Macroeconomics Chapter 1, 2, and 3 notes

What is the mechanism used to ration resources in the free market society?

-Price

Within a market setting, the competition that results from scarcity is an important ingredient in economic progress.

Competition among business firms for customers results in newer, better, and less expensive goods and services.

Competition between employers for workers results in higher wages, benefits, and better working conditions.

Competiton encourages discovery and innovation, two important sources of growth and higher living standards.

Guideposts to economic thinking:

2. Individuals choose purposefully; therefore, they will economize

   Economizing: gaining a specific benefit at the least possible cost.

   Utility= the basis for the evaluation of cost and benefit (it is subjective)

3. Incentives matter: as personal benefits (costs) from choosing an option increase, other things constant, a person will be more (less) likely to choose that option.

   Picking up a penny or a dollar? A dollar

   Cold or rainy days vs. sunny days? Sunny days

4. Economic reasoning focuses on the impact of marginal changes.

5. Although information can help us make better choices, its acquisition is costly.

   Shopping to compare prices, quality, and other attributes of alternative goods is an example of individuals searching to improve their information.

6. In addition to their initial impact, economic events often generate secondary effects that may be felt only with the passage of time.

   Ex: banning plastic bags

   Failure to consider secondary effects is one of the most common economic errors. Because the long-term effects often differ from those of the short-term, failure to consider the secondary effects often leads to fallacious conclusions.

7. The value of a good is subjective and varies with individual preferences.

   Ex: ballet tickets and football tickets

   Moving goods towards those who value them most and combining resources into good that individuals value more highly are primary sources of economic progress.

8. The test of an economic theory is its ability to predict and explain events in the real world.

   Economic thinking is scientific thinking.

Positive Economics: the scientific study of “what is” among economic relationships.

Positive economic statements involve potentially verifiable statements.

Note: they are not necessarily correct.

Ex: the sky is blue. The earth is made of marshmallows.

Normative Economics: Judgments about “what ought to be” in economic matter. Reflect subjective values.

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Pitfalls to avoid in economic thinking:

1. Violation of the ceteris paribus condition

   Latin term meaning “other things constant”

2. Good intentions do not guarantee desirable outcomes

   An unsound proposal will lead to undesirable outcomes even if it is supported by proponents with good intentions.

   Politicians may be able to gain by focusing attention on a problem even if their policy response is ineffective or even harmful.

3. Association is not causation

   Statistical association alone cannot establish causation

4. Fallacy of composition

   The erroneous view that what is true for the individual (or the part) is also true for the group (or the whole)

   Ex: athletic teams: just because each player on a team is outstanding

CHAPTER 2: 😀 some tools of the economist

5 topics:

1. Opportunity costs

2. Trade

3. Property rights

4. The potential output level of an economy

5. The creation of wealth

Basic economic questions:

• What to produce

• How to produce it

• For whom it will be produced

OPPORTUNITY COST

• The highest valued alternative that must be given up because of making a choice.

• Subjective

• All choices involve costs

• The opportunity costs of going to college includes:

  1. Monetary cost: room and board, books

  2. Non-monetary cost: forgone earnings

• 170-70=100/4(because its 4 hours more on bus than flying) = $25

TRADE

• Mutual gain is the foundation of trade

• When individuals engage in a voluntary exchange, both parties are made better off.

• Noah values his car at $20,000 and Kiara values it at $24,000

• By channeling goods and resources to those who value them most, trade creates value

Transaction costs

• The time, effort, and other resources needed to search out, negotiate, and conclude an exchange.

• Ex: physical obstacles, lack of information, political obstacles (taxes, licensing requirements, government regulations, price controls, tariffs, or quotas)

• Why do they reduce the number of trades? Because it is more expensive

• How have companies such as Ebay lowered transaction costs? Lowering increases because it takes less time to find what you are looking for.

• Do middlemen increase or reduce transaction costs? Reduces because they take the time, effort, and resources.

Question to ponder:

How have the following influenced the volume of trade:

a) internet

Trade creates value

1. When individuals engage in a voluntary exchange, both parties are made better off.

2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources.

   High transaction costs can be a barrier to productive exchange.

PROPERTY RIGHTS

The right to use, control, and obtain benefits from a resource, good or service.

When exchange occurs, it’s really the property rights of the item that change hands.

Private property rights involve 3 things:

1. the right to exclusive use

2. legal protection against invaders

3. the right to transfer to another person

• Incentive to use their resources to provide other with goods and services valued highly relative to cost.

• Incentive to care for and manage what they own.

• Incentive to conserve for the future, especially if the property’s value is expected to rise.

• Private ownership makes owners accountable.

KEYS TO PROSPERITY: CLEARLY DEFINED AND ENFORCED PRIVATE PROPERTY RIGHTS. find in book and get extra credit

THE POTENTIAL OUTPUT LEVEL OF AN ECONOMY (production probability curve)

ex: Production possibilities curve for Susan’s grades in English and economics with 10 hours of study.

An increase in the economy’s resource base (i.e. investment) will expand our ability to produce goods and services.

Advance technology and giving up leisure.

