Macroeconomics - Unit 1 Study Notes

Edward charges $100 to landscape his neighbors' lawns. His neighbors should hire Edward if the marginal (1) ________________of having their lawn landscaped is (2)_____________ than $100.

1. Benefit 2. Greater

What is the trick to opportunity costs?

Ask yourself "or what" Should you hang out with your friends on Saturday afternoon? - Or what? Or should you study for Tuesday's exam? Should you devote a lot of time to an extracurricular activity and aim for a top leadership position? - Or what? Or should you study a lot more and aim for straight A's?

How do you quantify the enjoyment you get from a purchase? Determine how much you paid for the item last time your purchased it. Consider how much similar items cost. Find out how much the item costs. Determine the maximum you are willing to pay for the item.

Determine the maximum you are willing to pay for the item.

What is the trick to marginal benefit?

How many How many workers should I hire? - Simplifies to: Should I hire one more worker? How many pairs of shoes should I buy? - Simplifies to: Should I buy one more pair of shoes?

What are the four important lessons to know about opportunity costs?

Lesson 1: Some out-of-pocket costs are opportunity costs. Lesson 2: Opportunity costs need not involve out-of-pocket financial costs. Lesson 3: Not all out-of-pocket costs are real opportunity costs. Lesson 4: Some nonfinancial costs are not opportunity costs.

What is a normative analysis?

Normative economics aims to determine people's desirability or the lack thereof to various economic programs, situations, and conditions by asking what should happen or what ought to be. Therefore, normative statements typically present an opinion-based analysis in terms of what is thought to be desirable.

What is a positive analysis?

Objective analysis of an economy

How do I apply the Marginal Principle?

Once you have broken a problem into a series of marginal choices, apply the cost-benefit principle. The marginal principle is useful for "how many" decisions, but not for "either/or" choices.

You are launching a new consulting business and you need to decide how many employees to hire. Applying the marginal principle, what question should you consider? Should I hire one more employee? How many employees can I afford? How many people have applied for the position? What level of education should I require?

Should I hire one more employee?

What is the opportunity costs associated with this example? Should you start a new business or stay in your current job?

Starting a new business means quitting your job and, thus, giving up the steady income and benefits paid by your employer. These forgone earnings are the opportunity cost of an entrepreneur's time.

You buy an expensive mattress on clearance which is nonreturnable. After a few weeks, you realize it's very uncomfortable and you are not getting a good night's sleep because of the mattress. Thinking like an economist, you should ignore the ______________________ costs and get a new mattress.

Sunk

What is an absolute advantage?

The ability to produce more of a product with the same resources as your competitor. This is called an absolute advantage because you are just simply overall more productive.

Use the cost-benefit principle to evaluate the following: a. You are about to buy a calculator for $10, and the sales-person tells you that the model you want to buy is on sale for $5 at the store's other branch, which is a 20 minute drive away. You should make the trip to the other branch if: The cost of your trip is less than 5$ The cost of your trip is more than 5$

The cost of your trip is less than 5$

You are about to buy a laptop for $1,000 and the sales-person tells you that the model you want to buy is on sale for $995 at the store's other branch, which is a 20 minute drive away. You should make the trip to the other branch if: The cost of your trip is less than 5$ The cost of your trip is more than 5$

The cost of your trip is less than 5$

What is the Trick to the interdependence rule?

What else?

to evalutate opportunity costs, you should ask yourself what two questions?

What happens if you pursue your choice? What happens under your next best alternative?

You are willing to pay full price for a new shirt, but you end up finding it half-off from an online retailer. Applying the cost-benefit principle, determine what has changed.: You receive a greater benefit from the purchase because you got the shirt on sale. Your cost and benefit have both decreased. You receive a lesser benefit from the purchase because you got the shirt on sale. Your cost has decreased, but your benefit remains the same.

Your cost has decreased, but your benefit remains the same.

What are sunk costs?

a cost that has already been incurred and cannot be recovered

You take a job driving for Lyft. It's a slow night and you are trying to decide whether to continue working or go home. You should.... continue working until the marginal benefit you receive from working additional time equals your marginal cost of working additional time. continue working as long as there are people looking for rides. set a daily revenue goal and stop working when you have achieved your goal. go home early.

continue working until the marginal benefit you receive from working additional time equals your marginal cost of working additional time.

The cost-benefit principle says that....

costs and benefits are the incentives that shape decisions. This principle suggests that before you make any decision, you should: Evaluate the full set of costs and benefits associated with that choice. Pursue that choice only if the benefits are at least as large as the costs.

Your expectations of the future have no impact on your investment choices. have a large impact on your investment choices. are rarely accurate. are always accurate.

have a large impact on your investment choices.

What is the interdependence principle?

mutual dependence of the participants in an economic system who trade in order to obtain the products they cannot produce efficiently for themselves.

