Unit 1
Macroeconomics
Micro vs. Macro:
Micro = individuals/firms (choices, competition, profit/happiness)
Macro = economy as a whole (growth, stability, unemployment)
3 Main Goals of Economy:
1. Promote growth
2. Keep prices stable
3. Limit unemployment
Implicit:
“no outflow of cash”
time, income, effort, and/or opportunities are looked upon as implicit costs
Explicit:
“outflow of cash”
wages/salaries for your employees, rent payment, health insurance, ticket prices, Spotify fee
O.C. + Economic Basics
Opportunity Cost = value of the next best alternative given up
Because I choose to… I gave up…
Explicit = $$ out of pocket (tuition, wages, rent)
Implicit = time, effort, income not earned
Accountant vs. Economist Example:
Accountant → tuition only ($30k)
Economist → tuition + lost income ($30k + $60k = $90k)
Positive vs Normative Statements
Positive = no comments about good or bad (fact)
Normative = has a comment, a + b = c and that’s bad/good
with NORMative you are comparing the statement’s contents to some NORM.
CETERIS PARIBUS
Latin for “hold all other things constant”
We change one variable at a time and all other variables remain unchanged.
Scarcity = unlimited wants + limited resources
Leads to 3 economic questions:
What to produce?
How to produce?
For whom to produce?
Types of Economies:
Traditional → based on custom
Command → government decides
Market → supply & demand decides
Mixed → combination of both
Factors of Production:
1. Land → natural resources
2. Labor → human effort
3. Capital → tools, machinery, factories
4. Entrepreneurship → innovation + risk-taking
Business Cycle
Business Cycle:
Alternates between downturns and upturns.
Key Terms of Cycle:
Recession: Output and employment are falling.
Expansion (Recovery): Output and employment are rising.
Depression: A very deep and prolonged recession.
Peak: Economy turns from expansion to recession.
Trough: Economy turns from recession to expansion.
Macroeconomic Fundamentals
Labor & Output
Employment: People working.
Unemployment: People looking for work.
Labor Force: Employment + Unemployment.
Aggregate Output: Total production of goods/services. It falls in a recession and rises in an expansion.
Prices
Deflation: A falling overall price level.
Price Stability: A stable overall price level, which is a key goal.
Inflation: A rising overall price level.
Economic Concepts
Economic Growth: An increase in the economy's maximum possible output.
Models: Simplified representations used by economists to understand real situations.
Production Possibilities Curve (PPC)
Why it matters: Resources are limited, so choices must be made.
Opportunity Cost = what you give up to gain something else
Ex: Can’t give 100% to both studying & sports.
PPC/PPF shows trade-offs:
Points on curve → efficient use of resources
Inside curve → feasible but inefficient
Outside curve → not possible with current resources
Constant vs. Increasing Opportunity Costs:
Straight line → constant trade-off
Bowed curve → increasing trade-off (less suitable resources used over time)
Growth, Efficiency & Applications
Shifts PPC outward (greater production possibilities)
Allocative Efficiency: Producing the mix of goods/services society most wants.
Key Question: If demand rises, can production exceed PPC?
No → production capped by resources/technology.
But growth can shift PPC outward over time.
Capital vs. Consumer Goods:
Investing in capital goods boosts future production & growth.
Growth, Efficiency & Applications
Economic Growth:
Increase in resources (land, labor, capital, entrepreneurship)
Improved technology (more efficient production)
Comparative Advantage & Trade
Overview:
Trade = More Options = Better
Lunch trade example → more people to trade with = more choices = more benefits.
Voluntary Trade is GOOD
Both sides gain → lower prices, higher quality, specialization, more consumption.
Creates a Consumption Possibilities Curve (CPC) beyond the normal PPC.
Absolute vs Comparative Advantage
AA vs. AC
Absolute Advantage: the ability to produce a good or service more efficiently than a competitor
Who can make it with fewer resources (input).
Comparative Advantage: the ability to produce a good or service at a lower opportunity cost than another party
Who gives up the least (lower opportunity cost).
Countries/people should specialize where they have the lower OC.
Key Steps on Tests:
Is it input or output?
Use IOU (Input = Other Under) or OOO (Output = Other Over).
Specialize in what you do at the lowest opportunity cost.
With trade, both win.
PPC Curve Practice
Problem
Alice can produce 40 apples or 20 oranges, while Bob can produce 30 apples or 30 oranges.
Absolute advantage: Alice (apples), Bob (oranges)
Comparative advantage: Alice (apples), Bob (oranges)
Opportunity costs:
Alice — 1 apple = 0.5 orange
Bob — 1 apple = 1 orange
Trade range: between 0.5 and 1 oranges per apple (or 1 to 2 apples per orange).
Fair example rate: 1 apple = 2/3 orange (1 orange = 1.5 apples) — both parties can gain.