MACRO ECONOMICS TEST 1 NOTES CHAPTER 1 Is Life Getting Better or Worse 1 Life Expectancy 2 Health 3 Income 4 Education 5 Entertainment Transportation Technology Medicine Changes in 8 Guideposts to Economic Thinking 1 Resources are scarce so decision makers must make trade offs no such thing as a free lunch Opportunity cost highest valued alternative that must be sacrificed when choosing an option 2 Individual are rational they try to get the most from their limited resources Greatest benefit at least possible cost 3 Incentives matter choice is influenced in a predictable way by changing incentives 4 Individuals make decisions at the margin Marginal describes the effect of a change in the current situation Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Information helps us make better choices but is costly 6 Beware of secondary effects economic actions generate both direct and indirect effects Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable 7 The value of a good or service is subjective Because goods are subjective voluntary trade creates value Moving goods and services to those who value them most is a primary source of economic progress 8 The test of a theory is its ability to predict 2 What is Economics Economics how we make choices under scarcity Choice the act of selecting among alternatives Scarcity the concept that there is less of a good freely available from nature than people would like ex Time money textbooks Scarcity is not the same as poverty Poverty is subjective Rationing allocating scarce goods to those who want them In a market economy price is used to ration goods Scarcity leads to competitive behavior Resources an input used to produce an economic good 1 Human resources human capital 2 Physical resources physical capital 3 Natural resources coal land gold iron ore timber etc Capital human made resources used to produce other goods and services Positive economics scientific study of what is testable Normative economics Judgments about what people think ought to be cant test Positive vs Normative Economics 4 Pitfalls to Avoid in Economic Thinking 1 Violation of ceteris paribus principal all other things constant 2 Good intentions do not guarantee desirable outcomes 3 Association is not causation 4 Fallacy of composition belief that what is true for one might not be true for all Microeconomics focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms Macroeconomics focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor Review 1 What is scarcity 2 What are the 8 guideposts to economic thinking 3 Positive vs Normative economics 4 What are the 4 pitfalls to avoid in economic thinking 5 CHAPTER 2 Private Property Rights 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property 4 Incentives of Property Rights 1 Incentive to use resources in ways that are considered beneficial to others 2 Private owners have an incentive to care for and manage what they own 3 Private owners have an incentive to conserve for the future Tragedy of the Commons 4 Private owners have an incentive to make sure their property does not damage your property Production Possibilities Curve PPC PPC 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 efficient use of resources 4 Factors that shift the PPC 1 A change in the economy s resource base Investment purchase construction or development of resources Investment requires us to give up consumption goods 2 Change in technology the knowledge available in an economy at any time 3 A change in the rules under which the economy functions laws 4 Change in work habits Law of Comparative Advantage total output of a group of individuals an entire economy or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost Every economy faces 3 questions 1 What will be produced 2 How will it be produced 3 For whom will it be produced Two ways to answer these questions 1 Capitalism economic organization where Production resources are owned privately Goods and resources are allocated through market prices Markey organization method of organization in which private parties make their own plans and decisions with the guidance of market prices 2 Socialism system of economic organization where Ownership and control of the means of production rest with state 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 Why capitalism tends to work and socialism doesn t 1 Capitalism is similar to natural selection It uses the idea of a market efficiency 2 Socialism suffers from an information problem CHAPTER 3 Demand curve Law of demand There is an inverse negative relationship between the price of a good and the quantity that buyers are willing to purchase Consumer surplus difference between the max amount consumers would be willing to pay and the amount that they actually pay Consumer surplus is the area below the demand curve above price Demand vs Quantity Demanded Change in quantity demanded a movement along the curve Caused by a change in the price of that good Change in demand a shift of the curve Caused by a change in anything that affects demand other than price Increase in demand curve shifts right Decrease in demand curve shifts left Shifts in Demand 1 Change in consumer income 2 Change in the number on consumers 3 Change in the price of a related good A Normal goods goods you would buy more of with more money Income goes demand goes B Inferior goods goods you buy less of with more money of consumers goes demand goes A Substitutes price of substitute goes demand goes B Compliments Price of compliment goes demand goes A Expected change in price Pfuture goes current demand goes B Expected change in income Ifuture goes Dcurrent goes Consumer tastes and preferences go demand goes 5 Change in consumer tastes and preferences 4 Change in expectations 6 Change in demographics Population younger demand for goods they like
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