Economics 1301

Economics as a science: Hard science

- Natural sciences --biology, chemistry, - Characterized by testable predictions/hypotheses, "purer" form of scientific method

Which economic figure hypothesized that the human population will expand in periods of plenty until the population size causes distress on natural resources?

A. Alfred Marshall B. David Ricardo C. Thomas Malthus D. Adam Smith C. Thomas Malthus

Increase in Demand ->

higher price and larger quantity

Property Rights

The ability of an individual to own and exercise control over scarce resources ○Usually assigned by the state and its actors

Entrepreneurship

The ability to organize and get something done

Economics as a science: Soft science

- Social sciences --economics, sociology, psychology - Characterized by fewer constraints on researcher bias, large amounts of observational data, more likely to intersect with everyday experience

Two functions of government

- Taxes provide public services - Oversees interactions of businesses and households

GDP indicator limitations

- informal activity not accounted for - errors (data needs to be collected in short space of time) - ignores quality of output - doesn't tell you about income distribution - doesn't tell you what kind of output (capital vs consumer) - doesn't take into account other aspects of living standards (health, education)

Foundations of Economics Economic Analysis

-Cost-benefit - Supply and Demand - Market predictions (identifying shifts in supply and demand) - Market interpretations (working backwards)

Limitations of Economic indicators

1 .They need to be correctly interpreted. 2. Most of the data is somewhat inaccurate. 3. Measuring gross domestic product (GDP) is almost impossible.

Name the biggest names in classical economic theory

1. Adam smith 2. Karl Marx and Friedrich Engels 3. John Maynard Keynes

Homo Economicus or "Economic man"

1. Consistently rational, self-interested, pursues wealth 2. Has a great understanding of macroeconomics and economic forecasting 3. Relies on perfect knowledge 4. An Egoist: all people should do whatever benefits their self-interest 5. Foundation/ assumptions for economic theory 6. 100% rational/ focused on money as an incentive

The Core Principles of Economics

1. Cost-Benefit Principle 2.Opportunity Cost Principle 3. Marginal Principle 4. Interdependence Principle

Unemployment rate Limitations

1. One limitation of using unemployment to measure the economy's health is that it doesn't include employed people looking for work. - Ex. part-time workers looking for full-time employment are classified as employed and are not included. 2. It also includes discouraged workers who are people of the legal working age who want to work but have stopped looking. - Ex. the unemployment rate included people who haven't looked for work in the past four weeks.

PPF(visually) demonstrates...

1. Scarcity 2. Efficiency 3. Trade-offs 4. Opportunity cost 5. Economic growth

Types of Businesses

1. Sole Proprietorships 2. Partnerships 3. Corporations

Samuels Three Questions

1. What to produce? 2. How to produce? 3. For whom to produce?

Coordination Problem:

1. What, and how much, to produce 2.How to produce it 3.For whom to produce it

Homo economicus assumptions

1. consistently rational 2. self-interested 3. pursues wealth

Understand why economic agents trade

1. fueling economic growth 2. supporting good jobs at home 3. raising living standards 4. help Americans provide for their families with affordable goods and services

Three functions of money

1. medium of exchange 2. unit of account 3. store of value

You take a trip to Dhaka, Bangladesh. Your hotel room costS 12,000 Bangladeshi taka per night, and the nominal exchange rate is 85 taka per U.S. dollars. How much does your hotel room cost in U.S. dollars? (round to the nearest Dollar).

12,000/ 85= 141

The Law of Demand

= quantity demanded rises as price falls (other things constant); quantity demanded falls as price rises (other things constant) - Demand assumes the willingness and ability to pay; want does not

Experimental Economics

A branch of economics that studies the economy through controlled laboratory experiments

Economic Model

A framework that places the generalized insights of the theory in a more specific contextual setting

Quantity Supplied

A specific amount that will be supplied ata specific price

Suppose you are moving across town. Doing your research you find that the average rate of a moving company is about $250 per hour for each mover (moving truck included). The marginal benefit you receive from each hour of the movers time (and truck) is listed in the accompanying table. For how many hours should you hire the movers?

A. 2 B. 3 C. 5 D. 4 A. 2

The government raises the minimum wage, if there are already unemployed people in the economy, we would expect the unemployment rate to:

A. Fall B. Stay constant C. Become zero D. Rise D. Rise

When a country occasionally buys or sells currencies to influence the exchange rate but usually let's market forces determine the exchange rate, it has a:

A. Fixed exchange rate B. Gold standard C. Partially flexible exchange rate D. Flexible exchange rate C. Partially flexible exchange rate

Which of the following is not a component of GDP?

