Macroeconomics UCF Nora Underwood

Economics

the study of how society manages its scarce resourses

-society means: individuals, firms, goverment

scarcity

the limited nature of society's resources

-what do we mean resources: things used for production or consumption

-in some locations land, water, fossil fuels, or other mineral resources can be scarce

ex: time, income

Situation:

You want to do something fun over break, but you only have $500 to spend. What is your constraint and what is your objective?

constraint - $500

objective - fun

Which of the following are economic decisions?

a. Joe decides to work 3 hours per week at his job.

b. Jane decides to spend 3 hours cleaning her house.

c. George decides to save 20% of each paycheck.

d. Floyd buys $100 worth of groceries.

e. All of these are economic decisions.

E

opportunity cost

the value of what you give up to get an item (to get something we want, we usually have to give up something else that we want)

-includes more than monetary cost (what you pay)

-some monetary costs do not count as part of this)

opportunity cost is the value of the next best _____________________

alternative

Explicit cost

monetary cost

-ex: a firm pays wages to a worker, a person pays for a cup of coffee

Implicit cost

something you gve up but do not explicitly pay for

-ex: you stand in line for 30 minutes to get on the ride at Disney, you spend 4 hours searching for hotels for an upcoming vacation, the college athlete gives up income when he chooses to remain in school until graduation

Marginal analysis

people make decisions by comparing marginal benefit to marginal cost

-individuals decide what to do with their time and income

-firms decide how many workers to hire and how many goods to produce

marginal change

small incremental adjustment to an existing plan of action

(margin means "edge")

total benefit

revenue generated by all customers for all advertising hours

total cost

total amount spent for all hours of advertising

net benefit

total benefit minus total cost

marginal benefit

revenue generated by the additional customers gained from the last hour of advertising

marginal cost

cost of the last hour of advertising

net benefit =

total benefit - total cost

Economics is best defined as the study of

a. how society manages its scarce resources.

b. how to run a business most profitably.

c. how to predict inflation, unemployment, and stock prices.

d. how the government can stop the harm from unchecked self-interest.

10 Principles of Economics

1. People face trade-offs

2. The cost of something is what you give up to get it

3. Rational people think at the margin

4. People respond to incentives

5. Trade can make everyone better off

6. Markets are usually a good way to organize economic activity

7. Governments can sometimes improve market outcomes

8. A country's standard of living depends on its ability to produce goods and services

9. Prices rise when the government prints too much money

10. Society faces a short-run trade-off between inflation and unemployment

efficiency vs. equality

efficiency: when society is getting the maximum benefits from its scarce resources (economic pie)

equality: when those benefits are distributed uniformly among society's members (how the economic pie is divided into individual slices)

incentive

something (such as the prospect of punishment or reward) that induces a person to act

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

market failure

a situation in which a market left on its own fails to allocate resources efficiently

property rights

the ability of an individual to own and exercise control over scarce resources

externality

the impact of one person's actions on the well-being of a bystander

market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

productivity

the quantity of goods and services produced from each unit of labor input

inflation

an increase in the overall level of prices in the economy

business cycle

fluctuations in economic activity, such as employment and production

Your opportunity cost of going to a movie is

a. the price of the ticket.

b. the price of the ticket plus the cost of any soda and popcorn you buy at the theater.

c. the total cash expenditure needed to go to the movie plus the value of your time.

d. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money.

A marginal change is one that

a. is not important for public policy.

b. incrementally alters an existing plan.

c. makes an outcome inefficient.

d. does not influence incentives.

Adam Smith's "invisible hand" refers to

a. the subtle and often hidden methods that businesses use to profit at consumers' expense.

b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants.

c. the ability of government regulation to benefit consumers, even if the consumers are unaware of the regulations.

d. the way in which producers or consumers in unregulated markets impose costs on innocent bystanders.

Governments may intervene in a market economy in order to

a. protect property rights.

b. correct a market failure due to externalities.

c. achieve a more equal distribution of income.

d. All of the above.

If a nation has high and persistent inflation, the most likely explanation is

a. the central bank creating excessive amounts of money.

b. unions bargaining for excessively high wages.

c. the government imposing excessive levels of taxation.

d. firms using their monopoly power to enforce excessive price hikes

positive economics

when economists try to describe the world as it is

ex: if income tax rates rise then people will pay more in taxes

normative economics

when Economists (like everyone else) also make value judgments about how the world should be

ex: we should increase income tax rates so the government can collect more tax revenue and reduce the size of the budget deficit.

economic models

a simplification of reality - it specifies key variables and attempts to understand and explain how the variables are related

-the model is used to explain the past and predict the future

ex: For example, we may want to explain how and why the price of a gallon of gas fluctuates over time

model

a relationship between variables

variable

something that changes over time, such as the price of apples

example

the law of demand states that all else the same, an increase in the price of a good will reduce the quantity demanded

models make ____________________ to simplify the problem

assumptions

circular flow diagram

explains how people in the economy interact with each other

2 markets

1. market for goods/services

2. market for factors of production

2 groups of people

household -

-own/supply factors of production

-receive income

-demand/buy goods/services

firms -

-hire/demand factors of production

-pay income

-supply/sell goods/services

production possibilities frontier

a graph that shows combinations of two goods that can be produced with available factors of production and existing technology.

purpose -

illustrate scarcity, efficiency, tradeoffs, opportunity cost, and economic growth