unit 1-2 macro

Scarcity

Unlimited Wants + Limited Resources

• forces choices.

Shortages

• temporary

• shortage

Positive economics

• facts

normative economics

feelings

marginal analysis

• additional

• making decisions based on increments (1 more)

• if MB>MC do it!

Command Economies

Government Planners Decide

What to produce?

How to produce?

For whom to produce?

market Economies

Individual choices and prices

Incentive

A reward or punishment that motivates a choice.

Private Property Rights

• are the "secret sauce" that makes Market Economies more efficient at solving scarcity.

• you own what you produce.

land

natural resources

• fields, minerals, deposits, forests, water

labor

human effort; the physical and mental effort used by the people to produce goods and services

capital

• human capital: skills knowledge: increases labor productivity

• physical capital: machinery, tools

entrepreneurship

risk taking and innovation; business

Trade Offs

All the alternatives we give up.

If you go to the movies on Saturday, your trade offs are:

• Working

• Mall

• Hiking

• Beach

Opportunity Cost

The most desirable alternative we give up.

• “next best thing”

increasing opportunity cost

as you produce more of a good, the opportunity cost (amount of the other good you give up) rises.

• happens because resources are specialized

constant opportunity cost (straight line)

resources used to produce two goods are perfectly adaptable or interchangeable

consumer goods

these goods are produced for immediate consumption and current satisfaction

• clothing, food, entertainment

capital goods

goods used to produce other goods in the future

• industrial robots, telecommunications, infrastructure, manufacturing plants

logic of growth

point on the PPC that favors capital goods constitutes a national “investment”

• meaning fewer consumer goods and lower “happiness” today

• expand the country’s productive capacity

• causes the entire PPC to shift outward, allowing the nation to reach previously unattainable levels of production for both types of goods in the future and increase overall economic growth

the unattainable

outside the curve represents levels of production that are currently impossible to achieve

• represent “future goals” if the economy acquires more resources or tech

inefficiency and unemployment

• point inside the curve

• represents inefficient use of resources

• occurs when an economy faces high unemployment or when factories are underutilized

PPC & efficiency: allocative efficiency

the point society most desires

• free markets: prices and services are set by supply and demand through competition, without government control

PPC & efficiency: productive efficiency

using all resources (factors of production)

shifting the PPC

1. change in resource quantity of quality

2. change in technology

3. change in trade

losing factors of production

destroyed means shift inward, inefficiency means point inside the curve.

absolute advantage

• most total production

• purely on raw productivity and maximum total output capacity

comparative advantage

produce a good at a lower opportunity cost than other producers

comparative advantage = lower opportunity cost

• determines trade decision and optimal economic specialization

benefits of specialization

• focus entirely on goods where they hold comparative advantage, maximizing resource efficiency

• expanded PPC: trade allows nations to consume at a point outside their original PPC

• standard of living: access to wider variety, higher quantity, and lower overall costs benefits consumers globally.

output problems

different amounts produced with fixed resources/time

• tons of wheat, cars built

Cost of 1 unit of A = units of B given up / units of A produced

input problems

different resources/time needed to produce a single fixed output (e.g hours per lawn)

Cost of unit1 A = time for A / time for B

interdependence

modern economies rely on intricate global supply chains

• trading partner achieve economic growthand consumption levels unattainable in isolation

demand

willingness and ablility to buy

• price and quantity

quantity demand

price changed = moved points

why demand slops downward

• cheaper substitues/ options

• price decreases

• law of diminishing marginal utility - the more you consume of something, yeilds less extra satisfaction

individual vs market demand

Market Demand: the horizontal summation of individuals buyers’ quantities demanded at every price level

individual demand: the quantity of a product a single consumer is willing and able to buy at different prices

Movement vs. shift in demand

• up and down: change in quantity demanded; change in the goods own price

movement along the existing demand curve

price change never shifts the curve

• side to side: change in a non-price determinant

shift in the entire curve

at the exact same prices, consumers buy more or less

• shift right= increase

• shift left=decrease

determinant of demand

TRIBE

• Taste; preferences

• related goods; substitues and compliments

• income'

• buyers

• expectations

normal goods

goods where demand moves in the same direction as income

income (y) Goes up = demand goes up

inferior goods

goods where demand moves the opposite direction of income

law of supply

there is a direct (or positive) relationship between price and quantity supplied

• because at higher prices profit seeking firms have an incentive to produce more

determinants of supply

1. prices of availability of inputs (resources): they directly change the production costs and total market capacity at every given price.

2. number of sellers: more competitors entering an industry automatically raise total goods available

3. technology: as we get better at making heart rate monitors, smart watch supply goes up

4. government action: taxes and subsidies

5. 5. expectations of future profit: change in price don’t shift the curve. it only causes movement along the curve

change in supply

• non-price determinants

• effect: willing andable to offer a different quantity at every single price level

change in quantity supplied

movement along the exis