Positive Economics

• (positive economics)- U.S. GDP approx $14 trillion, unemployment =9.5%, little or no disagreement, Test Question: Ernie the economist told me that “the Unemployment rate is currently 9.7%. Ernie is making a an (Positive) economic statement

Sunk Costs

• “I paid for it”, time and money, shouldn’t factor into future decisions. You go to a movie and you don’t like it but you stay because that money is gone

Normative Economics

• (Normative economics)- “health care plan will…”, we should or should not

·         the value or satisfaction that people derive from the goods and services they consume and the activities they pursue

Nominal variables

Real variables

• (Real variables)- inflation adjusted, Test Question: If I want to know about the purchasing power of my income relative to ten years ago I should study how my real wage has changed as opposed to studying what my nominal wage has change (True)  

Markets

Opportunity Cost

• what you give up to do something buy something or make something

·         is the condition of having to choose among alternatives, 1. What should be produces, 2. How should goods and services be produced, 3. For whom should goods and services be produced

Ceteris Paribus

·         All other things equal (an increase in the price of peanut butter will decrease the demand for jelly

• Test Question: Ceteris Paribus means that we should (Hold all relevant factors constant when looking at how one economic variable affects another)

• (equity)-distribution who ends up with it

What does it mean to think at the margin?

(All you can eat buffet?)

• is a decision to do a little more or a little less of something
• This does not figure into future decisions, $8 Buffet is a sunk cost, cost of benefits marginal cost vs. benefits           
  

Understand the “fallacy of false cause”

• the incorrect assumption that one event causes another because the two events tend to occur together
• Test Question: The incorrect presumption that because two events tend to occur together, one must cause the other is that (fallacy of false cause)

types of jobs economists may perform

government agencies, business firms, colleagues and universities

What is the current unemployment rate in the U.S.? 

Is that high or low relative to the last twenty years?

• Overall (9.8% from October 2010)

• That is high

Productive Efficiency

• (productive)-shows the combination of output a society can effectively produce given the factors of production

Allocative Efficiency

• (allocative)-all the points are on the line
• Test Question: Any point on the PPF represents an output combination that achieves allocative efficiency but not necessarily productive efficiency (False)

• (Only one point achieves Allocative efficiency, many points may achieve productive efficiency)

  PPF and Opportunity Cost (As slope of PPF and in general)

Why does the PPF shift?

  When does it NOT shift?

• is shifts because of a natural disaster or something else that is economy changing, Test Question: If you are in charge of Econland and you want to create the best situation for the economy to grow in the long term what situations would you like to see occur, You must choose the best option, think about the importance of the PPF (Have a new discovery of fertile land in Econland)
• it doesn’t shift because there were no disasters

Understanding what the factors of production are and why they are important

• they are land, labor, capital and entrepreneurial ability

What are externalities?   

• Effects that happen outside of the market pollution

Goals of Macroeconomics (Efficiency, Equity, Stability and Growth)

• (Efficiency)-that we produce on the frontier
• (Equity)-fairness
• (Stability)-price levels that are predictable, market economies do well with it, no inflation
• (Growth)-free markets do better than command because we save more
  • Test Question: Economic evidence suggests that over the (Free market) economies tend to experience the most economic growth and that (Free market) economies tend to have greater economic stability (well defined property rights, stable currencies etc.)
  • Test Question: Which of the following will not lead to economic growth? (restrictions on international trade)

Types of Economic Systems:

• (Market)- United States is not a pure economy, what should you produce: interaction of supply and demand: how to produce: low cost most efficient, how to divide well: people keep what they earn
• Command Economy (centrally planned or socialist)- what to produce: what the economy wants to, how to produce: full employment, how to divide well: equally, everyone gets something,
• Test Question: In a command economy the question of “what to produce” is answered by (a central planner) and in a market economy it is answered by (the interaction of supply and demand)

Laissez Faire

• French for “hands off” or “to leave alone” This term is often used to describe a free market attitude about government. While most economics believe that the government should enforce property rights and provide a national defense the idea behind a free market belief in economics is that government intervention in markets should be as limited as possible.

• It is in between the market economy and command economy

Three Fundamental Questions of Macroeconomics

• what to produce, how to produce and how to divide well?

Who was Adam Smith?

What did he contribute to the history of economic thought?