THE CREATION OF WEALTH: entrepreneurs, innovation, and shifts in the production possibilities curve

Entrepreneur: a person who decides what resources will be used, how they will be combined, and what goods are services they will be used to produce.

When entrepreneurs produce goods that are highly valued relative to cost, their actions will both generate personal success and expand the economy’s production possibilities.

GAINS FROM DIVISION OF LABOR:

The division of labor: breaks down the production of a good into a series of tasks performed by different workers.

Specialization and the division of labor increase output.

Specialized workers become more skilled with time. Permits individuals to take advantage of their existing skills.

LAW OF COMPARITIVE ADVANTAGE

The proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer.

MASS PRODUCTION AND INNOVATION

Mass production methods: oftentimes large-scale production leads to lower per unit costs.

KEYS TO PROSPERITY: HUMAN INGENUITY

Economic goods are the result of human ingenuity and action. Through time, the size of the “economic pie”

Market organization: a method of organization that allows for unregulated prices and the decentralized decisions of private property owners to resolve the basic economic problems.

Sometimes called CAPITALISM

Political organization is the major alternative to the use of markets. Involves the use of collective decision making (government) to decide, what, how, and for whom goods and services will be produced.

CHAPTER 3: DEMAND, SUPPLY, AND THE MARKET PROCESS

Consumer choice and law of demand

Market prices, reflecting the forces of demand and supply, coordinate their actions and bring their choices into harmony.

Law of Demand- the inverses relationship between the price of a good and the quantity consumers are willing to purchase.

As the price of a good rises, consumers buy less.

The availability of substitutes (goods that perform similar functions) explains this negative relationship.

A market demand schedule- shows the quantity of good people will demand at varying prices.

• Let’s try to buy a pizza.

• A market demand schedule lays out the quantity

The height of the demand curve, at any quantity, shows the maximum price consumers are willing to pay for that additional unit. Thus, the height of the curve reflects the consumer’s valuation of the marginal unit.

Consumer surplus- the difference between the amount consumers are willing to pay and the amount they have to pay for a good. The area below the demand curve but above the actual paid price.

Elastic demand (unnecessity)- a change leads to a relatively large change in quantity demanded. Demand will be elastic when close substitutes for the good are readily available. (Tacos, food, clothing)

Inelastic demand (necessity)- a change in price leads to a relatively small change in quantity demanded. Demand will be inelastic when few, if any, close substitutes are available. (gas, rent, insurance)

Change in demand

• a shift in the entire demand curve

• Ex: consumer income increases

• Ex: college students go home for the summer and demand decreases for pizza shops

Change in quantity demanded

• a movement along the same demanded curve in response to a change in its price

Demand curve shifters

• Changes in consumer income

• Change in the number of consumers

• Change in the price of a related good

• Change in expectations

• Demographic changes

• Changes in consumer tastes and preferences

PRODUCER CHOICE AND THE LAW OF SUPPLY

Cost and the output of producers

• Producers purchase resources and use them to produce output. Producers will incur costs as they bid resources away from their alternative uses.

• Firms will not stay in business for long unless they are able to cover the cost of all resources employed, including the opportunity cost of the resources owned by the firm.

ECONOMIC COST AND ACCOUNTING COST

• Economic cost: the cost of all resources used to produce a good

• Accounting cost: often ignores the cost of the resources owned by the firm when they calculate the firm’s cost. An example is the firm’s equity capital.

LAW OF SUPPLY

• Law of supply: there is a positive relationship between the price of a product and the amount of it that will be supplied. As the price of a product rises, producers will be willing to supply a larger quantity.

PRODUCER SURPLUS

Elastic supply

SUPPLY CURVE SHIFTERS

• Changes in resource prices

• changes in technology

• Elements of nature and political disruptions (price of chicken eggs)

• Changes in taxes

HOW MARKET PRICES ARE DETERMINED

• Equilibrium: will occur where the quantity demanded equals the quantity supplied. If the price in the market differs from the equilibrium level

PROFIT AND ENTREPRENEURSHIP

• Profit provides entrepreneurs with the incentive to search for, discover, and act upon opportunities to increase the value of resources.

• First, when profit opportunities are the result of disequilibrium in a market, entrepreneurs will help direct the market toward equilibrium.

Complementary goods

• Peanut butter and jelly

• cars and wheels

• pickle ball paddle and ball

Substitute goods

• cake or brownies

STUDY GUIDE

30 mc and essay over substitute goods and complementary

Chp 1 opportunity cost, scarcity, the definition of economics, Adam Smith, scientific decision making, positive and normative statements, marginal analysis and how people make a decision, good intentions and pitfalls of economic thinking, fallacy of composition, and association is not causation.

Chp 2: trade and what is it based on, voluntary exchange, property rights, the definition of transaction costs, what is the gain from trade, what is a middleman, entrepreneur and their function, role of specialization when someone trades, comparative advantage, law of absolute advantage, production possibilities curve, what causes possibility curves to go up or down

Chp 3: demand and supply, the law of demand and supply, inelastic and elastic, substitute and complementary goods, when demand decreases shift to the left, roles of profits and losses for entrepreneurs are to make sure that the resources are used to the optimal level. What does it mean when the supply of products increases or decreases.