Macroeconomics Exam 1

Economics

Study of how society manages its scarce resources

Scarcity

Limited nature of society’s resources

opportunity cost

What you give up to get an item (explicit plus implicit)

Society

Individuals, firms, government

how do people manage scarce resources?

Make decisions to achieve objectives given constraints

Explicit cost

monetary cost

Implicit cost

Something you give up but do not explicityly pay for

Explicit cost example

firm pays wages to workers

Implicit cost example

standing in line for 30 minutes to get free stuff

On Friday night you could go to work and earn $40 or you could go to the movies and this will cost you $20. What is the opportunity cost of attending the movie?

$60

Marginal Change

Small incremental adjustment

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

For advertising what is the rule?

As long as the marginal benefit is greater than or equal to the marginal cost, keep going until its less

Economic way of thinking

What are the wants and constraints of those involved, What are the trade-offs, how will others respond, Are resources being allocated in the best way possible?

What are the wants and constraints of those involved?

considers difference between what people and want and what they can afford

What are the trade offs?

Considers teh application of opportunity cost and marginal analysis when evaulating between the options

Are resources being allocated in the best way possible?

About efficiency

how will others respond?

About incentives, action taken by one party can encourage or discourage others from taking action

What do models do to simplify a problem

make assumptions

What is the circular flow diagram

explains how people in the economy interact with each other

Circular flow diagram has two groups of people

Households and firms

Households

own/supple factors of production, receive income, and demand/buy goods and services

Firms

Hire/Demand factors of production, pay income, and supply/sell goods and services

Draw circular flow diagram

Draw it

Positive analysis

Statements that describe the world as it is

Normative analysis

claims that offer an opinion about what should be

Production Possibilities Frontier

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

Purpose of PPF

Illustrate scarcity, efficiency, trade-offs, opportunity cost, and economic growth

Point on the PPF line

Feasible and efficient

Point inwards the PPF Line

Feasible but no effecient

Point not in the PPF Line

Not feasible

Comparative advantage

Ability to produce a good at a lower opportunity cost than another producer

Absolute advantage

Ability to produce a good using fewer inputs than another producer

Market

A physical or virtual place where buyers and sellers interact and determine the price of a good

Demand curve

illustrates law of demand and helps us understand the behaviors of buyers in the market

Market demand

sum of the individual demands

Supply curve

Illustrates the law of supply and helps us understand the behavior of sellers in the market

Market supply

sum of the individual supply curves for each firm

Equilibrium

Quantity demanded equals quantity supplied

Surplus

Quantity demanded is les than quantity supplied, means there is an incentive to decrease price

Shortage

Quantity demanded is greater than quantity supplied, incentive to increase price

Microeconomics

study of how individuals and firms manage resources

Macroeconomics

Study of the economy as a whole and how policy makers manage the growth and behavior of the overall economy

Marginal decision making

idea that rational people compare the additional benefits of a choice against the additional costs without considering related benefits and costs of past choices

Incentive

Positive or negative but can influence people to behave a certain way by changing trade offs they face

Positive incentive

makes people more likely to do something

Negative Incentive

Makes people less likely to do something

What are the markets in the circular flow diagram

Market for goods and services and Market for the factors of production

What are the two loops in the circular flow diagram

Flow of dollars and flow goods and services

What should a model do?

Predicts cause and effect, states its assumptions clearly, and describes the real world accurately

What questions does the PPF answer

The first and second question

Moving up on the PPF line means

Y increases while x decreases

Moving down on the PPF line means

Y decreases and X increases

Concave curve

Bows out instead if a straight Line

What happens to the curve if x production increases while y stays the same?

the line pivots outward along the x axis

What is true about comparative and absolute advanatges?

You can have a comparative advantage without having an absolute advantage

What is impossible if the opportunity cost is inverse?

This means no producer has a comparative advantage at everything and each producer has a comparative advantage at something

What happens if producers specialize

If each producer focuses on making a good that it has a comparative advantage for then total production increases

Gains from trade

Improvement in outcomes that occur when specialized producers exchange goods and services

What are the two things that occur that allows for room to trade

The two countries differ in their opportunity costs to produce a good and they set a favorable price which needs to benefit both parties

What is the favorable price?

A price that falls between their opportunity costs

Market Economy

Private individuals make the decisions

Competitive market

fully informed, price taking buyers and sellers easily trade a standardized good or service

Price taker

A buyer or seller who cant affect the market price

Characteristics of perfectively competitive markets

Participants are price takers, standardized good, full info, and no transaction costs

Quantity demanded

amount a good that buyers in a market will buy at a given price during a specific period.

What happens to quantity demanded if price goes lower

it increases

Law of demand

Inverse realtionship between the price and quantity,When all else is held equal, quantity demanded rises as price falls

Demand Schedule

shows quantities of a good or service that customers are willing and able to purchase at various prices

Demand Curve

visually shows the demand schedule

What does the Demand curve represent

consumers willingness to buy

What are the nonprice determinants of demand?

Consumer preferences, prices of related goods, income of consumers, expectations of future prices, and the number of buyers

Substitutes

Two goods that serve similar purposes, if one increases price then the other one that stays at the same price, its demand will increase

Complements

Related goods that are consumed together, If peanut butter price increases then jelly’s demand will decrease

Normal goods

most goods, if there is an increase in income than there is an increase in demand

Inferior goods

As income increases, demand decreases

Is the shift of the demand curve horizontal or vertical?

Horizontal

Demand curve shifts to the what when quantity demanded is higher

right

Demand curve shifts to the what when quantity demanded is lower

Left

What are shifts in the demand curve caused by

changes in the nonprice determinants of demand

How do we move along the Demand curve if prices increase

moving up

What are movement along the demand curve caused by

Price factors

What happens to the demand curve if demand decreases

shifts to the left

What happens to the demand curve if demand increases

Shifts to the right

Where does the point move along the line if the price increases

moving up

What is the saying for a shift of the demand curve

increase/decrease in demand (nonprice determinants)

What are the saying for a movement along the demand curve

increase/decrease in quantity demanded

Quantity supplied

amount of a particular good or service that producers will offer for sale at a given price during a specified period

Law of Supply

all else held equal, quantity supplied increases as price increases

Supply schedule

table that shows quantities of a particular good or service that producers will supply at various prices

Supply curve

graph of the info in the supply schedule, shows producers willingness to sell

Nonprice determinants of supply

prices of related goods, tech, prices of inputs, expectations, number of sellers

What affects the shift of the supply curve

change in nonprice determinant which increases/decreases supply

What affects the movement along the supply curve?

chaneg of price increases or decreases the quantity supplied

What happens to the supply curve if there is an increase in supply

shifts to right

What happens to the supply curve if there is a decrease in supply

shifts to left