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Macroeconomics Unit 1.docx

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ECON 1115
Peter Simon

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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) 1. Land (natural resources, area we build on) paid in rent 2. Labor (us, physical labor, talents, mental capacity) paid in wages 3. Capital (factories, machines, equipment) paid in interest to lender 4. Entrepreneurship (factors to be successful despite risks) paid in profit What are the three methods by which countries allocate their scarce resources? 1. Tradition 2. Government 3. Markets 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 complementary goods? 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
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