• how people’s selfishness can work in society’s best interests when he talked about the invisible hand in the Wealth of Nations (1776)
• When people wish to buy a good it’s price goes up; that encourages firms to produce a good

Comparative Advantage

• (Comparative Advantage)- we should specialize in producing the good we producing the good we produce at the lower opportunity cost. Test Question: Given the information in the graph which nation has the comparative advantage in producing automobiles? Which nation has the comparative advantage in producing wheat? (South Korea, United States)

Absolute Advantage

• (Absolute Advantage)- the ability to produce a good more efficiently at a lower cost. Test Question: Given the information is the graph which nation has the Absolute advantage in producing automobiles? Which nation has the Absolute advantage in producing wheat (United States, United States)

 What are the potential gains from trade? 

Does anyone lose because of trade?

The people can work together

• They might if the person doesn’t want to trade

Supply and Demand

• makes up markets, determines prices and amounts of goods that are sold

Law of Demand

• shows that as the price of a good falls the (quantity demanded) of the amount of that good consumers are willing and able to buy and increase
• Test Question: When the price of a good falls the demand for that good will be expected to increase all other things equal (True)
• Test Question: If the demand for housing increase and the supply of housing decreases (price will increase, but the quantity change is indeterminate)

Law of Supply

• taste and preferences, price substitutes, complements, income (increase in demand function), expected future price by consumers and population

Supply Determinants

• Input costs decrease, supply increases, improved technology supply increases, number of producers, opportunity cost of producing the good falls supply increases

Shifts in Supply/Demand, What happens to price and quantity?

• supply- change is the supply curve a change increases the quantity of a good or service supplied at each price shifts the supply curve to the right, decrease in supply (input price increase, lost technology and fewer producers), supply decreases price increases and quantity decreases, supply increases price decreases and quantity increases. Test Question: As a result of consumers expecting the price of computers to fall next month we expect the price today of computers to (Decrease) and the amount sold today to (decrease)
• Demand- a movement along the demand curve that results from a change in price increase in demand is caused by increase price of a substitute, increase in income, decrease of a price complement, Demand increases price increase and quantity increase, demand decreases price decreases and quantity decreases Test Question: As a result of the government taxing the production of a good we except the price of that good to (Increase) and the amount sold to (decrease)

Price Ceilings

• Price Ceilings- maximum legally allowed price by the government this can create a shortage. An example “free highways”, donated organs, rent controlled apartments 
• Test Question: A price ceiling enforced by the government would create a shortage in a market when the ceiling is placed below the equilibrium price (True)
• Test Question: A binding price ceiling in the market for K-State basketball tickets will create a situation where are many more tickets for sale than people wish to purchase (False)

• (price floor- minimum legally allowed price by the government this can create a situation where there is a surplus, if the floor is set to high. An example is minimum wage

Understand the issues we study in macroeconomics

• Macroeconomics- the study of national and international economic issues. We study supply and demand of money, influences interest rates, monetary policy (U.S. Central Bank FED), GDP or GNP size of the U.S. Economy Test Question: Which of the following is not a topic of study in macroeconomics (The market for apples and why the price of apples has gone up or down)

What makes up the supply and demand in markets for goods and services, what about the factors of production

• Markets for good and services, consumers-demand, firms-supply, factors of production (land, labor, capital) consumers-supply and firm-demand

What is GDP (including size of GDP)?

• Gross domestic product represents all new, final, legally produced output produced in the USA in a calendar year 14.6 trillion

What is GNP?

• GNP goods and services and GDP doesn’t mention goods and services

Expenditure approach to GDP/Importance of each component

• Consumption (71%) plus Investment (11%) plus Government (21%) plus Net Exports (negative 3 %) equals Y (GDP Output Income)

• Consumption
  • 71%, spending on durable goods lasts more than 3 year (car, furniture, TV), no durable goods everyday purchases (food, gas, several purchases), it’s the biggest part and rapidly growing services

• Investment
  • 11% spending by firm on capital goods (plant and equipment, machinery used to produce the output, consumer spending on homes)

• Government
  • 21% spending both federal and state local which is larger and rapidly growing, spending on good and services, not transfer payment

What makes up net exports?

• Net Exports
  • -3% value of all exports minus the value of all imports

Durable vs. non-durable goods.

• durable goods (lasts more than 3 years, car, furniture and TV’s) non-durable goods (everyday purchases, food, gas and several purchases)

What is not included in GDP?