ECON 1100 Chapter Notes - Chapter 1-4, 6-7, 11-15: Opportunity Cost, Aggregate Supply, Government Spending
13 Dec 2016
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MACROECONOMICS NOTES
Chapter 1 The Ordinary Business of Life
Individual Choice: the decision by an individual of what to do, which necessarily
involves a decision of what not to do. Underlying principles:
• Principle 1: Resources are scarce (choices are necessary) the quantity
available isn’t large enough to satisfy all productive uses
• Principle 2: Opportunity Cost the real cost of something is what you must
give up to get it. Ex: the cost of attending class is what you must give up to
be in the classroom during the lecture… what you have to forgo to obtain
your choice
• Principle 3: Decision at the Margin “How much?” You make a trade-off when
you compare costs with benefits of doing something. –Marginal decisions are
decisions about whether to do a bit more or a bit less of an activity. –
Marginal analysis= making trade-offs at the margin; comparing the costs and
benefits of doing a little bit more vs. doing a little bit less. Ex: hiring 1 more
worker, studying 1 more hour, eating 1 more cookie
• Principle 4: People Respond to Incentives people usually take advantage of
opportunities to make themselves better off. An incentive is anything that
offers rewards to people who change their behavior. Ex: price of gas rises—
people buy more fuel efficient cars
Interaction: How economies work—my choices effect your choices, vice versa—
feature of most economic situations. Underlying principles of the interaction of
individual choices:
• Principle 5: There are Gains from Trade people can get more of what they
want through trade than they could if they tried to be self-sufficient—this
increase in output is due to specialization: (divisions of trade) each person
specializes in the task that he/she is good at performing (everyone is
interdependent). The economy as a whole can produce more when each
person specializes in a task & trades with others
SPECIALIZE->TRADE->GAIN to maximize our well being
o Positive economics : analyze things as they are (objective economist)
• Principle 6: Markets Move Toward Equilibrium an economic situation is in
equilibrium when no individuals would be better off doing something
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different. Any time there is a change, the economy will move into a new
equilibrium. Ex: what happens when a new checkout line opens at a busy
supermarket
• Principle 7: Resources Should be Used Efficiently as possible to achieve
society’s goals. An economy is efficient if it takes all opportunities to make
some people better off without making other people worse off. Maximize
capacity… equity over efficiency sometimes (trade off). Equity means
everyone gets their fair share. Since people can disagree about what’s “fair,”
equity isn’t as well-defined a concept as efficiency
o Efficiency vs Equity Ex: handicapped designated parking spaces in
busy lot—conflict between equity: making life “fairer” for handicaps
and efficiency: making sure all opportunities to make people better
off have been fully exploited by never letting parking spaces go
unused.
• Principle 8: Markets Usually Lead to Efficiency (competition maximizes
efficiency)—the incentives built into a market economy already ensure that
resources are usually put to good use. Opportunities to make people better
off are wasted.
o Exceptions: Market failure, the individual pursuit of self-interest
found in markets makes society worse off—the market outcome is
inefficient
• Principle 9: Government Intervention can Improve Society’s Welfare when
markets don’t achieve efficiency. Why do markets fail?
o Individual actions have side effects not taken into account by the
market (externalities).
o One party prevents mutually beneficial trades from occurring in the
attempt to capture a greater share of resources for itself
o Some goods cannot be efficiently managed by markets. Ex: freeways,
traffic
Monetary & Fiscal values. Govt. step up by increasing expenditures and
raising taxes during deflation ; reduce expenditures and impose taxes
during inflation –prices go down
Economy Wide Interactions: economy as a whole. Underlying Principles:
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• Principle 10: One Person’s Cost is Another’s Income *OUTPUT=INCOME
• Principle 11: Overall Spending of Economy can get Out of Line with
Economic Capacity to Produce Aggregate Demand= Aggregate Supply…
Supply>demand= inflation (higher prices) Demand>supply= deflation (lower
prices, staying in supply)
• Principle 12: Government Policies Can Change Spending Patterns. Macro-
economic policy—govt. spending, taxes, and control of money. Try to steer
spending away from inflation and recession
Review
• All economic activities involve individual choice.
• People must make choices because resources are scarce
• The real cost of something is its opportunity cost—what you must give up to get it. All costs
are opportunity costs. Monetary costs are sometimes a good indicator of opportunity costs,
but not always.
• Many choices involve not whether to do something but how much of it to do. “How much”
choices call for making a trade-off at the margin. The study of marginal decisions is known
as marginal analysis.
• Because people usually exploit opportunities to make themselves better off, incentives can
change people’s behavior.
• Most economic situations involve the interaction of choices, sometimes with unintended
results. In a market economy, interaction occurs via trade between individuals.
• Individuals trade because there are gains from trade, which arise from specialization.
Markets usually move toward equilibrium because people exploit gains from trade.
• To achieve society’s goals, the use of resources should be efficient. But equity, as well as
efficiency, may be desirable in an economy. There is often a trade-off between equity and
efficiency.
• Except for certain well-defined exceptions, markets are normally efficient. When markets
fail to achieve efficiency, government intervention can improve society’s welfare.
• In a market economy, one person’s spending is another person’s income. Changes in spending
behavior have repercussions that spread through the economy.
• Overall spending sometimes gets out of line with the economy’s capacity to produce goods
and services. When spending is too low, the result is a recession. When spending is too high,
it causes inflation.
• Modern governments use macroeconomic policy tools to affect the overall level of spending
in an effort to steer the economy between recession and inflation.
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Document Summary
Individual choice: the decision by an individual of what to do, which necessarily involves a decision of what not to do. Marginal decisions are decisions about whether to do a bit more or a bit less of an activity. Marginal analysis= making trade-offs at the margin; comparing the costs and benefits of doing a little bit more vs. doing a little bit less. Ex: hiring 1 more worker, studying 1 more hour, eating 1 more cookie: principle 4: people respond to incentives people usually take advantage of opportunities to make themselves better off. An incentive is anything that offers rewards to people who change their behavior. Ex: price of gas rises people buy more fuel efficient cars. Interaction: how economies work my choices effect your choices, vice versa feature of most economic situations. The economy as a whole can produce more when each person specializes in a task & trades with others.
