Principles of Macroeconomics ECO2013 Exam Study Guide Economics the study of how we make choices under scarcity Scarcity The concept that there is less of a good freely available in nature than we would like Rationing the allocation of scarce goods to those who want them Scarcity leads to competitive behavior Scarcity necessitates rationing Resources an input used to produce an economic good 1 Human Resources Human capital 2 Physical Resources Physical capital 3 Natural Resources The Economic way of thinking 1 Resources are scarce so decision makers must make tradeoffs o Opportunity Cost the highest valued alternative that is and must be sacrificed when making a decision 3 2 Individuals are rational they try to get the most from their limited resources Incentives matter choice is influenced in a predictable way by changing incentives Individuals make decisions at the margin o Marginal describes the effect of a change in a current situation Information helps us make better decisions but information is costly 5 6 Beware of secondary effects economic actions generate both direct and 4 7 The value of a good or service is subjective worth different amounts to indirect effects different people 8 The test of a theory is its ability to predict Positive vs Normative Economics Positive The scientific study or what is testable Normative Judgments about what ought to be not testable 4 Pitfalls to avoid in Economic Thinking 1 Violation of the Ceterus Paribus principle Ceterus Paribus All other things constant 2 The belief that good intentions guarantee desirable outcomes 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 Just because two things happen together they do not cause each other 4 Fallacy of composition the fallacious belief that what is the true for one is true for all Ex Standing at a football game Microeconomics vs Macroeconomics Microeconomics focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms trees Macroeconomics focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor forest Importance of Property Rights Property rights include 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 Private Property Rights 1 Incentive to use resources in ways that are considered beneficial to others 2 Private owners also have an incentive to care for and manage what they own 3 Private owners have an incentive to conserve for the future 4 Private owners have an incentive to make sure their property does not damage your property Production Possibilities Curve 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 The slope of the curve indicates the amount of one good we must give up to produce more of the other good Factors 1 A change in an economy s resource base Increase shift outward Decrease shift inward 2 Changes in technology 3 A change in the rules under which the economy functions 4 Change in work habits Law of Comparative Advantage The 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 Economic Organization o Every economy faces 3 questions 1 What will be produced 2 How will it be produced 3 For whom will it be produced Socialism 1 Ownership and control of the means of production rest with the 2 Resource allocation is determined by centralized planning state Capitalism 1 Productive resources are owned privately 2 Goods and resources are allocated through market prices Market Organization A method of organization in which private parties make their own plans and decisions with the guidance of market prices Socialism A system of economic organization where 1 Ownership and control of the means of production rest with state 2 Resource allocation is determined by centralized panning Collective decision making The method of organization that relies on public sector decision making to resolve basic economic questions The 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 The differences between the maximum amount consumers would be willing to pay and the amount they actually pay Demand vs Quantity Demanded Change in quantity demanded is a movement along the demand curve o Caused by a change in price of the good o Increase in Qd is a movement down the curve to the right Change in Demand is a shift of the curve o Caused by a change in anything that affects demand other than the price of the good o Price remains constant but Qd increases or decreases o Increase in demand shift of curve right o Decrease in demand shift of curve left Shifters of Demand 1 Change in Consumer Income 2 Change in the Number of Consumers 3 Change in the Price of a Related Good A Normal Goods income Demand B Inferior Goods income Demand A Consumers Demand A Substitutes Beef and Chicken Psub D B Compliments Cereal and Milk Pcomp D A Expected change in price P D B Expected Change in Income Income D A Tastes D 5 A change in consumer tastes and preferences 4 Change in Expectations The Supply Curve The law of Supply there is a direct positive relationship between the price of a good or service and the amount that suppliers are willing to produce Upward sloping curve o The height of the supply curve indicates the minimum amount necessary to induce producers to supply that additional unit o Producer Surplus The difference between the minimum price suppliers are willing to accept and the price they actually receive Supply vs Quantity Supplied Change in Quantity Supplied a movement along the supply curve o Caused by a change in the price of that good Change in Supply a shift of the supply curve o Caused by anything that affects supply other than the price of a good Shifters of Supply 1 Change in resource Price Presource Supply 2 Change in Technology Technology Supply 3 Changes in Nature and Politics Depends 4 Changes in Taxes Taxes Supply Inelastic Changes in quantity
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