A. Price B. Net exports C. Investment D. Consumption A. Price

A large trade deficit that the United States has with China would be narrowed by a:

A. Rise in the value of the U.S. dollar or by U.S. inflation B. Decline in the value of the U.S. dollar or by U.S. inflation C. Decline in the value of the U.S. dollar or by Chinese inflation D. Rise in the value of the U.S. dollar or by Chinese inflation C. Decline in the value of the U.S. dollar or by Chinese inflation

Primarily, economics is the study of

A. Scarcity B. History C. Boring things D. Money A. Scarcity

Explicit function of the Fed include all the following except:

A. Serving as a lender of last resort to financial institutions B. Providing banking services to the U.S. government C. Conducting fiscal policy D. Conducting monetary policy C. Conducting fiscal policy

A(n)_______ occurs when the quantity demand exceeds the quantity supplied.

A. Shortage B. Subsidy C. Surplus D. Equilibrium A. Shortage

Technological change is most likely to affect:

A. Structural unemployment B. Frictional unemployment C. Seasonal unemployment D. Cyclical Unemployment A. Structural unemployment

Keynesian economists tend to focus their analysis on:

A. The long run B. Economic growth C. The short run D. Inflation C. The short run

Once you have identified the output gap in the IS-MP graph in the Fed model, how would you connect to the Philips curve?

A. Trace the real interest rate from the IS-MP model down to the same real interest rate in the Philips curve. B. Trace the unemployment rate from the IS-MP model down to the same unemployment gap in the Philips curve. C. Trace the output gap from the IS-MP model down to the same output gap in the Philips curve. D. Trace the inflation rate from the IS-MP model down to the same inflation rate in the Philips curve. C. Trace the output gap from the IS-MP model down to the same output gap in the Philips curve.

For normal goods.

A. when income rises, demand rises B. When income rises, demand falls C. When income falls, demand rises D. when income falls, demand does not change A. When income rises, demand rises

Efficiency

Achieving a goal as cheaply as possible - using as few inputs as possible

Productive Efficiency

Achieving as much as possible from a given amount of inputs or resources

Laissez-Faire

An economic policy of leaving coordination of individuals' actions to the market

Socialism

An economic system based on individuals' goodwill toward others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce - Evolved to an economic system based on government ownership of the means of production (command economy) - 21st Century Socialism: Government ownership or control of major resources and an economy dominated by business cooperatives owned and operated by workers supported by government loans and contracts (Hugo Chavez, Venezuelan President, 1999-2013)

Capitalism

An economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists

"either/or" - "how much" -

"either/or" -Cost-Benefit and Opportunity Cost "how much" -Marginal and Interdependence

Political and social forces

(i.e. laws, cultural norms) block economic forces and the invisible hand

* Go over marginal principle slide* (9,10)

* Go over marginal principle slide* (9,10)

Macroeconomics Examples

* Iceland Eliminates "Pink Tax" * Up to 85,000 Jobs at Risk Despite Full Employment

Supply Table

Represents the minimum price that a supplier is willing to accept for various quantities of a good ○The existence of competing suppliers limits prices charged - Quantity supplied varies directly with price - Assumes other things held constant

Conventional Economic Theory

Rise in the minimum wage leads to a cut in employment and an increase in product prices

Consumer Sovereignty

The consumer's wishes to determine what's produced

Movement Along a Demand Curve

The graphical representation of the effect of a change in price on the quantity demanded

Shifts in demand lead price and quantity to move in...

The same direction

Microeconomics

The study of individual decisions ex. how to generate the income you need in retirement

"Other things constant"

Things besides price affect demand○i.e. income, tastes and preferences, prices of other goods

Economic Institutions in a Market Economy

Three sectors: ●Businesses ●Households ●Government

Economists think that everyone is better off when trade is enabled.

True

Free trade agreements can have a negative impact on jobs

True

If nominal GDP rose, that means production rose as well.

