Macroeconomics: Chapters 1,2,3

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What is economics?
study of how people allocate their limits
2 Branches of economics
Macroeconomics (large)
Microeconomics (small)
Study of behavior of the economy as a whole
study of decision making undertaken by individuals and firms
3 Basic Questions
What/How much will be produced?
How will items be produced?
For whom will items be produced?
3 types of systems
Centralized command and control
Price System
Mixed Economic System
Centralized command and control
king, queen, or dictator- centralized government
Price System
individuals in society answer questions
Mixed Economic System
decision about how resources should be used is partly by private sector and partly by government sector
3 assumptions
Rationality, Ceteris Paribus, Self interest
individuals do not intentionally make decisions that would leave themselves worse off
Ceteris Paribus
“other things constant” “other things equal”
Self interest
seek many goals, not just increased wealth measured in money terms
Positive economics
statement of fact
Normative economics
deals with opinion “value judgement”
we do not ever have enough of everything including time to satisfy our every desire
inputs used in the production of the things we want
aka factors of production
4 important resources
land- natural resource (timber,water,fish,minerals)
Labor- human resource (contributions made by people who work)
physical- improvement to natural resources (irrigation ditches, machinery)
Entrepreneurship- preforms organizing, managing, and assembling (creative resource)
Opportunity Cost
value of next best alternative that must be sacrificed to obtain something or satisfy a want
Production Possibilites Curve
line defines the max quantity of 1 good or service that can be produced, given a specific quantity of another is produced; any point is efficient on curve
what each region consumes is not identical to what that region produces
The Division of Labor
segregation of resources into different specific tasks
Law of Demand
when price goes up people buy less
when price goes down people buy more
quantity demand is inversely related to price (move in opposite direction
5 determinants of demand
income, tastes and preferences, price of related good, expectations, market size
shift to the right= increase
shift to the left= decrease
increase in income equals decrease in demand
normal good-demand rises when customer income rises (shoes, smartphone)
inferior good- demand falls as income rises (house hold gets richer; buys more expensive things)
Tastes and Preferences
change in consumer taste changes the demand of a certain product
Prices of Related Goods
change in price of 1 commodity affect demand for related commodity
substitute- price of one goes up substitute for the other (steak and chicken)
complements- goods consumed together; change in price of product will cause a change in demand in opposite direction for the other good (phones and phone cases)
expectations of a product will prompt to buy more (product availability, future prices, income)
Market size (number of buyers)
increase= curve outward
decrease= curve inward
Law of Supply
higher prices, larger quantities will generally be supplied that at lower prices. Smaller quantity will generally be supplied than at higher prices
price of product or service and quantity supplied are related directly
5 determinants of supply
technology and productivity, cost of inputs used to produce the product, price expectations, taxes and subsidies, number of firms in the industry
Technology and Productivity
available production techniques change, supply curve will shift
Cost of inputs used to produce the product
input prices fall, production costs fall (decrease curve right; increase curve right)
Price Expectations
affects a consumers willingness to supply
Taxes and Subsidies
taxes reduce supply
subsidy-negative tax (government grant money for producing)
Number of Firms in the Industry
when firms change number of employees; hold constant (supply curve: right)
Market clearing price
quantity supplied equals quantity demanded at a particular price
occurs where supply and demand curves intersect
quantity demanded is greater than quantity supplied at price below market clearing price
quantity supplied is greater than quantity demanded
price falls for buyers
Categories: Macroeconomics