Macro terms
What is the difference in a positive and normative statement
Positive economics: • The is • fact • Analysis of situations • Not argumentative • Reasonable people, armed with sufficient facts, do not disagree • Normative economics: • The should be • opinion • Goal oriented • Different than just an opinion • Specify an objective function and determine techniques to achieve goal • Argumentative • Example of a light in the room: • The light is on or off (positive) • Are we better off if the light is on or off? (normative) • Positive is what we focus on, but normative is the fun stuff to argue about • Even economists don't agree
How does investment effect current and future consumption?
Process of using resources to create or buy new capital Ex deciding to go to college instead of working you are making an investment If society chooses to produce more consumer then capital goods in the short run it works well but in the long run it doesn't bc you need the capital goods Society has to be willing to sacrifice how well it lives today in order to have more later
What does a straight line PPF tells us about trade offs and the opportunity costs? What does a curved "bowed out" PPF tell us about trade offs and the opportunity costs?
Production does not expand at a constant rate Ex to make more pizzas, the society will have to use workers who are increasingly less skilled Law of increasing relative cost, states that the opportunity cost of producing a good rises as a society produces more of it
Explain gains from trade.
Self-sufficiency is not always a good thing because doing everything for yourself takes too much time • We all have different skills, abilities, and interest so its best to work together • Interdependence occurs because people are better off when they specialize and trade with others • Patterns of production and trade are based upon differences in opportunity costs
Making decisions on the margin require an individual to make what comparison?
The principle of self-interest: we assume people do whatever because it's in their best interest to make themselves better off; Mother Teresa • Homoeconomicus - the economic man • Rational - that is thoughtful and deliberative • Evaluating - calculates and compares options • At the margin: most decisions are incremental changes; most decisions are not "all or nothing" • Weigh the extra cost against the extra benefits of each action • If you eat a little less today you might live a little longer; if you stop eating today you won't live very long at all • You stop when the additional cost is greater than the additional benefit of an action • Optimal decision point: when the marginal benefit = the marginal cost • MB = MC A margin can also be thought of as the size of victory Ex why do people claen there whole house, dishes, vacuum etc but don't clean the dust bunnies under there fridge. Bc to do that would mean to have to move there whole fridge and you usually cant even see it so its not worth it
Explain how the scientific method is used in economics.
We try to approach problems and research using the scientific methods • Same as chemistry, psychology, physics, etc. • Hypothesis and testing • Less lab control than other areas • Try to eliminate emotion from emotional topics and stick with testable things • We want to be objective • Deal in the facts, things we can prove and test
Visually, what does a shift in the demand function look like (increase or decrease)?
What happens when something other the price changes? • A shift left or right of the demand curve is a change in demand as a result in other things changing • A change in demand shifts the entire demand function (increase or decrease) • Changes the demand at every price
Explain the market-clearing price.
Where the demand curve and the supply curve intersect MCP= price at which the quantity supplied is equal to the quantity demanded. We are looking for mcp doesn't mean we are happy with the price but you are willing to take it
Visually, what does a shift in the supply function look like (increase or decrease)?
o If the price of steel were to go up, cause the price of making cars more expensive, reduce the number of cars we can produce because it is now more expensive o A decrease in supply is a shift to the left, at every price it is now more expensive o An increase in supply is to the right o An increase in inputs (production of the good) or increase in price of good results in decrease supply
Explain the difference between a change in SUPPLY and a change in QUANTITY SUPPLIED. (Important point!)
o Quantity supplied : amount of good sellers are willing and able to sell • If a firm is not willing or able, it is not part of the market • High prices cause the quantity supply to increase o Law of supply : ceteris paribus, the higher the price of the good, the greater will be the quantity supplied • Direct relationship • As price increases, QS increases • Holding other relevant factors constant • A change in quantity supplied NOT supply
Explain the difference between structural, frictional, and cyclical unemployment.
o Structural • At one point, many people used to make horse-buggies and repair type writers • Would the US be better off if they still had jobs? • In the past, most people worked in agriculture • What changed? • Tastes change. Technology changes. Therefore, jobs change • What's the issue? • Demand for certain skills disappear • Learning certain new skills may take a long time or not at all Creative destruction: occurs when the introduction of new products and technology leads to the end of jobs and other industries, also known as economic evolution • How can a natural disaster cause structural unemployment? • Think earthquake/Tsunami in Japan or Katrina fishing • The infrastructure you need disappears • Have to wait to be able to get what you need again • Takes a while to rebuild and readjust • Matching your skills to the job Structural unemployment: is cause by changes in the industrial makeup: over the past two centuries the US has envolved from being primarily agriculture to industrial to now mostly service o Frictional • Sometimes you quit • Sometimes you get fired • Sometimes it takes a while to find a new job • Not the most concerning type of unemployment • What factors influence how long you (a worker) may be frictionally unemployed? • Causes: • Information - it takes time to know firms are hiring? • Government - unemployment insurance programs and other "job security" programs • Why does absentee rate go up in Italy after 12 week? • France and Germany reduce workweek? Goal. • Reducing hours reduces chance of overtime Can't go over time but need work means hiring more workers Frictional unemployment: caused by delays in matching available jobs and workers. Sometime it takes time for employers and workers to find one another and agree to terms o Cyclical : caused by economic downturn • Changes in the economy will influence the number of workers hired • This is where policy makers (government) focus • When cyclical rate is zero (o) we are said to produce the "full employment output (Y*) • In this case, the unemployment rate = the natural rate of unemployment • When times are so good that the cyclical rate is negative, the natural rate of unemployment is bigger • Structural and frictional are part of natural unemployment • We are not aiming for 0% unemployment o Structural and frictional will always exist o Cyclical changes • Never going to be a number that stays the same • 3-5% is the safe place essentially
What is an inferior good?