True

Unemployment

Unemployment Rate= the percentage of people in the economy who are both able and lookingfor work but cannot find jobs

Opportunity Cost and Choice

Given that resources are limited, producers and consumers have to make choices between competing alternatives. Economic choice-> Sacrifice-> Alternatives are . given up

Demand Curve

Graphic representation of the relationship between price and quantity demanded

Supply Curve

Graphic representation of the relationship between price and quantity supplied - Represents the minimum prices an individual seller will accept for various quantities of a good - When firms' costs are constant, a higher price means higher profits

Cost-Benefit Analysis

when one assign a cost and benefit to alternatives, and draws a conclusion based on those costs and benefits

WEEK 2

WEEK 2

Use Supply and Demand to evaluate welfare

Week 4 slide 3

Profit

What's left over from total revenues after all the appropriate costs have been subtracted

Inflation Indicator Limitations

While it may constitute a relatively good measure of price changes in the specific goods purchased in its "basket," one limitation of the CPI is that the consumer goods it considers do not provide a sampling that represents all production or consumption in the economy.

3. Corporations

business that are treated as a person, that are legally owner by their stockholders, who are not liable for the actions of the corporate "person"; 18% of US businesses - Ex. Google, Pepsi

Goods Market

businesses produce goods and services and sell them to households and government

1. Sole Proprietorships

businesses that only have one owner; 72% of US businesses - Ex. young Nike

Implicit Cost

costs associated with a decision that often aren't included in normal accounting costs

Sunk Cost

costs that have already been incurred and cannot be recovered

Households

groups of individuals living together and making joint decisions Key Elements: - Ultimately control government and business (voting, supply labor and capital, spending decisions) - Mostly decide what to buy and what is produced; potentially swayed by advertisements - Income largely earned through wages and income

Increase in Supply ->

lower price and larger quantity

Decrease in Demand ->

lower price and smaller quantity

With Cost-Benefit →

pursue the course of action that yields benefits at least as large as the opportunity, which is the next best alternative

Trade

the action of buying and selling goods and services ○ Everyone is better off when trade is enabled

Economics

the study of how human beings coordinate their wants and desires, given the decision-making mechanism, social customs, and political realities of the society

Comparative Advantage

Better suited to the production of one good than to the production of anothergood

Planned Economy

Centralized decisions are made about what is produced, how, by whom, and who gets what; also called command economies

Assumed Role of Government

Colander: 1. Providing a stable set of institutions and rules 2. Promoting effective and workable competition 3. Correcting for externalities 4. Ensuring economic stability and growth 5. Providing public goods

Economic Principle

Commonly held economic insight stated as law or principle

3. Marginal Principle

Decisions about quantities are best made incrementally; "how many" decisions should be broken into smaller, or marginal, choices.

2. Opportunity Cost Principle

Decisions should reflect the true cost of something, the next best alternative, rather than just out-of-pocket costs

Economic Surplus

total benefits minus total costs flowing from a decision; measures how much a decision has improved well-being ○ Both buyers and sellers benefit from voluntary exchange ○ Focus on the underlying costs and benefits, not how the costs are framed

Macroeconomics Fields of Study:

● The performance of the economy ● Policy models ●Finance and money (monetary policy) ● Taxes and budgets (fiscal policy) ● International policy and issues

The invisible hand

Is the price mechanism that guides our actions in a market; a market force - If there is a shortage, prices rise - If there is a surplus, prices fall

US Income Distribution

Median Household Income (American Community Surveys, 2018): - $61,937 per household - Increasing since 2013 - 2019 numbers to be released September 15th

Markets: Micro

Microeconomics= the study of how individual choice is influenced by economic forces - Considers economic reasoning from the viewpoint of individuals and firms - Ex. pricing policies, household buying decisions - Discussed in ECO 1302

Institutions

The formal and informal rules that constrain human economic behavior Examples: - Laws protecting ownership of property and the legal system to enforce and interpret laws - Cultural traits of society that guides people's tastes and behaviors - Organizational structures: corporations, banks, nonprofits

Shift in Demand

The graphical representation of the effect of anything other than price on demand

Shift in Supply

The graphical representation of the effect of anything other than price on supply

Market Demand Curve

The horizontal sum of all individual demand curves 1. At lower prices, existing demanders buy more 2. At lower prices, new demanders enter the market -At the market level, firms estimate market demand -adding individual demand curves is impossible

Market Supply Curve

The horizontal sum of all individual supply curves 1. At higher prices, existing suppliers supply more 2. At higher prices, new suppliers enter the market -At the market level, firms estimate market demand -adding individual demand curves is impossible

Externality

The impact of a person's actions on the well-being of a bystander; third party effects

Opportunity Cost

The loss the next bestoption represents the real sacrifice

Willingness to Pay

The most you are willing to pay to obtain a particular benefit or avoid a particular cost

Macroeconomics

The study of the economy as a whole ex. sovereign debt The study of the economy in the aggregate - I.e. how economic actors respond to unemployment, fluctuations in output, lack of economic growth, recessions, and inflation; and what to do about them

Positive Economics

The study of what is, and how the economy works

Normative Economics

The study of what the goals of the economy should be

What is economics?

