Macroeconomics Notes Unit 1
Introduction, Opportunity Cost, Elasticity
Peter Simon, Principles of Macroeconomics, ECON 1115 MWR 9:15am
What’s the definition of economics?
1. Economics is the study of decision-making
2. Of all the decisions that have to be made in life, the biggest one is “What are we
going to do with our scarce resources?” How should we allocate resources?
Individuals, companies, and governments ask these questions.
How you decide -> opportunity cost
All decisions require you to consider opportunity cost.
The reason we ask is because of limited time & money, you can’t do everything (too many
choices can be bad)
Allocation of scarce resources (aka factors of production)
(natural resources, area we build on) paid in rent
(us, physical labor, talents, mental capacity) paid in wages
(factories, machines, equipment) paid in interest to lender
(factors to be successful despite risks) paid in profit
What are the three methods by which countries allocate their scarce resources?
4. (Fourth method will exist one day)
Capitalism is efficient: least wasteful because opportunity cost is always considered
With profit as goal, there is efficiency. Production Possibilities Curve
Used to compare two goods/two groups of goods
Models opportunity cost, give up over gain
The next best alternative is the opportunity cost
The opportunity cost of producing wartime goods and winning the war is producing
peacetime goods but losing the war.
Consumer goods (C) are bought by consumers
Capital goods (K) are bought by businesses
If you are trying to maximize profit, market system is best.
What are the characteristics of the PPC?
It bows outward, unless opportunity costs are constant, because there is a trade-off that
increases. It features two possibilities. It is assumed that the possible choices share factors
of production (ex. labor). You want production to stay on the production possibilities curve
because it is the efficient amount that is still feasible.
If more capital goods are produced, the PPC will expand faster. If more consumer goods are
produced, there will be a high standard of living today. The Soviet Union chose to produce
more capital goods.
Models are simplifications of reality.
Why isn’t opportunity cost constant?
Once resources are specialized, it costs to convert them to another production outcome.
There are shared resources that aren’t as perfectly specialized. Not all resources are
equally good are everything (specialization of resources).
What explains the law of increasing opportunity cost?
Specialization of resources The Market System (Supply and Demand)
Market: where people buy and sell goods and services
Demand: depends on willingness and ability to buy something
What does demand depend on?
***Price, taste & preferences, number of buyers, price of related goods, income, and
expected future prices
What is the relationship between quantity demanded and prices of substitute and
Price of substitute good goes up, quantity demanded goes up
Price of complementary good goes up, quantity demanded goes down
A change in demand -> shift of demand curve
A change in quantity demanded -> movement along demand curve / shift in supply curve
There is an inverse relationship between the price of pizza and quantity demanded.
(Law of Demand)
What does supply depend on?
***Price, number of sellers, technology, costs of production (rent, wages, interest, profit),
taxes/regulation, expected future prices
Price is an endogenous variable (can be seen on graph)
Income is an exogenous variable (is outside of model)
Endogenous variables: price, quantity demanded, quantity supplied
What will shif