o as income increases, the demand will decrease • Demand shift to the left • If you win the lottery, you'll buy less of it • Ex: ramen noodles, easy mac
What is a normal good?
o as income increases, the demand will increase • Demand shift to the right • luxuries, if you win the lottery you'll buy more of it • Ex: cars, fancy clothes, steak
What impact do substitute goods have on the demand for good X?
o when a fall in the price of one good reduces the demand for another good ; an increase in the price of A results in an increase in the demand for B • Ex: diet coke and diet pepsi • If the price of diet coke increases, what happens to the demand for diet coke? • Nothing, the quantity demanded changes, not the demand, the demand is still there • The change in the price results in changes in quantity demanded • If the price of diet coke increases, what happens to the demand for diet pepsi? • Increases • Shift to the right • The price change of A results in the demand change of B If the price for nitendo wii goes up qd for wii goes down but demand for xbox goes up
We use the term ceteris paribus; what does it mean?
other things the same ; static analysis • Holding everything constant, what happens when (blank)? Ex if the wright brothers would have changed many variable to there wing they wouldn't know which one improved performance
Define absolute advantage.
the ability to produce more in total of something by comparison
What impact do complement goods have on the demand for good X?
when a fall in the price of one good increases the demand for another good ; an increase in the price of A results in a decrease for demand for B • Strawberry vs grape jelly • If the price of strawberry jelly goes up, what happens to the demand? • Nothing • What happens to the quantity demanded? • Goes down • If price of peanut butter decreases, what happens to the demand for jelly? • Increases • Shift to the right • Ex: peanut butter/jelly , gas/SUVS , milk/oreos o Example question • If JJ's coffee is a normal good. JJ's price increases. Which statement is correct? • The demand for jj's will fall • The demand for jj's will rise we are talking about price so you can go ahead and eliminate demand because price doesn't affect demand • The QD will fall • The QD will rise color ink cartridges and print paper are complimants. Price of ink goes up qd of ink goes down and the and demand for paper goes down bc you would expect less people to use it
Why must trade-offs be made?
• Given you can't do everything, you must make trade-offs with your resources • In a world of scarcity every decision incurs a cost • 1 hour: study for economics exam or go to dinner with friends • $5: buy a chicken sandwich or jittery joe's latte • Budget: rebuild Terry or hire a new faculty in 2015 • Tax money: expand 85 to Atlanta or upgrade Savannah River Dam • Cleaner enviorment or higher level of income for its citizens
Explain what a Production Possibilities Frontier (Curve) model illustrates? [PPF or PPC]
• How to present what we can produce • A graph that shows the combinations of output that the economy can possibly produce given available factors of production (assume that's constant) and production technology (assume that's constant)
Explain the difference between a change in DEMAND and a change in QUANTITY DEMANDED. (Important point!)
• Quantity demanded: amount of good buyers are willing and able to purchase • If I am not willing or able, I am not part of the market • Movement along demand function is a change in price • Ex: if there is a change in the price of chicken sandwiches • Law of demand: ceteris paribus, the lower the price of a good, the greater will be the quantity demanded; as price decreases, quantity demanded increases • Inverse relationship • Ceteris paribus - holding other relevant factors constant • Terminology (IMPORTANT) - a change in quantity demanded NOT demand - two different things
What function do markets play in trade?
• We end up with more study when we trade if everyone focuses on their comparative advantage (being the "low cost producer" ; having the lowest opportunity cost) • Harness the power of separation • Ex lebron pays people to cut his grass and sticks to basketball
Describe the influence of changes in tastes, expectations and number of buyers on the demand function.
• What factors shift the demand function? o Consumer income o Prices of related goods o Tastes o Expectations of future events o Number of buyers o Tastes - bell bottom pants, sweater vests • Tastes change • If it's popular, demand increase • If not, shift left o Expectations - hurricane season • What do you think is going to happen? • There is a potential hurricane, you know gas prices are going to increases after the hurricane, your demand for gas is going to shift today and you might get gas even if you don't really need it o Number of buyers - Christmas toys • Last minute Christmas toys, sudden change in demand, shift right
Define comparative advantage.
• being the low cost producer of a good; differences in opportunity costs are the basis for specialized production in trade
Explain the difference between a competitive market and an imperfect market.