The study of: 1. Scarcity 2. How people use resources and respond to incentives 3. decision-making

Demerit Goods or Activities

Goods or activities that government believes are bad for people even though they choose to use the goods or engage in the activities

Market Economy

- An economic system based on private property and the market in which, in principle, individuals decide how, what, and for whom to produce - An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services - Influenced by political, social, historical, economic forces - Driven by a system of rewards and payments -> individuals are encouraged to follow self-interest ○ The invisible hand = a guiding forcing in market interactions leading to desirable outcomes; self-interest is led to general economic well-being ○ Adam Smith: Individuals are usually best left to their own devices, without the heavy hand of government guiding their actions

Common Trade Offs

1. Efficiency/equality 2. Time/money 3. Labor/leisure

Factors that Shift Demand

1.Income increases demand for normal goods and decrease demand for inferior goods ○ Normal Goods- a good for which a rise in income increases the demand for that good ○ Inferior Goods- a good for which a rise in income decreases the demand for the good 2. Preferences (including advertising and social pressure) 3. Prices of complements and substitutes 4. Expectations 5. Congestion and network effects 6. The number and types of customers -NOT a change in price; anything that changes the quantity demanded at each price, or the marginal benefits of consumers

Mercantilism

16th -18th centuries; Europe - Society designed to maximize trade and the accumulation of physical wealth within a nation - High tariffs on manufactured goods to maintain a high trade surplus - Physical accumulation and collection of wealth invoked wars and influenced colonial expansion

Extra credit: Image that it takes an average Australian miner 10 hours to mine a metric ton of coal and 20 hours to mine a metric ton of manganese. it takes the average South African miner 4 hours to mine a metric ton of coal and 12 hours to mine a metric ton of manganese. What is the opportunity cost of the South African miner of mining 1 metric ton of manganese? (in tons of coal)

3

Feudalism

9th -15th centuries, Europe - Society structured around relationships derived from the holding of land in exchange for service or labor - Three classes: nobility, clergy, peasants

Public Good

A good that if supplied to one person must be supplied to all and whose consumption by one individual does not prevent its consumption by another individuals

Private Good

A good that, when consumed by one individual, cannot be consumed by another individual

Production Possibilities Frontier

A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output.

Invisible Hand Theorem

A market economy, through the price mechanism, will tend to allocate resources efficiently ●Efficiency= achieving a goal as cheaply as possible ●Relies on assumptions: individuals behave rationally, individuals behave in self-interest

Market force

A market force is an economic force that is given relatively free rein by society to work through the market

Shift in demand or supply is caused by...

A mechanism outside of price and does not affect the slope; therefore the y-intercept changes

Production Possibilities Modelopportunity cost

A method measuring the maximum combination of outputs obtained from a given number of inputs -Generally downward sloping; there is an inverse relationship between the two outcomes presented -There is a limit to what can be achieved given the existing institutions, resources, technology -Every choice has an opportunity cost

Supply

A schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant

Demand

A schedule of quantities of a good that will be bought per unit of time at various prices, other things constant

Market

A setting bringing together potential buyers and sellers -Requires a creative understanding of prices ○ Voting Market: policies of personal interest -> votes ○ Marriage: love, support, effort in running a household -> ideal partner ○ Grades: good performance on assignments, quizzes, papers, exams -> A

Market Failure

A situation in which a market left on its own fails to allocate resources efficiently

Quantity Demanded

A specific amount that will be demanded per unit of time at a specific price, other things constant - Price is inversely related to quantity demanded - Dependent on the invisible hand's ability to coordinate individuals' desires

Which of the following is a final good or service?

A. A haircut B. Fertilizer purchased by farmer C. Chevrolet windows purchased by a General Motors assembly plant D. Diesel fuel bought for a delivery truck A. A haircut

Suppose that the Federal Reserve has recently cut interest rates in the economy and there is a credible forecast that the Fed will again cut interest rates in the future. A manager who is IS-MP Savvy will expect that

A. The cost of borrowing will increase in the near future B. Interest rates will rise in the near future C. GDP in the economy will fall and sales will decrease in the future D. GDP in the economy will rise and the sales will increase in the future D. GDP in the economy will rise and sales will increase in the future

You are studying the international market for coffee. The world production of coffee beans increases, and at the same time, consumers worldwide start favoring tea over coffee. What is the effect on the equilibrium price and the equilibrium quantity in the coffee Market?

