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Macroeconomics Ch 1-14 study notes.doc

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Bridget O' Shaughnessy

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Macroeconomics Study Notes Chapter 1 Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have Economics is the study of how society manages its scarce resources Principle #1: People Face Tradeoffs There is no such thing as a free lunch. Making decisions requires trading off one goal against another For example, someone who decides to study economics take away the time that they can study for physics- a trade off Efficiency means that society is getting the most it can from its scarce resources Equity means that the benefits of those resources are distributed fairly among societys members in other words, efficiency refers to the size of the economic pie, and equity refers to how the pie is divided Principle #2: The Cost of Something is What You Give Up to Get It because people face tradeoffs, making decisions requires comparing the costs and benefits of alternative courses of actions the opportunity costs of an item is what you give up to get that item while you attend university earning a degree you could be working at a full-time job Principle #3: Rational People Think at the Margin rational people are people who systematically and purposefully do the best they can to achieve their objectives marginal changes are small incremental adjustments to a plan of actions a rational decision maker takes an action is and only if the marginal benefit of the action exceeds the marginal cost Principle #4: People Respond to Incentives an incentive is something (such as the prospect of a punishment or a reward) that induces a person to act Principle #5: Trade CAN Make Everyone Better Off trade between two countries can make each country better off for example, your family would not be better off isolated- it would have to grow its own food, make its own clothing, and build its own home your family gains much from its ability to trade with others trade allows each person to specialize in the activities he or she does best by trading with others, people can buy a greater variety of goods and services at lower cost Principle #6: Markets Are Usually a Good Way to Organize Economic Activity communist countries worked on the premise that central planners in the government were in the best position to guide economic activity these planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services in a market economy, the decisions of a central planner are replaced by the decisions of millions of firms and households firms decide whom to hire and what to make households decide which firms to work for and what to buy with their incomes Adam Smith proposed the invisible hand is households and firms interacting in markets act as if they are guided by an invisible hand Principle #7: Governments Can Sometimes Improve Market Outcomes the magic hand can work its magic if only if the government enforces the rules and maintains the institutions that are key to a market economy property rights are the ability of an individual to own and exercise control over scarce resources there are two broad reasons for a government to intervene in the economy and change the allocation of resources: o to promote efficiency and o to promote equity market failure is a situation in which a market left on its own fails to allocate resources efficiently externality is the impact of one persons actions on the well-beg of a bystander market power is the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices the government can improve on market outcomes at times does not mean that it always will Principle #8: A Countrys Standard of Living Depends on Its Ability to Produce Goods and Services productivity is the quantity of goods and services produced from each hour of a workers time if productivity is the primary determinant of living standard, other explanations must be of secondary importance to boost living standards, policymakers need to raise productivity by ensuring that workers are well educated, have the tools needed to produce goods and services, and have access to the best available technology Principle #9: Prices Rise When the Government Prints Too Much Money inflation is an increase in the overall level of prices in the economy when a government creates large quantities of the nations money, the value of the money falls high inflation is associated with rapid growth in the quantity of money and low inflation is associated with slow growth in the quantity of money Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment a higher level of prices is, in the long run, the primary effect of increasing the quantiy of money the short run effects of economic injections is as follows: o increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services o higher demand may, over time, cause firms to raise their prices, but in the meantime, it also encourages them to increase the quantity of goods and services they produce and to hire more workers to produce those goods and services o more hiring means lower employment there is a short run trade between inflation and unemployment this simply means, that over a period of a year or two, many economic policies push inflation and unemployment in opposite directions for example, if inflation was low then unemployment is high (they are inversely related) Chapter 2 The Circular Flow Diagram the circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms The Production Possibilities Frontier the production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology Microeconomics and Macroeconomics microeconomics is the study of how households and firms make decisions and how they interact in markets macroeconomics is the study of economy wide phenomena, including inflation, unemployment, and economic growth Positive versus Normative Analysis Positive statements claims that attempt to describe the world as it is Example, Minimum-wage laws cause unemployment. Normative statements claims that attempt to prescribe how the world should be Example, the government should raise the minimum wage Economists may disagree about the validity of alternative positive theories about how the world works Economists may have different values and, therefore, different normative views about what policy should try to accomplish Chapter 4 A market is a group of buyers and sellers of a particular good or service A competitive market is a market in which there are many buyers and many sellers so that each has a negligible impact on the market price A market is perfectly competitive if: o The goods offered for sale are all exactly the same o The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price buyers and sellers in a perfectly competitive market must accept the price the market determines, they are said to be price takers some markets have only one seller, and this seller sets the price, such a seller is called a monopoly for example, your local cable television company can be a monopoly Demand the quantity demanded is the amount of a good that buyers are willing and able to purchase the law of demand is the claim that, other things being equal (ceteris paribus) the quantity demanded of a good falls when the price of the good rises a demand schedule is a table that shows the relationship between the price of a good and the quantity demanded
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