Your friend remarks that longer movies are a better deal than shorter movies because the ticket price is the same in both cases. Therefore, the longer movie provides more benefit for the same cost as a shorter movie. Which of the following is the best argument against your friend's claim that longer movies provide more benefit than shorter movies? Based on the cost‑benefit principle, the benefits of a longer movie exceed the costs when compared to a shorter movie. marginal principle, you should only continue to watch an additional movie if it is shorter than the first movie. opportunity cost principle, the length of the movie does not matter as long as watching a movie is the best way to spend your time compared to other alternatives. interdependence principle, longer movies are affected by the market for shorter movies.

opportunity cost principle, the length of the movie does not matter as long as watching a movie is the best way to spend your time compared to other alternatives.

What is a comparative advantage?

the ability to produce a good at a lower opportunity cost than another producer

You are offered a position at FedEx. You should take the job if: the benefits of taking the job at FedEx are more than the costs of taking the job. you are worried that you may soon be laid off at your current job. the FedEx position offers a better work environment. the FedEx position pays better than your current job.

the benefits of taking the job at FedEx are more than the costs of taking the job.

What is marginal cost?

the extra cost of that worker is called the marginal cost. the cost of producing one more unit of a good

When applying the Opportunity Cost Principle, you consider... the trade-offs of your decisions. how other peoples' choices impact your best choice. whether to purchase one more of an item. marginal benefit versus marginal cost.

the trade-offs of your decisions.

What are the 4 aspects of the interdependence rule?

1. Dependencies between each of your individual choices 2. Dependencies between people or businesses in the same market 3. Dependencies between markets 4. Dependencies through time

Consider the following statement: "Economists always put things into monetary terms; as a result, economics can most appropriately be called the study of money." Is this statement true or false? False, even though economists use money as a form of measurement, economics is better described as the study of financial markets. False, even though economists use monetary terms often, economics is better described as a governmental approach to improving market outcomes. False, economists use monetary terms because they can be quantified and compared, but economics is better described as an approach to decision making. True, financial markets are the primary focus of economics.

False, economists use monetary terms because they can be quantified and compared, but economics is better described as an approach to decision making.

What is the Rational Rule?

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs. The Rational Rule leads to good decisions.

Should you include or ignore sunk costs?

Ignore Why? The opportunity cost principle asks you to compare the consequences of your choice with the consequences of the next best alternative. Since sunk costs can't be reversed, you'll incur those costs under either scenario, which means that they are not opportunity costs. Thus, you should ignore sunk costs.

What is the Framing effect?

In economics, the framing effect can impact on consumer behaviour. When advertisements and the sale of goods are framed differently, they can increase consumption. Framing effects can lead you astray.

What is the marginal principle?

Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost. The marginal principle says that decisions about quantities are best made incrementally. Whenever you face a decision about how many of something to choose (such as, "How many workers should I hire?"), break it into a series of smaller, or marginal, decisions (such as, "Should I hire one more worker?").

Which question uses the Opportunity Cost Principle to help make the best decision? Should I start my own business after graduation? Should I look for a new job or should I go back to school? Should I save more money for retirement? Should I meet my friends for dinner tonight?

Should I look for a new job or should I go back to school?

Put the Core Principles to work....

Step 1: First, use the marginal principle by breaking "how many" choices down into simpler marginal choices. Ask yourself whether you would be better off doing a bit more of something, or a bit less. Step 2: Then apply the cost-benefit principle by assessing the relevant costs and benefits. Since you're analyzing a marginal question, this says you need to assess whether the marginal benefit exceeds the marginal cost. Step 3: To evaluate all the relevant costs and benefits, you'll need to apply the opportunity cost principle and ask, "Or what?" This ensures that you take full account of what you give up when you make a choice. Remember to focus on the relevant opportunity costs, not just financial out-of-pocket costs. Step 4: The interdependence principle helps you identify how changes in other factors—in your own choices, other people, other markets, and expectations about the future—might lead you to make a different decision.

What is your economic surplus?

The difference between the benefits you enjoy and the costs you incur.

What is the "Someone elses shoes" technique?

The idea behind putting yourself in someone else's shoes is to allow yourself to have an empathetic understanding of how someone else views the world. In movies like Freaky Friday, mother and daughter have to switch bodies to learn to understand each other, but you can do it by mentally putting yourself in someone else's shoes.

What is the Cost-Benefit Principle?

The theory in economics states that action should only be taken by an individual or a company if the marginal benefits drawn from the action are at least equal to or more than the marginal costs of the action.

What is marginal benefit?