A. The equilibrium price Falls, and the equilibrium quantity is ambiguous B. The equilibrium rice rises, and the equilibrium quantity falls C. The equilibrium price falls, and the equilibrium quantity rises D. The equilibrium price falls, and the equilibrium quantity is ambiguous D. The equilibrium price falls, and the equilibrium quantity is ambiguous

Which of the following is a positive economic statement?

A. The government ought to balance its budget and eliminate the deficit. B. A 10% inflation rate is too high and should be reduced C. If the government raises taxes, people will have less income available for purchases and saving D. That company with a 50% profit rate made too much profit at the expense of consumers C. If the government raises taxes, people will have less income available for purchases and saving

What happens to the investment line if the real interest rate increases?

A. The investment line shifts to the right B. The investment line shifts to the left C. There is a movement up and to the left along the same investment line D. There is a movement down and to the right along the same investment line C. There is a movement up and to the left along the same investment line

What is measured on the y-axis on the Philips curve diagram?

A. The output gap B. unexpected inflation C. The price level D. Real GDP B. unexpected inflation

According to the Rational Rule, which of the following statements is false?

A.Consumers will stop consuming when MC=MB B. The Rational Rule is an important part of the Cost-Benefit Principle C. When MB>MC, economic surplus increases D. When MB aren't exactly, consume at a point where MB>MC B. The Rational Rule is an important part of the Cost-Benefit Principle

If the government institutes a tax credit on funds invested, then the ___ loanable funds shifts to the ______.

A.Supply of; right B. Demand for; left C. Demand for; right D. Supply of; left C. Demand for; right

Economic Policies

Actions (or inactions) taken by the government to influence economic actions

1. Cost-Benefit Principle

Costs and benefits are the incentives that shape decisions. Before any decision, you should: evaluate the full sets of costs and benefits associated with that choice; pursue that choice (only) if the benefits are at least as large as the costs

Draw the circular flow diagram

Economic Actors: • Households •Firms Missing: • Public Sector/ Government

Apply the efficiency-equity tradeoff to inequality and poverty

Efficency-equity trade off: actions intended to make economic outcomes fairer can cause efficiency to decrease An equity-efficiency tradeoff results when maximizing the productive efficiency of a market leads to a reduction in its equity—as in how equitably its wealth is distributed. Poverty- The concern for some is that the least affluent members of society receive a disproportionately small share of the increasing wealth. More equity necessarily means less efficiency, they warn, and hence fewer goods to be distributed. - The equality-efficiency trade-off provides a ready justification for economic inequality—with its proposition that reducing inequality is too costly.

Supply and demand framework in a real life setting

Ex. shortage in corn -> increase in price of corn + demand for substitutes -> firms react outside of pricing

Shift

Expectations encourage suppliers to sell more goods at every price 1. Set new quantity supplied to quantity demanded 2. Solve for equilibrium price 3. Substitute P and solve for Q (quantity, price)

Shifts in Supply Factors

Factors that shift supply: 1. Input prices 2. Productivity 3. Other opportunities: prices of related outputs 4. Expectations 5. The number and type of sellers -NOT a change in price; anything that changes the quantity supplied at each price, or the marginal costs of suppliers

Limitations of the supply demand Framework

Fallacy of Composition = the false assumption that what is true for a part will be true for a whole - By assuming other things constant, complex interactions are ignored when they should be included

The Rational Rule for Markets says to produce more of a good if its marginal benefit is less than its marginal cost.

False

The Economic Problem

How to make the best use of limited, or scarce, resources. - Match limited resources to unlimited wants and needs - The wants and needs of people are endless, but the resources available to satisfy the needs and wants are limited - Limited in physical quantity (land, resources) - Limited in use (labor, machinery)

The goal of markets

In economics, the goal of markets it to maximize efficiency.

Shifts in supply lead price and quantity to move in...

