Introduction to Macroeconomics: Econ Exam Modules, Summaries of Macroeconomics

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G. Mankiw,

Introduction to

macroeconomics

Econ Exam Modules Economic thinking:

• Scarcity o Means that there are never enough resources to satisfy all human wants
• Opportunity cost o Is the what we give up when we choose one thing over another
• Everyone has unlimited wants o What we want and will never have enough of
• Everyone has limited resources
• Economics is about how people choose to use their scarce resources to satisfy their unlimited wants
• Scarcity exists when human wants goods and services exceed the available supply
• At any moment in time, there is a finite amount of resources available o Even when the number of resources is very large it is still limited
• Economics
• Economics is the study of how humans makes choices under conditions of scarcity, these decisions can be made by individuals, families, businesses, or societies
• The Problem of Scarcity o Every society, at every level, must make choices about how to use its resources. Families must decide whether to spend their money on a new car or a fancy vacation o Economics helps us understand the decisions that individuals, families, businesses, or societies make, given the fact that there are never enough resources to address all needs and desires
• Key Points from the Video o There are four productive resources (factors of production) ▪ Land: any natural resource, including actual land, but also trees, plants, livestock, wind, sun, water, etc. ▪ Economic Capital: anything that’s manufactured to be used in the production of goods and services. Note the distinction between financial capital (which is not productive) and economic capital (which is). While money isn’t directly productive, the tools and machinery that it buys can be ▪ Labor: any human service-physical or intellectual. Also, referred to as human capital ▪ Entrepreneurship: the ability of someone (an entrepreneur) to recognize a profit opportunity, organize the other factors of production, and accept risk.
• The Idea of Opportunity Cost o Economists use the term opportunity cost to indicate what must be given up to obtain something that’s desired. A fundamental principle of economics is that every choice has an opportunity cost

• Budget =P 1 ×Q 1 +P 2 ×Q 2 +⋯+Pn×Q o Where P and Q are the price and respective quantity of any number, n, of items purchased and budget is the amount of income one must spend
• Apply the budget constraint equation to the scenario
• Use the equation
• Graph the results Supply and Demand
• Law of demand states that other things being equal o More of a good will be bought the lower its price o Less of a good will be bought the higher its price o Ceteris Paribus means “other things being equal”
• Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price
• Demand is based on needs and wants o A consumer may be able to differentiate between a need and a want, but from an economist’s perspective, they are the same thing
• Demand is also based on ability to pay, if you can’t pay for it you have no effective demand
• What a buyer pays for a unit of the specific good or service is called the price
• The total number of units purchased at the price is called the quantity demanded
• A rise in the price of a good or service almost always decreases the quantity of that good or service demanded
• Economists call this inverse relationship between price and quantity demanded the law of demand o The law of demand assumes that all other variables that affect demand are held constant
• A table that shows the quantity demanded at each price is called a demand schedule
• Supply means the amount of some good or service a producer is willing to supply at each price o Price is what the producer receives for selling one unit of a good or service o A rise in price almost always leads to an increase in the quantity supplied of that good or service, while an all-in price will decrease the quantity supplied
• Economists call this positive relationship between price and quantity supplied, that a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied, the law of supply
• The law of supply, like the law of demand, assumes that all other variables that affect supply (to be explained in the next reading) are held equal
• Supply is not the same as quantity supplied
• Quantity supplied, means only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers to the (specific) point on the curve

• A supply schedule is a table that shows the quantity supplied at a range of different prices
• A supply curve is a graphic illustration of the relationship between price, shown on the vertical axis and quantity shown on the horizontal axis.
• A shift in supply means a change in the quantity supplied at every price
• Goods and services are produced using combinations of labor, materials, and machinery, or what we call inputs.
• When a firm’s profits increase, it’s more motivated to produce output, since the more it produces the more profit it will earn
• So, when costs of production fall, a firm will tend to supply a larger quantity at any given price for its output. This can be shown by the supply curve shifting to the right
• A government subsidy, on the other hand, is the opposite of a tax o Occurs when the government pays a firm directly or reduces the firm’s taxes if the firm carries out certain actions Government Action
• Laws that government enacts to regulate prices are called Price Controls o Price controls come in two ▪ Price ceiling: keeps a price from rising above a certain level ▪ Price flooring: keeps a price from falling below a certain level
• Price Flooring o Is the lowest legal price that can be paid in markets for goods and services, labor, or financial capital, the best-known example is the minimum wage, which is based on the normative view that someone working full-time ought to be able to afford a basic standard of living o Price floors are sometimes called “price supports”
• Alfred Marshall wrote that asking whether supply or demand determined a price was like arguing: whether it is the upper or the under blade of pair of scissors that cuts a piece of paper.” o The answer is that both blades of the demand and supply scissors are always involved o The adjustments of equilibrium price and quantity in a market-oriented economy often occur without government direction or oversight
• If government services are to be provided, people must pay for them o The primary source of government revenue is taxes o As income rises, the doctrine asserts, people can pay more for public services; a tax system should therefore be constructed so that taxes rise too o Regressive tax is one that takes a higher percentage of income as income falls o Proportional tax is one that takes a fixed percentage of income, total taxes rise as income rises, but taxes are equal to the same percentage no matter what the level of income

Elasticity:

Elasticitymeasuresthebehavioralresponseofeconomicagentsinagivensituation.It

isalsoaneconomicsconceptthatmeasurestheresponsivenessofonevariableto

changesinanothervariable.Italsowillchangeinresponsetoanothervariablelikethe

priceoftheproduct.Demandisinelasticwhen

consumesareinsensitivetochangesinprice.Ifsubstitutesareeasytofindwhenthe

priceofaproductincreases,thedemandwillbemoreelastic.Iftherearefeworno

alternatives,demandwillbelesselastic.Anecessityissomethingthatyouabsolutely

needtohaveandaluxuryarethebonusthingsthatarenicetohave.Priceelasticityof

demandisusuallylowerintheshortrun,andhigherinthelongrun.Competitive

marketshaveelasticdemand.

Surplus:

Efficiencyinthedemandandsupplymodelhasthesamebasicmeaningwhichisthat

theeconomyisgettingasmuchbenefitfromitsscarceresources.ConsumerSurplusis

theareaabovethemarketpriceandbelowthedemandcurve.Producersurplusshows

theequilibriumpricereceivedinthemarketwasmorethanwhatmanyofthe

producerswerewillingtoacceptfortheirproducts.