We call the extra benefit you get from one more worker the marginal benefit; The benefit of adding 1 more unit

van has inherited his mother's 1963 Chevrolet Corvette, which he values at $45,000. He decides that he might be willing to sell it, so he posts it on Craigslist for $55,000. Samantha is interested and willing to pay up to $72,000 for one, so they agree on a price of $55,000 for the car. a. ____________________________ willing to voluntarily engage in this exchange. b. How much economic surplus, if any, does Ivan gain from engaging in this exchange? c. How much economic surplus, if any, does Samantha gain from engaging in this exchange? d. How much total surplus, if any, is gained from this exchange?

a. Ivan and Samantha are both. b. 10,000 c. 17,000 d. 27,000

Assume England and Mali can both produce grain and dates, and that the only limited resource is the farming labor force, meaning that land, water, and all other resources are plentiful in both countries. Each farmer in England can produce 10 tons of grain or 5 tons of dates in a season. Each farmer in Mali can also produce 10 tons of grain or 25 tons of dates. Please answer the four questions. Which country has the absolute advantage in producing dates? Mali Neither England Which country has the absolute advantage in producing grain? England Mali Neither Which country has the comparative advantage in producing dates? Neither Mali England Which country has the comparative advantage in producing grain? England Neither Mali

a. Mali b. neither c. Mali d. England

During the economic downturn of 2008-2009, the unemployment rate increased to nearly 10%. At the same time, the price of higher education tuition and the number of enrollees increased. a. Which statement best explains why more people enrolled in higher education institutions during this time period even as the price of tuition increased? More people enrolled because... if the next best option was unemployment, many individuals may have preferred to enroll in higher education and live off of student loans while waiting for the job market to improve. of the social pressure people feel to go to college. Universities exploited this and increased the price of tuition without losing many students. if the next best option was unemployment, many individuals may have preferred to enroll in higher education and gain new skills in hopes of increasing their future employment prospects. of the bandwagon effect. When something becomes popular or trendy, ever more people are willing to pay high prices for it. b. The core principle that best explains this is the opportunity cost principle. Marginal principle opportunity cost principle cost benefit principle

a. if the next best option was unemployment, many individuals may have preferred to enroll in higher education and gain new skills in hopes of increasing their future employment prospects. b. opportunity cost principle.

Determine whether each statement reflects positive analysis or normative analysis. a. The richest 11% of Americans should pay more taxes than the remaining 9999%. normative analysis positive analysis b. A decrease in the supply of coconut will increase the price of German chocolate cake, a good that requires coconut shavings as a key ingredient. normative analysis positive analysis c. As the minimum wage increases, the prices of all goods and services also tend to increase. normative analysis positive analysis d. Social welfare spending in Sweden occupies too large a portion of the national budget. positive analysis normative analysis

a. normative analysis b. positive analysis c. positive analysis d. normative analysis

Competing against other potential employees for a job is an example of the ______________________ set of interdependencies.

second

Khaled is a preschool teacher working at a public school, but he is considering quitting his job to start a daycare facility of his own. Indicate which of the four types of interdependency is most relevant to each factor in Khaled's decision. Use the market for daycare facilities as Khaled's market of interest. a. Khaled knows there are few daycare facilities in the area, but many families looking for daycare. This scenario is an example of dependencies between __________________ b. An increase in graduation rates for teachers saturates the market for preschool teachers. This decreases the wages of teachers. This scenario is an example of ___________________________ c. If Khaled opens his own facility, he will be responsible for taxes, insurance, licensing, and facility upkeep, among other things. However, as a teacher Khaled will only need to keep up his teaching license. In addition, Khaled will not be able to take a long vacation in the summer if he runs a daycare center. This scenario is an example of __________________________ d. Khaled is up for a raise in the next 6 months at his teaching job. This scenario is an example of __________________________

a. people or businesses in the same market. b. dependencies between markets. c. dependencies between each of your individual choices. d. dependencies through time.

In 2016, the top-selling pharmaceutical drug in the world was AbbVie's Humira, which is used for the treatment of several common, chronic conditions. The majority of its profits are derived from treatment of the most common diseases, but AbbVie also develops drugs for rare conditions. Why might AbbVie develop drugs for rare diseases instead of investing all of its resources toward drugs for common diseases? It is possible that... the opportunity‑cost principle may encourage AbbVie to produce drugs for rare conditions, because the full benefits outweigh the costs. The company must be maximizing its total economic surplus. framing effects may be enticing AbbVie to develop and produce drugs for rare conditions. Since these drugs are more expensive, AbbVie will make a large profit. the interdependence principle may be guiding AbbVie to develop and produce drugs for rare conditions. Common chronic and rare conditions are often experienced by the same people, so AbbVie can easily produce drugs for both. the marginal principle may be guiding AbbVie in determining if it is worth producing drugs for rare diseases. Since it is developing and producing treatments for rare diseases, the marginal benefits must exceed the costs.

the marginal principle may be guiding AbbVie in determining if it is worth producing drugs for rare diseases. Since it is developing and producing treatments for rare diseases, the marginal benefits must exceed the costs.