suffers from an information problem 1 productive resources are owned privately Chapter 3 Understand the law of demand and why demand curves are downward sloping Know that the height of the demand curve is the maximum price consumers are willing to pay for an additional unit Law of Demand there is an inverse relationship between the price of a good and quantity that buyer are willing to purchase results in a downward sloping demand curve Demand Curve as prices increased demand decreases 3 The height of demand curve at any quantity shoes the max price that consumers are willing to pay for an additional unit when consumers have more of the good they value it less Know how to find and calculate consumer surplus Consumer Surplus difference between max willing to pay and amount that they actually pay area below the demand curve but above the price Know the difference between a change in quantity demanded a movement along the curve caused by a change in the price of the good in question and a change in demand a shift of the curve caused by anything other than the change in price of the good in question Change in quantity demanded a movement along the curve cased by a change in the price of that good increase in quantity demanded movement down the curve to the right decrease in quantity demanded movement up the curve the the left Change in demand a shift in the curve caused by a change in anything that affected the demand other than the price of the good Know the
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