Macroeconomics Exam 1 Review

Complements / Substitutes (definitions)

Complements: Two goods that are typically consumed jointly (PB & J) Rule: when the PRICE of Good A RISES, the DEMAND for Good B FALLS (and vice versa) Substitutes: Two goods that satisfy similar needs or desires (Pepsi & Coke) Rule: When the PRICE of Good A RISES, the DEMAND for Good B RISES (and vice versa)

Factors that can shift the demand curve (5 of them)

1. Income (normal or inferior goods) 2. Prices of related goods (substitutes / compliments) 3. Preferences 4. Number of buyers 5. Expectations of future prices

Factors that can shift the supply curve (6 of them)

1. Prices of relevant resources 2. Technology 3. Number of sellers 4. Expectations of future prices 5. Taxes and Subsidies 6. Government Restrictions

Surplus (Excess Supply)

A condition in which quantity supplied is greater than quantity demanded. Surpluses occur only at prices above the equilibrium price (price floor)

Supply Schedule

A method used to show the different amounts of a certain product or item that a company would need to supply based on different price points

Economic Models (simplify)

Economic Models are essentially just simplifications of the real world, they focus only on the most important variables Ex: Production Possibilities Frontier (no such thing as a free lunch)

Significance of Resources and Technology in regards to the PPF

An INCREASE in resources or an ADVANCE in technology can increase the production capabilities of an economy, leading to economic growth causing a shift outward of the PPF (supply curve shifts out)

Economic growth

An increase in resources or an advance in technology can increase the production capabilities of an economy, leading to economic growth and shift outward in the PPF

Law of Demand

As the price of a good RISES, the quantity demanded of the good FALLS, and as the price of a good FALLS, the quantity demanded of the good RISES

Law of supply

As the price of a good RISES, the quantity supplied of the good RISES, and as the price of a good FALLS, the quantity supplied FALLS

Effects with respect to minimum wage

The market-clearing price (wage) for unskilled labor equates the quantity demanded by employers, with the quantity supplied by unskilled workers. If the government sets a floor above the market-clearing level, then it will induce a surplus of unskilled labor. - many workers will get fired, have their hours cut, get their benefits reduced or other consequences that may come along with changing the minimum wage (Ex: $15 an hour for McDonalds workers)

Equilibrium

The price at which quantity demanded of the good equals quantity supplied (market clearing price)

Supply (definition)

The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period

Shortage (Excess Demand)

a condition in which quantity demanded is greater than quantity supplied. Shortages occur only at prices below equilibrium price (price ceiling)

Economic goods (definition)

a good or service that can command a price when sold

Price Floor

a government imposed price control or limit on how low a price can be charged for a product. - Surplus - Fewer trades Ex: minimum wage

Price Ceiling

a government mandated maximum price above which legal trades can not be made - a price ceiling creates a shortage - fewer trades - alternative rationing devices - black market / illegal trades - tie-in sales Ex: Rent controls

Law of Increasing Opportunity Costs

as you produce more and more of a good, the opportunity costs of producing that good increases - Resources are not equally suited to the production of the same good

Bowed out PPF

the bow illustrates increasing opportunity cost

Market demand curve

the graphical representation of the law of demand

Market supply curve

the graphical representation of the law of supply, which states that price and quantity supplied are directly related

Opportunity Cost (definition)

the loss of potential gain from other alternatives when one alternative is chosen

Demand Schedule

the numerical representation of the law of demand

Production Possibilities Frontier

the primary purpose of this model is to drive home the concept of there is no free lunch - Scarcity necessitates choices must be made - Making choices means incurring opportunity costs - We also add the concepts of efficiency, inefficiency and economic growth - Ex: a student taking two classes must balance the workload for the individual classes or it may result in them getting a higher grade in one class and lower grade in the other

Straight Line PPF

the straight line illustrates constant opportunity costs - anything beneath the line is considered "inefficient"

Economics (definition)

the study of how a society manages it's scarce resources

Demand (definition)

the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period

Efficient point

MB=MC

Microeconomics / Macroeconomics (definition)

Micro- deals with human behavior and choices as they relate to relatively small units (an individual, a business firm) Macro- deals with human behavior and choices as they relate to highly aggregate markets (the goods and services market / the whole economy)

Normal / Inferior goods (definitions)

Normal- When INCOME INCREASES, DEMAND for these goods INCREASE (and vise versa) Ex: Homes, New cars, Sports tickets Inferior- When INCOME INCREASES, DEMAND for these goods DECREASES Ex: Used cars, Mac&Cheese, apartments

Positive / Normative Economics (definition)

Positive - the study of "what is" in economic matters Cause ---> Effect (controlled experiment) Normative- the study of "what should be" in economic matters Judgement & Opinion

4 Factors of Production

- we must use scarce resources to produce goods and services 1.Land 2.Labor 3.Capital (physical and human) 4.Entrepreneurship

Ceteris Paribus

- a Latin term meaning "all other things constant" - the Law of Demand focuses only on the quantity demanded relative to price

Market (definition)

- any place people come together to trade Resource market- is a market where a business can go and purchase resources to produce goods and services Product markets- where finished goods and services are sold to consumers

Inefficient point

- any point below the curve

Unattainable point

- any point beyond the curve

Productive Efficiency (on PPF)

- any point on the curve - the condition where the maximum output is produced with given resources and technology

Rationality Assumption / Rational Self-Interest (definition / connection)

- the assumption that people don't intentionally make decisions that would leave them worse off - enlightened self-interest suggests that individuals pursuing their own hopes, dreams, and aspirations can also contribute to the betterment of others

Change in Quantity Demanded vs. Change in Demand

Quantity Demanded- a movement along the demand curve which occurs only when price changes Demand- A shift of the whole curve caused by a change in income,preferences,prices of related goods,number of buyers, and expectations of future price; which can all cause this to happen

Effects with respect to rent control

Rent control, like all other government-mandated price controls, is a law placing a maximum price, or a "rent ceiling," on what landlords may charge tenants. - if the rent control is too high no one will buy them (surplus) and if it is too low then you won't have enough supply to rent out because there will be a greater demand than quantity supplied (shortage)

Scarcity, Choices, Rationing Device, Competition - definitions, connections

Scarcity- the condition in which our wants are greater than the limited resources available to satisfy them - We must make choices and trade offs based on what has more value to us( Prices adjust based on decisions of buyers and sellers) - Dollar price serves as the primary rationing device; Prices send signals to consumers and producers as to what something is worth

Incentives (definition / significance)

Something that induces a person to act - Incentives shape behavior and send a price signal to both producers and consumers