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Econ Macro Notes.pdf

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McMaster University
Hannah Holmes

Chapter 1 10 Principals of Economics Scarcity o Limited nature of societys resourcesEconomics o Study of how society manages its scarce resources How People Make Decisions1 People face tradeoffsEx Enforce green laws to reduce pollution less pollution however the tradeoff is that a manufacturing company may lose productivityprofit charge more pay lower wages etcTradeoff btw efficiency and equityEfficiency o Getting the most you can from your resourcesEquity o Distributing economic prosperity fairly amount societal membersEfficiency refers to the size of the economic pieequity refers to how the pie is divided o Trying to equal out the pie sizes often makes the pie smaller less incentive to be successful2 The cost of something is what youd give up to get itOpportunity cost o Whatever must be given up to obtain something o Ex UniversityTuition books etcYour timeNot necessarily foodboard as you would have to pay for these regardless of going to university or not 3 Rational people think at margin edgenext stepDecisions in life arent blackwhite but shades of grey oa meal you dont think of fastinggluttoning but whether or not to take the extra spoonful of potatoes o Although the average ticket for an airplane may be 500 if there are empty seats and someone offers 300 to get on the plane you should accept the offer because they are offering much more than the marginal cost of flying on the plane the marginal cost would be the can of pop and bag of peanuts that they consumeA rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost 4 People respond to incentivesIncentive o Something that induces a person to act o bc rational people make decisions by comparing costsbenefits they respond to incentivesEx Before seatbelts there was great incentive to drive slower and more carefully as accidents were more dangerous Now with seatbelts accidents pose less of a threat to health Rational people weigh the costsbenefits and decide that since there is less risk it is worth it to drive fasterthis results in more accidents but fewer deaths however it has increased pedestrian deathsan adverse effect of an incentive that was improperly designed o When analyzing a policy we must consider no ony the direct effects but also the indirect effects that work through incentives If the policy changes incentives it will alter peoples behaviorHow People Interact With Each Other5 Trade can make some people better offthis is a matter of opinionIf we could add up all of the costs of all the people who lose from free trade it will be smaller than the sum of all of the money saved by people who benefit from free tradeTrade allows each person to specialize in activities they do bestallowing for a greater variety of goodsserviceslower cost6 Markets centrally planned tend to increase efficiency renamed trom txtEfficiencyhow much stuff we can produceMarket economy o Economy that allocates resources thru decentralized decisions of many firmshouseholds as they interact in markets for goodsservicesA more efficient country can have greater output with less stuffCommunism promotes equity fairnessthe tradeoff of efficiency o Communism lacks incentives to encourage the highskilled to work hardThe market is optimized by the invisible hand lead buy buyers and sellers determining the appropriate prices for GS7 Sometimes the government can eliminate market inefficiencies renamedGovernment is necessary to enforcing the lawthe protection of property o Or else GS couldnt be provided due to theftSometimes the government has to step in to eliminate an externality ormarket power o Externalitygoods and services that have an impact on a noninvolved 3rd partyEx Paying for a vaccine for your childthis indirectly helps other children as there are no risk for them to get sick from the vaccinated childEx negative I buy ciggaretteim happy the company is happy bc of their profitsmy roommate gets lung cancer and diesEx Pollution o Market powerAbility of a single economic actore to have a substaintial influence on market pricesEx Monopoly on the water in townraising prices ridiculouslyGovernments also provide a security blanket welfare healthcare etc that the invisible hand wouldntHow the economy as a whole functions8 A countrys standard of living measured per capitaGDP depends on its productivity output per worker ch7Productivity o The quantity of GS produced from each hour of a workers timeStandard of living is directly proportional to productivity o More productivity per person per hour results in a greater standard of living o Rich countries have a higher productivity that poor countries 9 Prices increase when the government prints too much money ch 1011Inflation o An increase in the overall level of prices in the economy o CausePrinting more money reduces the currencys value resulting in higher pricesinflation 10 There is a shortrun tradeoff btw inflationunemployment in the short run when one goes up the other goes downIncreasing the amount of money in economy stimulates spendingincreased demand o Demand causes greater production in short term tho in long term it increases prices o Results in more hiring in shortterm reducing unemploymentBusiness cycle o Fluctuations in economic activity employmentproduction o Policy makers can exploit short term benefits btw inflationunemployment by manipulating government spendingtaxesamount of money printed 1 Why is economics difficult o Express ideas in economicsEnglish languagewhen the price of coffee rises people drink less coffeeAlgebraequationsQdc100 067PcDiagramgraph o Translate btw each different form of communication2 Economics is a social people science o Although its a science we cant conduct experimetswe use scientific methodObserveTheorizeTest theoryUse natural experiment cant actually manipulate the economy like a physicist manipulates theyre experiments
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