• group of buyers and sellers of a particular good or service • A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price Imperfect market is one which either the buyer or seller has an influence on the market price Ex popular video games and front row concert tickets, they are specialized products so the owner has pricing power • We assume: • Many buyers and sellers • Little or no little transaction costs • Transaction cost: anything that you spend money or effort on that has nothing to do with the price of the good
Define opportunity cost.
• highest value forgone alternative ; best thing given up, loss to do something else • The trade-off of your next best choice for your resources • Your opportunity cost is not the sum of all your options (plural) • It is the best option given up (singular) ; the next best choice • The word cost does not imply only money • Cost could be time, price convenience • Ex two invitations to hike and go to a concert. You go to the hike the opp cost is the concert
If the PPF moves outward (away from the origin), what does that illustrate?
Below the PPF: inefficient production • Above the PPF: outside the range, impossible given factors of production and production technology; reachable if: new technology is introduced
Explain the difference consumer and capital goods.
Consumer are production for present consumption and satisfy our wants now. Ex food, entertainment, and clothing. Capital goods help in the production of other valuable goods and services. Ex roads, factories, trucks
What is the role of incentives in the study of economics?
Factors that motivate you to act or to exert effort Ex studying for an exam vs hanging out with friends, you are incetiviized to study bc an a will raise your gpa and will make you a more likely candidate for a job o Positive Encourages to do something or "end of year bonus" o negative not to do something "fear of receiving a speeding ticket o Direct - hopefully causes desired result "cut my grass and I will pay you $30" o Indirect - unexpected behavior " if person receives more welfare then they hope to make from a job, might decide to stay on welfare instead of work" o Incentives change our behavior
Explain the difference between the discouraged worker and the underemployed worker.
If the real unemployment rate is high - it creates discouraged workers who give up and stop looking for a job - also part time workers, ex worked at bofa now at target, they are still considered employed o Why might the unemployment rate going up be a good thing? • A good sign that the economy is improving because it means that more people are at least looking for jobs and less people have given up trying to find a job o Unemployment rate may go down because • People stop looking • Senior citizens become bigger portion of the population (retired people)
Why is a monopoly defined as an imperfect market?
Imperfect market is one which either the buyer or seller has an influence on the market price Ex popular video games and front row concert tickets, they are specialized products so the owner has pricing power
Using the correct terms, what is a surplus?
Is when the quantity supplied > the demand supplied
Using the correct terms, what is a shortage?
Is when the quantity supplied< the demand supplied
What is the point of trade?
It is beneficial to both parties and creates value for everyone involved • So are markets about competitions or cooperation? Both • We cooperate by doing what we are good at and trading • The competition is deciding who to cooperate with • Kidneys example: • Opportunity cost of selling your kidneys • We change our behavior based on incentives • Direct and indirect consequences Able to specialize in the production of goods and services and leave everyone better off
How do you determine the labor force participation rate?
Labor force= employed the unemployed Reflects the portion of the population that is working or searching for work Labor force participation rate= labor force/ population
Why is "Scarcity" such and important term in the field of economics?
Limited nature of societies resources given unlimited wants and needs • Economists study how individuals, companies, government, etc. allocate resources to given wants • Allocation of resources given the fact that we can't do everything
How do we go from the individuals demand to the market demand?
Market demand is the sum of all the individual quantities demanded by each buyer in a market at each price
How do we go from the individual supply to the market supply?
Market supply is the sum of the quantities supplied by each seller in the market at each price
Explain the difference between Microeconomics and Macroeconomics.
Microeconomics - individual units (person, company, country); externalities, bob's budget, firm decisions, etc. 1. Macroeconomics - interactions of the individuals as a whole economy; GDP, inflation, tax policy, exchange rates, etc; how does it affect me? Ex a worker gets laid off and becomes unemployed. It's a micro issue bc its one person but if it was a lot of people it would be a macro issue bc the
What are the characteristics of the unemployed?
Occurs when a worker who is not currently employed is searching for a job without success There is natural unemployment which happens during healthy macroeconomic conditions which is made up of structural and frictional But unemployment during a recession includes cyclical as well as structural and frictional see fig 7.4 When cycnical is at zero we are producing full employment
How do you determine the unemployment rate?
One of the most reliable indicators of an economys health, reflects the portion of the labor force that is not working and unsuccessfully searching for a job • Total population: 6 • All but 1 is working or looking for a job • LF: 5 • LFPR = 5/6*100 = 83.3333 83.3% • U-rate = 1/5*100 = 20% Unemployment rate= unemployed/labor force
How do the following impact the supply of good X? Input costs, Technology changes, Taxes and Subsidies, Number of sellers, and Expectations
Outside factors effect shift in supply curve Supply decrease/ shift to the left if Cost of input rises Business taxes increase or subsides decrease The number of sellars decrease The price of product anticipated to rise in the future A change in technology enables a producer to increase output bc able to produce at sell more at each price A seller who expects higher prices for a product in the future may wait to delay sales until a time when it will bring a higher price.