Opposite direction

4. Interdependence Principle

The best choice depends on other choices, choices other people make, developments in other markets, and expectations about the future. When these factors change, the best choice might change. ●All choices shape and are shaped by choices everyone makes now and, in the future ●Resources are limited -every choice affects the available resources available for every other decision ●Dependencies to consider:○Each individual choice ○Between people and businesses in the same market ○Between markets ○Through time ●"What else" -what else affects the decision, what else does the decision affect

Private Property Rights

The control a private individual or firm has over an asset

Fallacy of Composition

The false assumption that what is true for a part will be true for a whole - By assuming other things constant, complex interactions are ignored when they should be included - Implications for supply/demand analysis: ○Best used on goods comprising a small portion of the economy ○ To account for interdependency between aggregate supply decisions and aggregate demand decisions -> differentiating between macro and micro analysis ○ Considered a "step in good economic analysis"

Movement Along a Supply Curve

The graphical representation of the effect of a change in price on the quantity supplied

Inflation

a continual rise in the overall price level

Apply a cost-benefit analysis to economic growth policies

a cost- benefit analysis can apply to fiscal and monetary policy. it applies by using it as a means of stabilizing the economy.

Core principles in practice

apply the core principles in this order: - The marginal principle - The cost-benefit principle - The opportunity const principle - The interdependence principle

2. Partnerships

businesses with two or more owners; 10% of US businesses - Ex. early Microsoft, Apple

Economic thinking

economist think that everyone is better off when trade is enabled. Economic Man: consistently rational, self-interested, pursues wealth ●Bases choices on a personal utility curve ○We will learn more about this in micro ●Has a great understanding of macroeconomics and economic forecasting ●Relies on perfect knowledge Egoist: all people should do whatever benefits their self-interest ●Foundation/assumptions for economic theory

Economic Institutions

laws, common practices, and organizations in a society that affect the economy

Coercion

limiting people's wants and increasing the amount of work individuals are willing to do to fulfill those wants

look over "Circular Flow Diagram"

look over "Circular Flow Diagram"

Economic forces

mechanisms that ration scarce goods

Explain potential solutions to issues with inflation and unemployment.

monetary and fiscal policy are possible solutions.

Gross Domestic Product (GDP)

the total market value of all final goods and services produced in an economy in a one-year period

Business

private producing units in our society Key Elements: ●Decide whatto produce, how to produce it, for whom to produce it ●Driven by self-interest; influenced by market factors

Law of Supply

quantity supplied rises as price rises (other things constant); quantity supplied falls as price falls (other things constant) - Supply is dependent on a firm's ability to switch from one producing good to another, to substitute

Marginal Benefit

the additional benefit above and beyond what has already accrued

Marginal Cost

the additional cost over and above costs already incurred

Scarcity

the goods available are too few to satisfy individuals' desires 1.Our wants 2.Our means of fulfilling those wants

Globalization

the increasing integration of economies, culture, and institutions across the world ●Rewards for winning globally > winning domestically ●Harder to compete and stay in business in a larger market

Define unemployment and understand how it's measured

the percentage of people in the economy who are both able and lookingfor work but cannot find jobs (# of unemployed/ total labor force) x 100

Opportunity Costs

the true case of something is the next best alternative you have to give up to get it ○ Some out-of-pocket costs are opportunity costs ○ Opportunity costs need not involve out-of-pocket financial costs ○ Not all out-of-pocket costs are real opportunity costs ○ Some non-financial costs are not opportunity costs

11. Economic Equilibrium

the unit price for a particular good is the price at which the quantity demanded by consumers, equals the quantity supplied by producers. This price results in a stable economic equilibrium. - supply and demand are balanced

Law of One Price

the wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country

Recite the goals of the course and intention of the assignments.

•Participate and contribute in a narrative about the economy •Be able to understand the metrics used to measure indicators of the economy and business cycles •Use comparative statistics to discuss expansion and recession; compare countries and time periods •Understand what institutions are in place (in the United States) to influence the economy •Be prepared for ECO 1302 (Principles of Microeconomics) or ECO 3341 (Macroeconomic Theory)

The Economic Problem: Macro Examples

● Economic Cycles: economic growth and recession ● Societal Well-Being: poverty and prosperity ● Macro Indicators: inflation, unemployment, growth ● Fiscal and Monetary Policy: influencing the money supply, changes in government spending ● Trade and Currency: trade balance and exchange rates

Labor Day

- Its the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. - It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country. (US Department of Labor)

Foundations of Economics Future Models Based on Supply and Demand

- Markets: labor, capital, housing - Non-perfectly competitive markets: monopoly, oligopoly, monopsony

Demand Table

- Quantity demanded has a specific time dimension - Points are interchangeable - Assumes that everything else is held constant - Represents the maximum price that an individual is willing to pay for various quantities of a good

Creative Destruction

- The introduction of an innovation that sustains long-term growth as it destroys the value of established companies

Economic indicators measure...

