ECON 2105 Lecture Notes - Lecture 1: Market Failure, Market Power, Use Tax

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coralguinea-pig410

4 Jul 2018

School

University of Georgia

Department

Economics

Course

ECON 2105

Professor

Mc White

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Introduction to Macroeconomics

Objectives: introduce to the topics macroeconomists are in and to the theories that have

addressed them

Introduction:

●Macroeconomics is the study of the functioning of the economy as a whole and the

problems that could be derived from it

●Macroeconomists are mostly interested in

○Long run growth and development (what make countries rich and what make

countries poor)

○Unemployment

○Inflation

○Recessions

Chapter 1: What is Economics? 10 Principles of Economics

Questions:

●What kinds of questions does economics address?

●What are the principles of how people make decisions?

●What are the principles of how people interact?

●What are the principles of how the economy as a whole works?

Ten Principles of Economics

●Resources are scarce

●Scarcity: the limited nature of society’s resources

○Society has limited resources

■Cannot produce all the goods and services people wish to have

●Economics

○The study of how society manages its scarce resources

Ten Principles of Economics

●Economists study:

○How people decide what to buy, how much to work, save, and spend

○How firms decide how much to produce, how many workers to hire

○How society decides how to divide its resources between national defense,

consumer goods, protecting the environment, and other needs

How People Make Decisions

●Principle 1: People face trade-offs

○To get something that we like, we have to give up something else that we also like

■Going to a party the night before an exam

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●Less time for studying

■Having more money to buy stuff

●Working longer hours, less time for leisure

■Protecting the environment

●Resources could be used to produce consumer goods

■Look for an example of a trade-off you recently faced

○Society faces trade-offs:

■The more it spends on national defense (guns) to protect its shores

●The less it can spend on consumer goods (butter) to raise the

standard of living at home

■Pollution regulations: cleaner environment and improved health

●But at the cost of reducing the incomes of the firms’ owners,

workers, and customers

○Efficiency: society gets the most from its scarce resources

○Equality: prosperity is distributed uniformly among society’s members

○Tradeoff:

■To achieve greater equality, could redistribute income from wealthy to

poor

■But this reduces incentive to work and produce, shrinks the size of

economic “pie”

●Principle 2: The cost of something is what you give up to get it

○Making decisions:

■Compare costs with benefits of alternatives

■Need to include opportunity costs

○Opportunity cost

■Whatever must be given up to obtain some item

○The opportunity cost of:

■Going to college for a year

●Tuition, books, and fees

●PLUS foregone wages

■Going to the movies

●The price of the movie ticket

●PLUS the value of the time you spend in the theater

●Principle 3: Rational people think at the margin

○Rational people

■Systematically and purposefully do the best they can to achieve their

objectives

■Given the available opportunities

■Make decisions by evaluating costs and benefits of marginal changes

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Document Summary

Objectives: introduce to the topics macroeconomists are in and to the theories that have addressed them. Macroeconomics is the study of the functioning of the economy as a whole and the problems that could be derived from it. Long run growth and development (what make countries rich and what make countries poor) Scarcity: the limited nature of society"s resources. Cannot produce all the goods and services people wish to have. The study of how society manages its scarce resources. How people decide what to buy, how much to work, save, and spend. How firms decide how much to produce, how many workers to hire. How society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs. To get something that we like, we have to give up something else that we also like. Going to a party the night before an exam. Working longer hours, less time for leisure.

Related Questions

Microeconomics Multiple choice questions. Please answer all the questions.

1. Scarcity:
A. exists because resources are limited while human wants are unlimited.
B. means we are unable to have as much as we would like to have.
C. will likely be eliminated as technology continues to expand.
D. is not an issue addressed in economics.

2. People are forced to make choices because of:
A. unlimited wants and unlimited resources.
B. limited wants and unlimited resources.
C. unlimited wants and limited resources.
D. limited wants and limited resources.
E. irrational wants and limited resources.

3. Which of the following is closest to the definition of capital?
A. c and e.
B. c and d.
C. Tools, equipment, means of transportation
D. Factories and machinery.
E. Borrowed money.

4. Which one of the following is the most accurate definition of economics?
A. Economics is the study of stocks and bonds.
B. Economics is the study of how people allocate unlimited resources.
C. Economics is the study of how consumers choose to spend their income.
D. Economics is the study of how society chooses to allocate scarce resources.

5. The basic difference between macroeconomics and microeconomics is:
A. microeconomics concentrates on individual markets while macroeconomics focuses primarily on international trade.
B. microeconomics concentrates on the behavior of individual consumers while macroeconomics focuses on the behavior of firms.
C. microeconomics concentrates on the behavior of individual consumers and firms while macroeconomics focuses on the performance of the entire economy.
D. microeconomics explores the causes of inflation while macroeconomics focuses on the causes of unemployment.

6. Which of the following is not a resource?
A. Land.
B. Labor.
C. Money.
D. Capital.

7. Which of the following would an economist classify as capital?
A. 100 shares of Microsoft stock.
B. $50 bill.
C. credit card.
D. lawyer's personal computer.

8. Economics, according to its definition, studies how people:
A. earn and spend money.
B. invest in the stock and bond markets.
C. make choices in the face of scarcity.
D. supply goods in response to demand.

