Macroeconomics
1. Define the term opportunity cost.
-Opportunity cost is what you must give up to get something.
2. What is “marginal analysis”? Give an example of an economic decision made on the margin.
-Marginal analysis is the study of marginal decisions.
Incremental change of something; instead of having 5, have 10.
3. What is an economic incentive? Give an example of an incentive.
- Encourages a certain behavior.
- Exploiting opportunities to make themselves better off.
Anything that offers rewards to people who change their behavior.
4. What is an economic disincentive? Give an example of a disincentive.
-To discourage a certain behavior.
-Can be done by increasing cost of something or reducing the benefit of doing it.
Example: President Nixon wanted to reduce drivers on the road by increasing gas prices.
5. What is the difference between a positive statement and a normative statement? Give an example of each
-Positive statement is just how the world is now.
No bias, no opinion, no judgement.
-Normative is how the world should work.
6. Define efficiency. Define equity. Which of these is normative? Which is positive? Can these two goals be reached simultaneously? Explain.
-Efficiency is all the opportunities to make some people better off without worsening
others.
-Equity is making life “fairer” for disabled people.
7. What is the difference between a theory and a model? Give an example of each.
-Theory is like a proposal/representation, it can be as simple as one variable in the economy impacts another.
Example, interest rates effects house sales.
-Model is a simplified representations of real situations that used to better understand real-life situations. (simplification of reality to understand it)
Example, a globe of the Earth to find a country.
8. Define ceteris paribus. How do economists use ceteris paribus?
-Ceteris Paribus translates to “Other things held constant or equal”
-Other relevant factors remain unchanged.
Economists use it to test the impact of one variable and keeping the other constant. Not that we don’t care, but if we change a bunch of things, it’ll create chaos.
9. What is the difference between an endogenous variable and an exogenous variable? Which of these variables is inside our economic model? Which of these variables is outside our economic model?
-Endogenous: Endo = inside or within
-Exogenous: Exo = outside
Example: interest rates
10. What are the four categories of factors of production (resources)? Give an example of each type of factor of production (We are ignoring the book’s category of human capital and have added the more traditional category of entrepreneurial ability instead.).
Factors/Resources:
-Anything given to us by nature or man-built structures to produce-
A. Land: supplied by nature. (oil reserves --deep under physical land.)
Ex: a home being built.
B. (Physical) Capital: Anything that is productive to make other things.
Ex: walk into a bank, the structure is capital. Display shelves are capital stocks. MJR is a big capital stock.
C. Labor: The economy’s pool of workers.
Ex: On the job taking tasks from superior; somebody defines what you do on the job.)
D. Entrepreneurial Ability: the risk taker/ inventor/ business owner, with their own finances; risks into something.
Expand to see what happens or it becomes a habit. Not taking instructions from somebody, you’re your own boss.
Ex: buying first stock, you’re now an entrepreneur.
11. What is the difference between an entrepreneur and a laborer?
An entrepreneur makes choices for their own firm, while a laborer is for a firm.
12. What does the production possibilities frontier (curve) represent?
-It represents the trade-off this one-company economy would face, by showing the maximum quantity of one product compared to another.
Two things that take up lots of resources to build
13. Describe opportunity costs in production.
-The true cost of any good isn’t the money it costs to buy it, but what must be given up getting that good.
14. What does constant opportunity costs in production mean? Why is this first version of a production possibilities frontier drawn as a straight line? What do we know about the adaptability of factors of production in this situation?
Constant opportunity cost, they’re also resources are perfectly adaptable.
15. What does increasing opportunity costs in production mean? Why is this second version of a production possibilities frontier drawn concave (bowed toward the origin)? What do we know about the adaptability of factors of production in this situation?
-The more small jets the economy produces, the more costly it is to produce yet another small jet in the terms of forgone Dreamliners.
Start with assumption on bottom, where resources are not perfectly adaptable
So now it will have to end up with some type of curve, concave to be specific.
Will see increasing of costs in production. (measuring what we have to give up)
16. What are the two reasons why an economy would find itself at an interior point? Are these interior points efficient? Why or why not?
-Underutilization of resources, such as unemployment, leading to less production, or resources may not be being used efficiently. They’re not efficient because it means the economy isn’t maximizing the outputs given by the available resources.
17. Can the economy reach an exterior point today? Why or why not?
-No, we can’t reach exterior points today, its unattainable/not feasible
18. Which points in this commodity space are both feasible and efficient?
-The points on the curve are the most feasible and efficient.
19. Which points in this commodity space are feasible, but not efficient?
-The points on the inside are feasible, but not efficient.
20. Which points in this commodity space are not feasible in the present?
-The points on the outside; exterior points.
21. What is the difference between a capital good and a consumer good?
-Capital goods are physical, man-made assets businesses use to produce something else.
Ex: structure of shopping complex, hotel, not measured in money, like structure, software, etc.
-Consumer goods are something purchased and used personally.
Ex: Like for a home, not for work. Like a laptop, car, clothing.
22. What would cause the production possibilities frontier to shift outward? Could an exterior point be feasible in the future? Explain.
-A shift outward indicates an increase in the economy’s productive capacity, allowing it to produce more of both goods.
-It is feasible because the economy’s capacity has expanded.
Outward:
1. Resources: simply more resources and more capital stock.
2. Better Technology
23.
What would cause the production possibilities frontier to shift inward? Explain the difference between an economy moving to an interior point versus the entire production possibilities curve shifting inward.
-A shift inwards indicate a decrease in the economy’s productive capacity, leaving it to produce less.
Ex: due to natural disasters/wars. Because we lost structure, capabilities, and human life, we can’t continue. Can be long term problem. Will take decades to reform.
24. How does an economy's present choice between capital goods and consumer goods impact its economic growth? Which of the two types of goods causes economic growth? Explain.
-If something is purchased personally, and if something is purchased for a company.
Ex: Can be with one business or an economy. Buying laptop for yourself is consumer good, if a company buys the same laptop for their employees, that’s a capital good. That’s the change.