- how much a country is producing - whether the economy is growing - how the economy compares to other countries ex. GDP, Inflation rate, and Unemployment rate

A fall in the real interest rate causes:

A. A right shift in the IS curve B. A left shift of the IS curve C. Movement up and to the left along the same IS curve D. Movement down and to the right along the same IS curve D. Movement down and to the right along the same IS curve

The quality theory of money implies that an increase in the money supply will ultimately:

A. Affect only the level of real GDP, the price level will remain unchanged B. Increase the price level and leave real GDP unchanged C. Increase the price level and the level of real GDP D. Decrease the price level and the level of real GDP B. Increase the price level and leave real GDP unchanged

if you have trouble finding a job because of a slowdown in the overall economy, we would say that you are:

A. Cyclically unemployed B. Seasonally unemployed C. Frictionally unemployed D. Structurally unemployed A. Cyclically unemployed

Which of the following shows the medium of exchange function of money?

A. Darius goes window shopping B. Mena saves money in a certificate of deposit at the bank C. Daniela goes to the store and purchases roses with U.S. dollars D. Wilma wants to sell her old car, and she values it at $2,400 C. Daniela goes to the store and purchases roses with U.S. dollars

A bond that is issued by a firm in financial distress is most likely to have:

A. Default risk B. Inflation indexation C. Term risk D. Liquidity risk A. Default risk

Which of the following statements is TRUE regarding economic efficiency?

A. Efficiency is associated with minimizing economic surplus B. Efficient outcomes will not make everyone happy C. Efficient outcomes are also equitable D. Efficient outcomes will make everyone better off B. Efficient outcomes will not make everyone happy.

All of the following shift the consumption function except:

A. Expectations B. Income C. Wealth D. Real interest rate B. Income

A movement along the supply curve is caused by a change in:

A. Expectations B. Price C. Input Prices D. Taxes B. Price

How many stages are in the business cycle?

A. Four B. Six C. Five D. Between three and eight, depending on severity A. Four

How do interest rates affect consumption in the economy?

A. Higher interest rates make it more expensive for firms to take loans, and so consumption falls B. Lower real interest rates rise the opportunity cost of consumption, and thus consumption falls C. Lower interest rates encourage consumers to save more money, and thus consumption rises D. Higher interest rates discourage consumers from making financed purchases, and this lowers consumption D. Higher interest rates discourage consumers from making financed purchases, and this lowers consumption

If an economy has a negative output gap of 2%, this means:

A. Inflation is 2% above the long-run rate of inflation. B. GDP is 2% below potential GDP. C. Unemployment is 2% above the natural rate of unemployment. D. GDP is 2% above potential GDP. B. GDP is 2% below potential GDP

Which individual is considered the father of economics?

A. Karl Marx B. Adam Smith C. John Maynard Keynes D. Freidrich Engles B. Adam Smith

You have four friends. Which of your friends can be described as "cyclically unemployed"?

A. Keele, who lost her job after her company lost a lot of customers during an economic downturn B. Regan, who is in a nursing home C. Arthur, who quit his job to look for a better job D. Martha, who is a full-time stay-at-home parent A. Keele, who lost her job after her company lost a lot of customers during an economic downturn

According to the_____ theory, a market economy will tend to allocate resources efficiently through the price mechanism.

A. Law of Demand B. Laissez Faire C. Law of Supply D. Invisible Hand D. Invisible Hand

An efficient market will keep increasing production until:

A. Minimum average cost has been reached B. Maximum benefit equals maximum cost C. Marginal benefit equals marginal cost D. Total benefit equals total cost C. Marginal benefit equals marginal cost

Extra credit: You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on Project Y. How much profit does the project yield, and should your client invest in Project Y?

A. No, the client should not invest because the project yields a $15,000 loss. B. Yes, the client should invest because the project yields a $15,000 profit. C. No, the client should not invest because the project yields a $10,000 loss. D. Yes, the client should invest because the project yields a $50,000 profit. D. Yes, the client should invest because the project yields a $50,000 profit.

According to "The Lost Art of Economics," which of the following is the study of what is and the way the economy works?

