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ECON 201 (2nd half) Complete Notes

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University of Maryland
ECON 201

Chapter 1: Ten Principles of Economics 1. People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another. 2. The Cost of Something is What You Give Up to Get It. Decision-makers have to consider both the obvious and implicit costs of their actions. 3. Rational People Think at the Margin.A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. 4. People Respond to Incentives.Behavior changes when costs or benefits change. 5. Trade Can Make Everyone Better Off.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 or services. 6. Markets Are Usually a Good Way to Organize Economic Activity.Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government. 7. Governments Can Sometimes Improve Market Outcomes.When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution. 8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services. Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income. 9. Prices Rise When the Government Prints Too Much Money.When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. 10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes,government spending and monetary policy. Chapter 2: Thinking Like an Economist (Lecture 1 on ELMS) -Economics : The study of how best to allocate scarce resources among competing uses -Microeconomics vs. Macroeconomics -Microeconomics is the study of how households and firms make decisions and how they interact in specific markets.Amicroeconomist might study the effects of rent control on housing in New York City, the impact of foreign competition on the U.S. auto industry, or the effects of compulsory school attendance on workers’earnings. - Macroeconomics is the study of economy-wide phenomena. Amacroeconomist might study the effects of borrowing by the federal government, the changes over time in the economy’s rate of unemployment, or alternative policies to promote growth in national living standards. -Models & Assumptions -Assumption: the simplification of the complex world to make it easier to understand -ex: When studying international trade, consider only 2 goods and 2 countries -Models: The form of an assumption -Economists as Scientist -Scientific Statements: the testing of theories about how the world works 1 -Positive Statements vs. Normative Statements -Positive statement: describe the world as it is. (can be confirmed/refute) Ex. prices rise when the government increases the quantity of money. -Normative statement: describes how the world should be. -Models: -Circular-Flow Diagram: -Includes two “actors”: -households -firms -Includes two markets: -Factors of Production -labor, land, capital (buildings & machines in production) -households give themselves, firms receive factors -households receive wages, rent, profit in return -Markets for Goods and Services -finished goods and services -households spend money for G&S, firms get revenue -Production Possibilities Frontiers (PPF) -Possible points -on line: possible and efficient -inside line: possible but inefficient (or unemployment of resources) -outside line: impossible -Opportunity Costs: What must be given up to obtain an item -moving along graph represents how society faces a tradeoff -PPF shifters -Economic Growth: additional resources, shifts PPF outwards -Improvement in technology of a good: shifts only that good’s intercept -PPF shape - bowed outward Chapter 4: Market Forces of Supply and Demand (L2 - Good Markets on ELMS) -Quantity Demanded -Law of Demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises -Demand Schedule & Curve -Market Demand Curve vs Individual Demand Curve -Market Demand Curve is sum of all the Individual Demand Curves -Demand Curve Shifters: -no. of buyers: demand increases as # of buyers increases -income -normal good: demand increases as income increases -inferior good: demand decreases as income increases -prices of related goods -complements: when price of good A increases, demand for good B decreases -substitutes: when price of good A increases, demand for good B increases -tastes -expectations: one expects the price or Qd to change in the near future -Quantity Supplied -Law of Supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises -Supply Schedule & Curve 2 -Market Supply Curve vs Individual Supply Curve -Market Supply Curve = Sum of Individual Supply Curves -Supply Curve Shifters: -input price -technology -no. of sellers -expectations -Supply and Demand together -Equilibrium -Intersection of S&D -Surplus -When supply is greater than demand -Shortage -When supply is less than demand Analyzing changes in Equilibrium Chapter 10: National Output (“Measuring a Nation’s Income” in textbook) -National Output on the Circular Flow Diagram -Can be found by looking at household spending -Gross Domestic Product:, measures the total income of everyone in the economy -Incomes and Expenditures -GDP also measures total expenditures because a dollar spent is a dollar received for the seller -Analyzing the definition -”The market value of all final goods & services produced within a country in a given period of time.” -Market Value -Everything measured in some units (dollars) -On things with a market value (ex: exclude doing hw) -Final Goods -Include tires sold direct to consumer, exclude tires sold to build car -and Services -Includes intangible services (dry cleaning, therapy, etc) -Produced -Must have been currently produced -Within a country -Must have been produced within the borders -in a given period -For the year or quarter only -Components of GDP -Consumption (C): spending by households on goods & services w/ the exception of new housing -Investment (I): purchase of goods that will be used in the future to produce
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