Wednesday May 20 2015 Macroeconomics Midterm Prep Ch 1 The Economic Perspective There is no free lunch always someone who bears a cost Opportunity Costs to obtain more of 1 thing society must forgo the opportunity of getting the next best thing the sacri ce is the opportunity cost opportunity cost is not always money Utility pleasure obtained from consuming a good service Law of Increasing Opportunity Costs as production of a particular good increases the opportunity cost of producing an additional unit rises Marginal Analysis comparisons of marginal bene ts and marginal costs usually for decision making marginal extra Economic Principle statement about economic behavior or the economy that enables prediction of the probable effects of certain actions Generalization economic principles are generalizations relating to economic behavior or to the economy itself Other things equal Assumption the assumption that factors other than those being considered do not change Unintended Consequences People react to incentives when you didn t even think about the A part of costs that you didn t think of 1 Incentives Wednesday May 20 2015 Successful innovations that generate economic rewards People react to incentives If we like something we do more of it if we don t like it we do less Subsidies pay you to do more Tax rising cost you do less The Economic Perspective How Economists Think the World Acts scarcity purposeful behavior reason behind the choices people make people act on the margin Marginal Benefit and Cost Marginal Bene t The extra bene t of consuming one more Marginal Cost The extra cost of consumer one more If MB MC THEN WE DO MORE If MB MC THEN WE DO LESS If MB MC THEN WE STOP OPTIMAL Macroeconomics Examines either the economy as a whole or its basic subdivisions or aggregates speaks of such economic measures as total output total employment total income aggregate expenditures and the general level of prices in analyzing various economic problems 2 Wednesday May 20 2015 Positive and Normative Economics Positive Economics Statement Focuses on facts and cause and effect relationships Facts that can be proven true or false but still facts Normative Economics statement value judgments about what the economy should be like Always opinions Solving Economic Problems 1 Normative statement saying what the economy should do 2 Use positive statements to come up with costs and bene ts 3 Finish with a normative statement answering 1 Individuals Economizing Problem Economizing Problem The need to make choices because economic wants exceed economic means Limited Income Unlimited Wants Budget Line a curve that shows various combinations of two products a consumer can purchase with a speci c money income Consumer goods satisfy wants directly Capital goods do to indirectly by aiding the production of consumer goods Societies Economizing Problem Scarce economic resources Economic Resources 3 all natural and manufactured resources that go into the production of goods and services Wednesday May 20 2015 Resource Categories Land Labor Capital Entrepreneurial Ability Land the natural resources used in production forests land sunlight Labor the physical actions and mental activities that people contribute to the production of goods and services teacher retail clerk physicists Capital all manufactured aids used in producing consumer goods and services factory storage tools Entrepreneurial Ability The initiative and innovation an entrepreneur takes in combining all three resources to produce a good or service commercializes new products forms business organization Money is not a resource Economic Growth Economic growth is a result of increases in supplies of resources improvements in resource quality technological advances Production Possibilities Model Assumes full employment the economy is employing all of its available resources 4 xed resources the quantity and quality of the factors of production are xed two goods the economy is producing only two goods Wednesday May 20 2015 Production Possibilities Table Lists the different combinations of 2 products that can be produced with a speci c set of resources assuming full employment Production Possibilities Curve Shows different combinations of goods and services that society can produce in a fully employed economy assuming a xed availability of supplies resources and xed technology each point represents some max output of the two products the curve is a constraint it shows the limit of attainable outputs economies output of capital goods is on the vertical axis economies output of consumer goods is on the horizontal axis are attainable as long as the economy uses all of its available resources shows the economy using its full potential of resources are attainable but re ect less total output thus aren t desirable implies that the economy could produce more if it achieved full employment of its Points on the curve Points inside the curve resources Points outside the curve represent greater output but are unattainable with the current availability of resources and technology How can PPC change advances in technology international trade increase in education increase decrease in labor 5 Wednesday May 20 2015 Unemployment Growth and the Future A Growing Economy when we drop the assumption that the quantity and quality of resources and technology are xed the PPC shifts positions and the potential maximum output of the economy changes Increase in Resource Supplies the net results of increased supplies of factors of production is the ability to produce more of both consumer and capital goods shift outward economic growth a larger total output Advances in Technology brings new and better goods and improved ways of producing them Economic growth is the result of increases in supplies of resources improvements in resource quality technological advances the consequence of growth is that a full employment economy can enjoy a greater output of both consumption and capital goods Present Choices and Future Possibilities goods for the future capital goods research and education and preventative medicine 6 these increase the quantity and quality of property resources enlarge the stock of technological information and improve the quality of human resources Wednesday May 20 2015 the ingredients for economic growth goods for the present consumer goods such as food clothing entertainment International Trade International Specialization and Trade each nation rst specializes in