Macroeconomics Final Study Guide 1 Chapter 1 Economics is the study of how we make choices under scarcity Concept of scarcity there is less of a good freely available from nature then people would like Opportunity Cost the highest valued alternative that must be sacrificed when choosing an option 8 Guideposts of Economic Thinking 1 Resources are scarce so trade offs must be made 2 Individuals are rational They try to get the most from their limited resources Incentives matter Individuals make decisions at the margin Information helps us make better choices but is costly 3 4 5 6 Beware of secondary effects 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Positive economic statements are testable Normative economic statements are NOT testable 4 Pitfalls to Avoid in Economic Thinking 1 Violation of ceteris paribus principle 2 Good intentions do NOT guarantee desirable outcomes 3 Association is NOT causation 4 The fallacy of composition Chapter 2 Voluntary trade creates value and leads to economic progress 4 Incentives of Private Property Rights 1 Use resources in ways that are beneficial to others 2 To care for and manage what they own 3 To conserve for the future 4 To make sure their property does NOT damage your property Production Possibilities Curve PCC outlines all possible combos of total output that could be produced assuming a o Fixed amount of productive resources o Given amount of technical knowledge o Full efficient use of resources o o Efficient C B A Inefficient D Unattainable E Macroeconomics Final Study Guide 2 4 Factors that shift the PPC 1 A change in the economy s resource base 2 Changes in technology 3 A change in the rules under which the economy functions 4 Changes 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 3 Questions Every Economy Faces o What will be produced o How will it be produced o For whom will it be produced Socialism a system of economic organization where organization and control rests with the state ownership and control of the means or production AND resources allocation is determined by centralized planning Capitalism a system of economic organization where productive resources are owned privately AND private individuals market prices goods and resources are allocated through market prices Capitalism works better because its similar to natural selection it uses the idea of market efficiency Chapter 3 price Law of Demand there is an inverse relationship between the price of a good and the quantity that buyers are willing to purchase The inverse relationship causes it to be negative therefore downward sloping Consumer Surplus is the area below the demand curve but above the Producer Surplus the difference between the minimum price suppliers are willing to accept and the price they actually receive BxH Macroeconomics Final Study Guide 3 Change in Quantity Demanded a movement along the curve caused by a change in the price of the good Change in Demand a shift of the curve caused by anything other than the change in price of the good Shifters of Demand o Change in Consumer Income Normal Goods I DNormal Inferior Goods I DInferior o Change in the Number of Consumers Consumers D o Change in the Price of a Related Good Substitutes Psubstitute D Compliments Pcompliments D o Change in Expectations Expected Price Pfuture D Expected Income Ifuture D o Change in Consumer Tastes and Preferences Tastes and Preferences D The Law of Supply there is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce As price increases quantity supplied increases causing an upward slope Change in Quantity Supplied a movement along the curve caused by a change in the price of the good Change in Supply a shift of the curve caused by anything other than the change in price of the good Shifters of Supply o A change in resource price Presource S o A change in technology Technology S o A change in Nature or Politics Depends on Change o A change in taxes Taxes S Elasticity of Supply measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price High elasticity indicates the supply is sensitive to changes in prices low elasticity indicates little sensitivity to price changes and no elasticity means no relationship with price Elasticity of Demand The degree to which demand for a good or service varies with its price Normally sales increase with drop in prices and decrease with rise in prices Market Equilibrium If there is excess supply price will fall If there is excess demand price will rise 1 2 3 Therefore in equilibrium there is no excess supply or demand 4 Gives you the equilibrium Price and Quantity Changes in Supply and Demand 1 Take it one statement at a time a D or S b or Macroeconomics Final Study Guide 4 c P or Q 2 Repeat steps A B C for second statement 3 Add effects together Invisible Hand Principle the tendency for people while pursuing their own interests to promote the economic well being of society achieved through market prices Size of government is indicated by government expenditures as a of the Chapter 6 US GDP o 1930 9 4 o 2012 38 0 The government is spending your money taxpayer dollars on Transfer Payments transfers of income from some individuals to others social security unemployment benefits welfare etc Theories related to the economics of voting o Rational Ignorance Effect a rational individual has little or no incentive to acquire information needed to cast an informed vote o Median Voter Theory the idea that a vote maximizing politician in a two party system will be close to the middle so that there is littler different between candidates and the preferences of the median voter will be represented The Political Process works when voters pay in proportion to the benefits User Charger requires people who use a service more to pay a larger they receive share of the cost When the Political Process does NOT work 1 Special interest effect An issue that generates substantial benefits for a small group by generating minimal costs to a large group Done through A Logrolling B Pork barrel Legislation 2 Shortsightedness Effect politicians will favor programs that generate current visible benefits even if a long term cost of the project
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