Study guide for macroeconomics Final exam GOOD LUCK Chapter 1 The Economic Approach 5 Questions on test Economics is the study of how people make choices because of scarcity Scarcity less of a good available then people would like Resource input used to produce economic goods Rationing allocating limited number of supply among people Opportunity cost highest valued alternative that must be sacrificed Economizing behavior choosing option with highest benefit and lowest cost Utility benefit satisfaction expected from choice Marginal difference in cost and benefits between alternatives Secondary effects the after effects The 8 guideposts 1 The use of scarce resources is costly so decision makers must make tradeoffs 2 3 4 5 Ex Staying in to study for finals instead of going to Flipping Tuesdays at AJs Individuals choose purposefully try to get the most from limited resources Ex Only having five dollars and looking for the best bargains at Wal Mart Incentives matter Ex More likely to dance in class if you are getting extra credit Individuals make decisions at margin Ex Value Meal includes fries and drink whereas buying each separately cost more Information is costly Ex Getting information takes time and time is scarce 6 Secondary Effects Ex Taking aspirin taste gross but makes you feel better later 7 Value of a good service is subjective Ex One man s trash is another man s treasure 8 Economic thinking is scientific Ex Economist using data to get statistics Positive Economics What is Normative Economics What ought to be Positive can be tested whereas normative can be neither confirmed nor denied Ceteris Paribus Other things constant Four common mistakes 1 Violating ceteris Paribus make sure to isolate variables only change one thing at a time 2 Good intentions do not necessarily result in good outcomes 3 Association is not causation 4 Fallacy of composition Whats good for individual may not be best for group Chapter 2 Some tools of the economist 5 questions on test Transaction costs Any cost you incur in transaction Time shipping What are two important aspects of voluntary exchange 1 Both parties are made better off 2 Trade creates value and increases wealth Private property rights exclusively held by an owner Property rights change behavior in four key ways 1 By employing their resources in ways beneficial to others 2 Strong incentive to care for their property 3 Conserve for the future 4 Incentive to lower chance that property will cause damage to others Production possibilities curve shows max amount of any two products that can be produced with fixed set of resources Investment Purchase construction of resources that will expand expand economy s resources Creative Destruction Getting rid of old products to replace with better ones Ex From VCR to DVD Increase in economy s resource base Four factors that could potentially shift PPC outward 1 2 Advances in technology 3 4 Working hard giving up leisure Improvements in rules under which economy functions Law of comparative advantage everyone gains when you produce good that you can produce cheaply and exchange for goods that are expensive for you to produce In addition to specialization and division of labor how else is economic progress achieved 1 Mass production 2 Innovation Market organization private parties make plans and decisions with unregulated prices Capitalism Economic system using market organization minimal government involvement Socialism Government owns means of production and decides which goods are produced Society s three basic questions 1 What will be produced 2 How will it be produced 3 For whom will it be produced Chapter 3 Supply Demand and the Market Processes nine questions on test Law of demand Inverse relationship between price of good and quantity buyers are willing to purchase Substitutes products that serve same purpose Complements Products consumed jointly What is the difference between demand and quantity demanded Price change change in quantity demanded shift along curve Change in consumer income and price of related goods change in demand shift of curve Factors that cause a change in demand 1 Change of income 2 Change in of consumers 3 Change in price of related good 4 Change in expectation 5 Demographic changes 6 Change in consumer taste and preference Opportunity cost of production sum of producers cost of each resource Law of supply Positive relationship between price and amount of good suppliers will produce Factors that cause a change in supply 1 Change in resource price 2 Change in technology 3 Elements of nature political disruption 4 Change in tax Market Concept with forces of supply and demand Equilibrium Balance between supply and demand Economic efficiency All potential gains have been realized How market responds to changes in Demand and Supply Rise in Demand Right shift of D Price and Quantity go up Fall in Demand Left shift of D P and Q go down Rise in Supply Right shift of S P goes down Q goes up Fall in Supply Left shift of S P goes up Q goes down Simultaneous SHIFT Demand and supply rise Quantity rises and Price can rise or fall Demand falls and supply rises Quantity can rise or fall and price falls Demand and supply fall Quantity falls and Price can rise or fall Demand rises and supply falls Quantity can fall or rise and Price rises Functions of market prices 1 Prices communicate info to decision makers 2 Prices coordinate actions of market participants 3 Prices motivate economic players Chapter 7 Taking Nation s Economic Pulse four questions on test Gross Domestic Product Market value of all final goods and services produced within a country during a specific time period Key points about GDP does not count towards GDP necessarily COUNTRY s citizens count 1 Only final goods and services count Money spent before product is in hands of consumer 2 Only transactions involving production count Purchase of stocks bonds etc do not count 3 Only production within the country is counted Geographically within country NOT 4 Only goods produced during the current period are counted Secondhand goods do not Personal consumption Household spending on consumer goods and services Private investment goods that provide a flow of future services Net exports exports imports Gross national product Similar to GDP BUT instead of the market value of goods produced GEOGRAPHICALLY within country it is the goods and services produced by citizens of country no matter where they live What are the two ways to
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