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1 Macroeconomics Final Notes: CHAPTER 1: What is economics? We want more than we can get. Our inability to satisfy all of our wants is called scarcity. All resources are finite even if they are abundant. Economics is a social science that studies the choices that individuals, businesses, and societies choose to make. Economics is a problem of choice, the choices are based on incentive. Two big economic questions: 1. How do the choices determining what and for whom goods and services are produced. 2. When do choices made in pursuit of self-interest also promote social interest. What- choices, determines the patterns of production and the quantities produced. How-goods and services are produced by using productive resources: land labor capital entrepreneurship are factors of production. Human capital- quality of human labor Physical capital- machines, buildings, and instruments of production Whom- depends on the income that you earn in order to consume: Land earns rent, labor earns wages, capital earns interest, and entrepreneurs win it all. Economic way of thinking- every choice made has a tradeoff guns and butter - necessary vs consumer goods - Businesses choose between alternative production technologies - Distribution of buying power - Redistribution of income ( equality vs efficiency 0 - Present vs future - How to spend income or how government spends taxes Big trade off: - enjoy current consumption/leisure or work/save - increasing future production, productivity or consume - business can promote more resources to be used for research so they can produce more later, but they give up current consumption opportunity cost- cost is an opportunity forgone. Choosing at the margin: benefit with each increment of the activity is the marginal benefit when marginal cost is greater than marginal benefit there is less incentive a positive statement can be tested and checked a normative statement is what out to be, it cant be tested and depends on value of judgment. CHAPTER 2: The Economic Problem Production possibilities and the opportunity cost: quantities of goods and services are limited by the available resources.

2 - Economic growth does not eliminate scarcity - EX: the fewer resources we use now to produce pizza ( make current profit) and the more of those resources that are used for producing ovens ( makes future production easier ) the greater is the expansion of our future production possibilities. - Therefore: if a nation devotes all goods and services to consumption goods and services and none to developing new technologies, the PPF cannot expand in the future. The opportunity cost of investing is less current consumption. - All points on the PPF are productive efficient Gains from trade: people gain from specialization- when they have the comparative advantage in production - Comparative advantage- can produce an activity at the lowest opportunity cost:compares opportunity costs - Absolute advantage- a person who is more productive than others: compares productivities - People gain by specializing in their comparative advantage - Opportunity cost is the slope of the personal PPFs - Trade lines are outside of their PPF lines - Society is better off with specialization and free exchange (better utilization, efficiency, world output, consumption) - Can get the comparative advantage: naturally, knowledge, skill, experience Decentralized institutions need 4 complimentary social institutions: Firms- hire factors of production and organize them to produce and sell goods and services. Markets- enables buyers and sellers to get info and do business: facilitate trade Property rights- social arrangements that govern the ownership use and disposal of anything that people value (real property, or financial and intellectual property) Money- commodity that is an acceptable means of payments. Efficiency of trade.

3 CHAPTER 3; DEMAND AND SUPPLY Competitive market is one with many buyers and sellers ( the price is not set) Opportunity cost is the highest valued alternative forgone. Relative price- the ration of one money price to another, an opportunity cost Demand ( want it, afford it, and plan to buy it ) Quantity demanded- the amount consumers plan to buy during a certain time period- price is the influencing factor Law of demand- other things remaining the same the higher the price of a good, the smaller is the quantity demanded. The lower price, the more that is demanded. The higher price reduces quantity demanded because: Substitution effect- the relative price of a higher cost also increases, so while the product is unique, consumers will still chose a substitute product with a lower cost Income effect- the higher price makes the price rise relative to income, so consumers cannot afford all the things they previously bought. *demand refers to the entire relationship between the price of a good and the quantity demanded ( so a change in demand is a shift of the curve) *quantity demanded refers to a point on that relationship curve ( so a change in quantity demanded is a movement along the curve) Changes in demand (shift of graph) a. Price of related goods: the price of a substitute rises or lowers the product demand will change. Same with a compliment: a product that is closely related and dependent

4 b. Expected future prices- price will rise later, demand will increase now c. Income: a normal good- when income rises people consume more of it inferior good- when income rises people consume more of it d. Expected future income/credit: buy more now if you expect more money in the future e. Population- the demand depends on the size and age structure of the population f. Preferences- the value that each person places in a good. SUPPLY: the constraints of how much is supplied is the resources and technology available to produce The quantity supplied is not necessarily the same as the quantity sold, so shortages and surpluses result Law or supply: Other things remaining the same the higher the price of a good, the greater is the quantity supplied. The lower the price of a good, the smaller is the quantity supplied. - As the quantity produced of any good increases the marginal cost of producing the good increases. - Only willing to supply if they can at least cover the marginal cost of production Changes in supply: - Prices in factors of production - Prices of related goods produced: supply of a good increases if the price of a substitute falls. Supply of a good increases if the price of a compliment in production rises. - Expected future prices- less production now when future prices are expected to rise - Number of suppliers in the market - Technology - State of nature- natural disasters decreases supply CHAPTER 1-3 HW QUESTIONS - Macroeconomics is the study of nation economy and the global economy - All economic problems arise because society faces scarcity - Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make to cope with scarcity - Incentive is a reward that encourages an action or a penalty that discourages an action. - Factors of production are grouped into 4 categories: land labor capital and entrepreneurship - When you make economic choices that are in your self-interest and possibly also in the social interest. - Only do something if the marginal benefit of doing something is greater than the marginal cost

5 - Scarcity leads to tradeoffs - Normative statements=opinion - Positive statement=fact with evidence - An economic model is tested by comparing its predictions with the facts - Economists use natural experiments, statistical investigation and economic experiments - Testing an economic model is difficult because we observe the outcome sof the simultaneous operations of many factors - Productive efficiency: giving up the minimum amount of y possible to increase production of x as you move along the curve - The opportunity cost of producing and additional unit of x is equal to the interest of the opportunity cost of producing an additional unit of y - PPF is the boundary between those combinations of good and services that can be produced and those that cant - When production is efficient you can only produce one more unity of y by producing less of x - Marginal benefit from a good or service is the benefit received from consuming one more unit of it - Allocative efficiency occurs when we are producing at a point on the ppf such that the marginal benefit at that quantity produced equals the marginal cost - Marginal benefit curve illustrates the principal of decreasing marginal benefit - Economic growth comes from capital accumulation and technological advance - The opportunity cost of economic growth is greater the faster we make our production grow - Economic growth does not overcome scarcity because it is impossible to satisfy all of our wants no matter how much we produce - An economy that uses new technology increases standard of living buy doesn t overcome scarcity - Social institutions such as firms markets property rights and money are required for society to enjoy the benefits of specialization and trade - A firm is an economic unit that hires factors of production and organizes those factors to produce and sell goods and services. - The relative price of a gallon of gas in terms of pounds of bananas is $gas/$banana - The opportunity cost of a book in terms of games is the number of fames you must give up to get the book - A demand curve that illustrates the law of demand shows that the quantity demanded increases as price falls - A demand curve is a marginal benefit curve - A supply curve that illustrates the law of supply shows that the quantity supplied increases as the price rises - A supply curve tells us the lowest price at which someone is willing to sell - If the price of a sports car decreases the quantity of sedans that a firm plans to sell increases, then a sports car and sedans are substitutes in production - When a shortage arises the price rises to its equilibrium which decreases the quantity demanded and increases quantity supplied

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