Macro Econ Study Guide 1

Understand the concept of opportunity cost

the cost of an alternative that must be forgone in order to pursue a certain action

Understand the meaning of utility

Satisfaction

Understand the meaning of positive economics

positive economics focuses on facts and cause-and-effect relationships

Normative Economics

normative economics focuses on what particular policy actions should be used

Know how to use marginal analysis

If marginal benefits are larger than marginal costs, pursue the action

Know the definition of economic resources

Economic resources are natural, human, or manufactured inputs used to produce
goods and services

Know how economic resources are classified

Land, Labor, Capital and Entrepreneurial Ability

Know difference between market system and the command system

The market system is known as capitalism. The command system is known as
socialism or communism.

Understand the law of demand

The price level and demand have a negative relationship

Know how to construct the demand curve

Demand curve slopes downward

Know the difference between individual demand and market demand

Individual demand is demand from one consumer. Market demand is demand from
all consumers

Understand how different determinants of demand affect the demand curve

For example, if there is an increase in the number of buyers in a market, demand
curve shifts to the right

Know the difference between a change in demand and a change in quantity demand

A change in Demand is a shift of the demand curve to the right or to the left. A
change in Quantity Demand is a movement from one point to another point, from
one price-quantity combination to another, on a fixed demand curve

Know how to construct the supply curve

Supply curve slopes upward

Understand how different determinants of supply affect the supply curve

For example, improvements in technology enable firms to produce units of output
with fewer resources and it will shift the supply curve to the right

Know how the equilibrium price and quantity are determined

They are determined by the intersection of the demand and supply curves

Know how to predict the effects of changes in both demand and supply on equilibrium
price and quantity

For example, if demand curve shifts to the right and supply curve does not shift,
then both the price and quantity increase

Know the meanings of surplus and shortage

Surplus occurs when supply is larger than demand. Shortage occurs when demand is
larger than supply

Know how the calculate GDP per person

GDP per person = GDP/ population

Know that business cycles are driven by shocks.

Shocks are unexpected events

Know how to distinguish demand shocks and supply shocks

demand shocks affect demand, supply shocks affect supply

Know that GDP measures the dollar value of final goods and services

The unit for GDP is dollar

Know the definition of final goods and services

Goods and services that are directly consumed by consumers

Know that there are two ways to calculate GDP

Expenditure approach and Income approach

Know how to use expenditure approach to calculate GDP

Expenditure approach: GDP = C + I + G + NX

Remember that intermediate goods and nonproduction transactions are not included in
GDP

to avoid multiple counting

Know what it is meant by the business cycle

Business cycle are short run movements around the growth trend.

Know that a business cycle consists of four phases

Peak, Recession, Trough, Expansion

Understand why the production of durable goods is affected more by business cycles
than that of nondurable goods

Durables purchases are postponable

Know how to calculate unemployment rate

Unemployment rate = Unemployed/ Labor Force

Know the difference among frictional, structural and cyclical unemployment.
-

Know the difference among frictional, structural and cyclical unemployment.
- Frictional unemployment: workers with desirable skills searching for new jobs or
waiting to take new jobs.
- Structural unemployment: due to the changes in technology.
- Cyclical unemployment: caused by economic downturns or recessions.

Know the definition of natural rate of unemployment (NRU)

NRU = frictional unemployment + structural unemployment

Know how to calculate GDP gap.

GDP gap = Actual GDP - Potential GDP

Know how to calculate inflation rate

Inflation rate = (CPI this year – CPI last year)/ CPI last year

Know how to use the Rule of 70

The Rule of 70 is a formula used to estimate the number of years required to double the value of an investment or the size of an economy by dividing 70 by the annual growth rate.

Know the difference between demand-pull inflation and cost-push inflation

- Demand-pull inflation is the result of excess total spending in the economy.
- Cost-push inflation is the result of factors that raise production costs