Macroeconomics Notes Chapter 1 What is economics The study of hoe people make choices Why do we study economics Economic literacy To understand how the world works o If something costs more people will do less of it o If something costs less people will do more of it o Incentives and costs matter Free good anything that is so abundant in nature that the price is 0 and you can get as much many as you want From each according to his ability to each according to his need Dirty air sunlight and saltwater Everything else is a scarce good Scarce goods Because of scarcity we need ways to ration things o First come first served inefficient o Tallest prettiest arbitrary o Lottery chance random o Communism Resources Factors of production Anything used to produce other goods and services o Capitalism Price o Land o Labor o Capital Iron oceans rivers etc Mental physical knowledge experience etc Tools machinery factories etc Can also mean money but rarely in this class o Entrepreneurship Specialized form of human capital Scarcity vs Poverty Scarcity objective definition Poverty subjective definition The Economic Way of Thinking 8 guideposts There is always a trade off o Called opportunity costs The highest valued option given up when you choose one thing over Individuals choose purposefully therefore economically another o Highest utility o Lowest cost Incentives matter Economic thinking is marginal thinking o People make decisions at the margin o Marginal refers to The change of difference between two alternatives Man made resources as opposed to natural resources The satisfaction a consumer receives from a good Holding everything else constant in an analysis Information is a costly good o Rational ignorance Remaining ignorant about something where the cost of obtaining the knowledge is greater than the benefit of learning it Remember the secondary effects o Increases in the money supply that give people more income but eventually result in higher inflation The value of a good or service is subjective o What is something worth Whatever someone will pay for it The test of a theory is the ability to predict o Economic thinking is scientific thinking Pitfalls to avoid in economic thinking Violating the ceteris paribus condition o All else equal other things constant Just because something seems like a good idea doesn t mean it is Association is not causation o Every time it rains I see people with umbrellas Conclusion umbrellas cause rain The fallacy of composition o Just because something is good for one does not make it good for all Comparative advantage The ability to produce a good at a lower opportunity cost than others can The highest valued option given up when you choose one thing over another The ability to produce a good faster or cheaper than someone else can The advantage that a middleman produces by reducing transactions costs Chapter 2 Tools of the Economist 1 Opportunity Costs a Time and money b Subjective c Failure to consider poor policy 2 Trade Creates Value a Voluntary Exchange i Trade is not a zero sum game 1 Both parties are made better off ii Trade creates wealth 1 By taking something that was not as valuable from one and giving to someone who values it more highly b Transaction Costs i Barrier to trade c Middleman 1 Internet has greatly reduced transaction costs i Reduces costs of trade and increases value 3 Property Rights in a free market a Don t infringe on anyone else s property rights b Include 3 elements i Exclusive use ii Legal protection 1 You can do whatever you want If some uses your property without your permission 1 2 Protected through the courts iii Right to transfer sell exchange or mortgage the property Good things that result from having private property rights When trying to decide what to do with your property there are incentives to o Use property to benefit others Lose when you don t o To take care of your property protect value Government intervention o Rent controls Tragedy of the commons o Be careful with property Limit liability o Countries that don t enforce property rights cause Little incentive to improve property Little incentive to conserve Little incentive to take care of property Investment goods IG Any good used to produce another good Resources Ex factories Consumer goods CG Consumables Ex food movie tickets cars etc Production limited by Technology Resources 4 Production Possibility Curves All possible combinations of goods and services that can be produced given a country s resources Assumes o Fixed amount of resources o Fixed amount of technology o Efficient use of resources Can be linear or non linear o Linear Opportunity cost is constant transferable Doesn t have to be 1 1 o Non Linear Opportunity cost is increasing If its possible to produce more IG and CG you are inside the PPF production possibility frontier the most that can be produced Opportunity cost is constant because the resources are equally Opportunity cost is increasing because the resources are not equally transferable 5 Comparative Advantage Absolute Advantage In the production of a good or service the entity with the lower lowest opportunity cost should do the producing o In the production of a good or service the entity that does the producing best should do the producing Comparative advantage between South Africa and Nigeria Production Possibilities Curve w trade CPC consumption possibilities curve Test Question What are profits and losses to a free market economist Profit o Taking resources worth a certain amount of money making something and increasing the value of the resources o Taking resources worth a certain amount of money making something and destroying or reducing the value of the resources Loss Republic Democracy Supply Seller Demand Ruled by laws Laws are applied equally to every single person Ruled by majority People start to vote to take things away from people Chapter 3 Where does Price come from Buyer Schedule of price and quantities Law of Demand o As price rises demand goes down o Inverse relationship Demand curves Downward sloping because of o Complementary goods o Excess supply o Substitution o The inverse relationship between income and consumption Change in quantity demanded o Price o Slide Change in demand o Anything but price o Shift Consumers Surplus pay producer wants him to pay Supply Curve Also called marginal cost Law of supply The difference between what the producer has to pay for resources and what he wants to The difference between
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