9. Which of the following is the best example of a microeconomic topic?
A. The impact that the money supply has on inflation.
B. The reasons for increases in the price of soft drinks.
C. The effect that federal budget deficits have on the interest rate.
D. The tradeoff between inflation and unemployment.

10. Which of the following is a macroeconomics topic?
A. Wages of textile workers in the Northeast.
B. The cost of producing 10,000 bookcases.
C. The economy's annual growth rate.
D. National demand for fish.
E. Effects of farm subsidies on food prices.

11. An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, Ceteris paribus. The phrase "Ceteris paribus" means that:
A. other relevant factors like consumer incomes must be held constant.
B. the gasoline prices must first be adjusted for inflation.
C. the theory is widely accepted but cannot be accurately tested.
D. consumers' need for gasoline remains the same regardless of the price.

12. An economic model is:
A. a plastic scaled version of the economy.
B. a complete depiction of reality.
C. an abstraction from reality.
D. applicable to consumer behavior but not to producer behavior.
E. not an accepted tool of the economics profession.

13. Which of the following sayings best reflects the concept of opportunity cost?
A. "You can't teach an old dog new tricks."
B. "There is no such thing as a free lunch."
C. "I have a baker's dozen."
D. "There's no business like show business."

14. The opportunity cost of watching television is:
A. all of the alternative programs that appear on other stations.
B. zero because there is no money expenditure involved.
C. the alternative use of the time foregone by watching the program.
D. zero if it benefits you.

15. Which of the following does not illustrate opportunity cost?
A. If I study, I must give up going to the football game.
B. If I buy a computer, I must do without a 35" television.
C. More consumer spending now means more spending in the future.
D. If I spend more on clothes, I must spend less on food.

16. When deciding whether to buy a second car, marginal analysis indicates that the purchaser should compare the:
A. benefits expected from two cars with the cost of both.
B. additional benefits expected from a second car with the cost of the two cars.
C. dollar cost of the two cars with the potential income that the cars will generate.
D. additional benefits of the second car with the additional cost of the second car.

17. According to marginal analysis, you should spend more time studying economics if the extra benefit from an additional hour of study:
A. is positive.
B. outweighs the extra cost.
C. exceeds the benefits of the previous hour of study.
D. will raise your exam score.

1. Explain why economics is a study of choices. Why do we have to make choices?

2. What are the economic resources? Why are they scarce?

3. Outline the differences between macroeconomics and microeconomics.

4. What are the economic questions? How is each question answered?

5. Outline the interaction of supply, demand, and price.

6. What is the difference between a buyers and a sellers market? Provide examples of each in your answer.

7. What causes equilibrium? How does price react?

8. What is the marginal principle? How can you apply it as a consumer?

9. & 10. We all hear talk about the dependency of oil and how higher oil prices affect our economy. Why have we not made greater strides to energy efficiency? Make sure you have at least two references to back your opinion.

1/ All the problems studied in economics arise from

a. the unequal distribution of income

b. the scarcity of resources

c. inappropriate government action

d. overpopulation

e. war

2/ The overall performance of the economic system as a whole is the focus of

a. macroeconomics

b. public economics

c. international finance

d. labor economics

e. microeconomics

3/ After graduating from high school, Steve had the following three choices for his immediate future, listed in order of preference: (1) attend our campus, (2) work in a printed circuit board factory, or (3) attend a rival college. His opportunity cost of going to college here includes which of the following?

a. The income he could have earned at the printed circuit board factory plus the direct cost of attending college here (tuition, textbooks, etc.)

b. The benefits he could have received from going to the rival college.

c. Only the tuition and fees paid for taking classes here.

d. Cannot be determined from the information given.

e. The cost of books and supplies at the rival college.

4/ The question of scarce resources and unlimited wants are addressed in

a. psychology

b. history

c. anthropology

d. political science

e. economics

5/ Consider an economic model designed to analyze the purchasing decisions of households. An assumption that a household chooses between only two goods would be an example of an

a. positive assumption

b. simplifying assumption

c. macroeconomic assumption

d. financial assumption

e. critical assumption

6/ Which of the following explains why economists may disagree over normative issues?

a. They have different beliefs and values.

b. They often employ different statistical techniques when examining data.

c. Some work only on microeconomic issues, while others focus exclusively on macroeconomic issues.

d. They examine the same data to draw their conclusions.

e. They need to disagree to publish their research findings.

7/ Suppose your friends take you out for dinner on your birthday, and you have a much better time than you would have had to do anything else. There is still an opportunity cost, even though they will not let you pay for anything. True/False

8/ Microeconomics

a. addresses scarcity from a global perspective

b. is purely theoretical and has little value in explaining real-world phenomena

c. focuses on what is happening in the economy as a whole

d. examines how individuals, households, and firms make economic decisions

e. answers the fundamental economic questions of how, when, where, and why.

9/ People and organizations have to make choices about how to allocate time and money because

a. religious values conflict with economics

b. time and money are both scarce

c. government require it

d. there are unlimited resources

e. corporations control our lives

10/ The objective of an economic model is to

a. yield a better understanding of important relationships

b. use simplifying assumptions to make positive economic statements

c. be an accurate description of reality

d. predict real-world occurrences with complete accuracy

e. use basic principles of economics to derive fundamental assumptions about human behavior.

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ECON 2105 Lecture Notes - Lecture 1: Market Failure, Market Power, Use Tax

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