A. Political Economy B. Positive Economics C.Macroeconomics D. Normative Economics B. Postive Economics

all of the following cause a shift in the demand curve except:

A. Price B. Taxes C. Income D. Expectations B. Taxes

Several states have a minimum wage that is higher than the federal minimum. In those states that impose such a minimum wage, it is more likely that the minimum wage acts as a binding:

A. Price floor, causing excess supply in the market B. Price floor, causing excess demand in the market C. Price ceiling, causing excess supply in the market D. Price ceiling, causing excess demand in the market A. Price floor, causing excess supply in the market

All of the following are always true about Homo Economicus except:

A. Rational B. Cooperative C. Motived by wealth D. Self-interested B. Cooperative

A country that wants to fix its exchange rate at a higher level than the market exchange rate would most likely:

A. Reduce the money supply B. Raise government spending C. Increase the money supply D. Raise income taxes A. Reduce the money supply

The problem portrayed by the short-run Philips curve is that:

A. Stagflation is unavoidable B. Changes in the composition of the labor force tend to increase the natural rate of unemployment C. Inflation tends to increase when unemployment falls D. Unemployment tends to increase when prices are rising C. Inflation tends to increase when unemployment falls

The price of macadamia nuts falls. This conveys all of the following EXCEPT a signal:

A. That the price of almonds is rising B. That is understood in every in every language and that helps coordinate the macadamia market C. To producers that demand for macadamia nuts is low, so they should produce less. D. to consumers that macadamia nuts are in plentiful supply, so they should buy more A. That the price of almonds is rising

Which of the following scenarios shows evidence of inflation?

A. The United Kingdom experiences a reccesion B. The economic growth rate in a country increases significantly C. Watermelons are labeled "buy one, get one free" at the local grocery store D. The average house price in an economy rises D. The average house price in an economy rises

Inefficiency

Getting less output from inputs that, if devoted to some other activity, would produce more output

Decrease in Supply->

Higher price and smaller quantity

Factor Market

Households supply of labor and other factors of production to businesses

Evaluate existing economic institutions

Institutions- The formal and informal rules that constrain human economic behavior Examples: ●Laws protecting ownership of property and the legal system to enforce and interpret laws ●Cultural traits of society that guides people's tastes and behaviors ●Organizational structures: corporations, banks, nonprofits

Markets: Macro

Macroeconomics= the study of the economy as a whole - Considers aggregate relationships - Ex. household consumption and income, government policies and growth

Remaining Economic Actor: Government

Main roles: 1. Referee- setting the rules that determine relationships between business and households 2. Actor- collecting money in taxes and spending that money on projects such as defense and education

Define the market failure role of government

Market Failure = when the forces of supply and demand lead to an inefficient outcome ● Government Failure= when government policies lead to worse outcomes

Natural Experiments

Naturally occurring events that approximate a controlled experiment where something has changed in one place but has not changed somewhere else

Efficiency Market

Planned Economy= centralized decisions are made about what is produced, how, by whom, and who gets what; also called command economies Market Economy = each individual makes their own production and consumption decisions, buying and selling in markets ●Market= a setting bringing together potential buyers and sellers ●Requires a creative understanding of prices ○Voting Market: policies of personal interest -> votes ○Marriage: love, support, effort in running a household -> ideal partner ○Grades: good performance on assignments, quizzes, papers, exams -> A

Precepts

Policy rules that conclude that a particular course of action is preferable

Theorems

Propositions that are logically true based on the assumption in a model

Dismal Science

Scientific method of theory and observation with natural experiments, with the application of assumptions.

Government Failure

Situations in which the government intervenes and makes things worse

Extra Credit: _______ is the best know publication by John Maynard Keynes.

The General Theory of Employment, Interest, and Money

Market Power

The ability of a single economic actor (or group of actors) to have substantial influence on market prices

Art of Economics

The application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics; political economy

opportunity cost

The benefit of the forgone of the next-best alternative

structure and purpose of welfare states (week 4)

Welfare State= the collection of government programs designed to alleviate economic hardship Purpose: 1. Social Safety Net= the cash assistance, goods, and services provided by the government to better the lives of those at the bottom of the income distribution 2. Alleviating income inequality 3. Poverty Programs= government programs designed to aid the poor 4. Alleviating economic insecurity ○Social Insurance Programs = government programs designed to provide protection against unpredictable financial distress 5. Reducing poverty and providing access to health care ○Promotes the social benefits of poverty reduction and access to health care