BUSA 2210: Introduction to Macroeconomics - Core/Microeconomics Concepts Review: Part I Notes

Core/Microeconomics Concepts Review: Part I

Core Concepts - Review Before Macroeconomics

  • Review of microeconomic concepts, assuming some details have been forgotten.
  • Many microeconomic principles are applicable to macroeconomics.
  • Topics to review:
    • Terminology (Chapter 1)
    • Market forces using Supply and Demand Analysis (Chapter 3)
    • Elasticity (Chapter 4, appendix)
    • Tax Incidence (Chapter 4)
  • Marginal Revolution videos suggested as a resource.

Terms and Concepts

  • Concepts that should be familiar:
    • Incentives:
      • Positive and Negative
      • Direct and Indirect
    • Opportunity Cost and Trade-offs
    • Marginal Thinking
    • Comparative Advantage

Incentives and Decisions

  • Incentives: Influence decisions.
    • Positive Incentives: Encouragements (carrot).
    • Negative Incentives: Discouragements (stick).
    • Direct Incentives: Intended actions.
    • Indirect Incentives: Unintended consequences.
  • Example: Tariffs
    • Definition: Additional cost on foreign goods.
    • Negative incentive to purchase foreign goods.
    • Direct effect: Decreased imports, increased sales of domestic goods.
    • Indirect effect: Potential negative impact on consumers, retaliatory tariffs from other countries on U.S. goods.

Macro Examples of Incentives Altering Decisions

  • Government assistance programs (CHIP, Medicare, student loans):
    • Consider citizen response to changes.
    • Indirect effect: potential increase in national debt.
  • Federal Reserve (FED) increasing the federal funds target rate:
    • Direct and Negative effect: Higher borrowing costs leading to decreased consumer activity.
  • Government increasing unemployment benefits:
    • Direct effect: Easier bill payments for the unemployed.
    • Indirect effect: Potential delay in accepting available jobs or ceasing job search.

Opportunity Costs and Trade-offs

  • Decisions based on SCARCITY: Unlimited wants vs. limited resources.
  • Choices are made regarding prioritization of wants, considering resources.
  • Trade-offs: Giving up one thing to obtain another.
    • Example: Attending an 8 am class means missing breakfast or gym at the same time.
  • Opportunity Cost: The most valuable alternative that is sacrificed.
    • Example: Attending an 8 am class instead of breakfast, gym, or sleeping in.
    • If class is canceled, and you go to the gym, then the gym was the opportunity cost of attending class.

Macro Perspective on Opportunity Costs and Trade-offs

  • Tax revenue:
    • Decision: Spend on tanks or school buses?
    • Trade-off: Cutting taxes now (deficit), leading to higher future taxes and less spending.
  • Increased budget for “Homeland Security”:
    • Decision: Security wall, more agents, new computers/equipment?
    • Opportunity Cost: Could that money be spent on interstate highways instead?

Marginal Thinking

  • Due to scarcity and multiple needs, decisions are made incrementally at the margin.
  • Scenario: Biology and Economics exams tomorrow, one hour left to study.
    • Question: Spend an hour on one subject, or split the hour?
    • Inquiry: What improvement (better grade) will result from that additional study time?
    • Benefit tends to decrease with increased study time.
    • Marginal benefit of extra time studying Biology?
    • Marginal benefit of extra time studying Economics?

Marginal Thinking (Macro)

  • “Getting the best bang for your buck!”
  • FED:
    • Impact of 0.25% or 0.50% change to the federal funds rate?
    • Marginal cost: Unhappy voters increases as rates go up.
  • Congress:
    • Revenue from a 1% tax rate change?
    • Cost savings from raising the Social Security retirement age by 6 months?
  • Habersham County:
    • School funding changes with a 0.5% property tax rate increase?

Comparative Advantage

  • The opportunity cost to produce goods/services differs among individuals or countries.
  • Specialize in areas of strength and trade with others.
  • Specialization represents comparative advantage; trading benefits all parties.
  • Examples:
    • Paying someone else to build a house.
    • Paying someone else for dental work.
    • Better to trade with someone who has a comparative advantage in those jobs.

Core Concepts - Summary

  • Key Concepts:
    • Incentive
    • Opportunity Costs
    • Thinking on the “margin”
    • Comparative Advantage
  • Applicable in any Economics class.
  • Suggestion: Complete the related InQuiz assignment.
  • Next topic: Supply and Demand Market Analysis.