Study Guide Macroeconomics Exam II NOTE All of the information on this study guide are NOT my personal words this information all comes from the textbook the lectures and the PowerPoint slides presented by Dr Corey This study guide covers everything that you will need to know for Exam II For Plagiarism Purposes I Chapter 1 a Economics i The study of how we make choices under scarcity 1 Scarcity the idea that there is less of a good available from nature than the people would like to have a Rationing allocating scarce goods to those who want them 2 Three types of resources a Human capital b Physical Capital c Natural Resources i Remember that capital are human made resources that are used to make other goods and services b Eight Guideposts to Economic Thinking i Resources are scarce so decision makers must make trade offs 1 Think opportunity cost ii iii iv Individuals are rational thus they try to get the most of their limited resources Incentives matter thus choice is influences in a predictable way by changing incentives Individuals make decisions at the margin 1 Think about the cost benefit analysis Information helps us make better choices but this is costly v vi Remember the secondary effects when economic actions generate both direct and indirect effects 1 Secondary effect the indirect impact of an event or policy that may not be easily and immediately observable vii The value of a good or service is subjective viii The test of a theory is its ability to predict c Positive vs Normative Economics i Positive the scientific study of what is this is testable ii Normative the judgments about what ought to be and this is not d The Four Pitfalls to Avoid in Economic Thinking i Violating the ceteris paribus principle 1 Ceteris paribus means other things constant ii The thought that good intentions do not guarantee desirable testable outcomes iii Association is not causation iv The fallacy of composition 1 The belief that what is true for one might not be true for all i This is because the value of goods is subjective thus voluntary II Chapter 2 a Trade creates value trade creates value b Private property rights 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 c Four incentives to property rights i Incentive to use resources in ways that are considered beneficial to others ii Owners have an incentive to care for and manage what they own iii Private owners have an incentive to conserve for the future iv Private owners have an incentive to make sure their property does no damage your property 1 The lack of property rights leads to the lack of economic d PPC Productions Possibilities Curve progress i It outlines all possible combinations of total output that could be produced assuming 1 A fixed amount of productive resources 2 A given amount of technical knowledge 3 A full and efficient use of resources ii Four factors that shift the PPC 1 A change in the economy s resource base 2 Changes in technology 3 A change in the ruler in which the economy functions 4 A change in the work habits e The Law of Comparative Advantage i This is the total output of a group of people that the entire economy or a group of nations will be largest when the output of each item is produced by whoever has the lowest opportunity cost f Three Economic Questions i What will be produced ii How will it be produced iii For whom will it be produced g Economic Organization i Capitalism a system of economic organizations in which 1 Productive resources are owned privately 2 Good and resources are allocated through market prices a In this we see market organization this is a method in which an organization with private parties make III Chapter 3 a The Law of Demand their own plans and decisions with the guidance of market prices ii Socialism a system of economic organization where 1 Ownership and control of the means of production rest with the state a 2 Resource allocation is determined by centralized planning In this we see collective decision making which is the method of organization that relies on public sector decision making to resolve basic economic questions iii Between the two Capitalism works better It uses the idea of market efficiency 1 2 Socialism suffers from an information problem i There is an inverse relationship between the price of a good and the quantity that buyers are willing to purchase 1 This is downward sloping as the price goes up the quantity b Consumer Surplus demanded goes down i The difference between the maximum amount consumers would be willing to pay and the amount they actually pay 1 The area below the demand curve but above the price ii Demand vs Quantity Demanded 1 A change in the quantity demanded is a movement along the demand curve this is caused because of a change in the PRICE a When the quantity demanded increases there is a movement down the curve b When the quantity demanded decreases here is a movement up the curve 2 A change in demand is a shift of the entire demand curve this is caused by anything BUT the price a When there is an increase in the demand the curve b When there is a decrease in demand the curve shifts shifts to the right to the left 1 A change in the consumer income a For normal goods as the income rises the demand b For inferior goods as the income falls the demand rises falls 2 A change in the number of consumers a When the number of consumers goes up the demand goes up iii Shifters of Demand b When the number of consumers goes down the demand goes down 3 Change in the price of a related good a Substitutes as the prices goes up the demand of the other good goes up b Compliments as the price goes up the demand of the other good goes down 4 Change in expectations a Expected price change b Expected income change i ii i ii If price is expected to go up the demand right now will go up If the price is expected to go down the demand right now will go down If the income is expected to go up the demand will go up If the income is expected to go down the demand will go down 5 Change in consumer tastes and preferences iv The Law of Supply 1 There is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce a The curve is upward sloping as the price goes up the quantity supplied goes up 1 This is the difference between the minimum price that suppliers are willing to accept and the price they
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