Macroeconomics Unit 1 Basic Economics Concepts

Macroeconomics Unit 1: Basic Economics Concepts Key Terms- Define the following: 3 Economic Systems 1. Scarcity 1. Centrally Planned Economies Individuals, businesses, and governments have Economic system where the government owns the unlimited wants but limited resources. resources and decides what to make, how to make 2. Consumer Goods vs. Capital Goods it, and who gets it. Total government control of the Consumer goods- (ex: pizza) goods made for direct economy consumption 2. Free-Market Economies (Capitalism) Capital goods- (ex: restaurant oven) goods made for Economic system where individual citizens own indirect consumption. Goods that make consumer goods the resources and decides what to make, how to 3.Trade-offs make it, and who gets it. Little or no government ALL possible options given up when you make a choice involvement in the economy 4. Opportunity Cost 3. Mixed Economies The ONE best option given up when you make a choice Almost all economies are a mixture of the above including the money, time, and forgone opportunities. systems. Production Possibilities Curve (Frontier) Use the chart to create a PPC to the right. Shoes Calculate the 30 Opportunity Cost: A B C D E A→B: 1 Shoe 25 Z= Impossible Hats 0 1 2 3 4 B→C: 4 Shoes Shoes 30 29 25 15 0 E→D: 1 Hat 20 C→A: 2 Hats Label the following three points on the 15 graph: X= Unemployment/Inefficiency 10 X= Inefficient Y= Efficient Y= Efficient (on the curve) Z= Impossible given current resource 5 0 Constant Opportunity Cost Why does this occur? Resources are easily adaptable between both products. Draw the graph below Bicycles 6 2 A 4 B As more tricycles are made, resources that are easily adaptable to producing either good are moved away from bicycles and towards tricycles. Opportunity cost for each tricycle is constant at 2 bicycles. 1 2 3 4 Hats Increasing Opportunity Cost Why does this occur? Resources are not easily adaptable between both products Draw the graph below Bikes A 20 3 5 B 17 12 2 C C 2 12 2 At combination A, all resources are put towards making bikes, including resources that are better for making iPhones. The opportunity cost of the first iPhone is small (3 bikes) as resources, like electrical engineers, are moved away from making bikes. As more iPhones are produced, the opportunity cost gets larger. D 1 2 3 Tricycles D 1 2 3 iPhones Shifting the PPC Key Terms Define InvestmentIdentify the three shifters of the PPC Investment is business spending on capital (tools and 1. Change in resource quantity or quality machinery) that makes businesses more productive 2. Change in Technology Define Capital Stock3. Change in Trade (DoesnÕt change the amount Capital stock is the amount of capital businesses have. they can produce, but it does change the amount The more capital stock, the more output they can make they can consume) Production Possibilities Practice (draw 3 PPCs with pizza and cars) Scenario: Workers loose their jobs Scenario: Increase in consumer Scenario: More resources that due to a recession demand for pizza improve the production of cars Pizza Pizza Pizza The curve The curve doesnÕt shift. It is doesnÕt shift. Only car B just a point Only the production is inside the curve combination improved A changes Cars Cars Absolute and Comparative Advantage Output Questions Input Questions The table shows the amount of sugar and cars each country can make with the same number of resources Cars The table shows the number of hours it takes to produce a ton of sausage and a ton of computers Sugar (tons) Cars Sausage Computers 40 10 2 6 Canada (1S costs ¼ Car) (1C costs 4 Sugar) (1S costs 1/3 comp) (1C costs 3 sausg) 100 10 10 Mexico 50 UK (1S costs 2 Cars) (1C costs ½ Sugar) (1S costs 1 comp) (1C costs 1 sausg) 1. Which country has an absolute advantage in sugar? 1. Which country has an absolute advantage in How about cars? Mexico/Mexico sausage? How about computers? Canada/Canada 2. What is CubaÕs opportunity cost for producing one 2. What is CanadaÕs opportunity cost for producing one car? 4 sugar computer? 3 sausage 3. Which country has a comparative advantage in 3. Which country has a comparative advantage in cars? How about sugar? Mexico/Cuba computers? How about sausage? UK/Canada 4. For both countries to benefit from trade, how much 4. For both countries to benefit from trade, how many sugar can be traded for each car? 1 Car for sausages can be traded for each computer? 1 comp ___1___ Sugar (any number between 4 and ½) for ___2___ sausage (any number between 3 and 1) Circular Flow Matrix (Model) Product Market- Places where individuals buy goods Draw the Circular Flow Matrix and services from businesses Factor (Resource) Market- Places where businesses buy the factors (land, labor, capital) from individuals Factor Payments- Payments made by businesses. Rent for land, wages for labor, interest for capital Transfer Payments- Payments made by the government to meet a specific goal rather than pay for goods and services (ex: welfare) Cuba Supply Demand The Law of Demand: Inverse relationship between price and quantity demanded The Law of Supply: Direct relationship between price and quantity supplied P↑ Qd __↓_ P↓ Qd __↑_ P↑ Qs _↑__ P↓ Qs _↓__ What is the different between a change in quantity demanded and a change in demand? A change in quantity demanded is movement along the curve due to a change in price. A change in demand is when the entire demand curve shifts left or right due to a change in one of the shifters Changes in Demand and Supply (Shifting the Curve) What changes demand? (5 Shifters of Demand) What changes supply? (5 Shifters of Supply) 1. Tastes and preferences 1. Prices/availability of inputs (resources) 2. Number of consumers 2. Number of producers 3. Price of related goods- Substitutes and complements 3. Technology 4. Government action: taxes & subsidies 4. Income 5. Future expectations 5. Expectations of future profit Substitutes: Complements: Price of A↑ Demand for B __↑_ Price of A↓ Demand for B __↓_ Price of A↑ Demand for B __↓_ Price of A↓ Demand for B __↑_ Normal Goods: Inferior Goods: Equilibrium and Disequilibrium Draw a shortage Draw a surplus S S P2 Pe Pe P1 D D Qs Qe Qd Qd Qe Qs Supply and Demand Practice Demand Decrease Demand Increase Price _↓_ Quantity _↓_ Income ↑ Demand ___↑_ Income ↓ Demand ___↓_ Income ↑ Demand ___↓_ Income ↓ Demand ___↑_ Government Involvement Price Ceiling- Legal cap on prices designed to keep prices artificially low When binding, ceilings go _below__ equilibrium and result in a shortage. Price Floor- Minimum legal price sellers can sell a product When binding, floors go __above_ equilibrium and result in a surplus. Subsidy- Government payment to producers designed to encourage them to produce more Double Shift Practice Price _↑_ Quantity _↑_ If demand increases AND supply increases then price _indeterminate_ and quantity __increases__ Price S A Supply Decrease S1 B Supply Increase Price _↑_ Quantity _↓_ Price _↓_ Quantity _↑_ D D1 Quantity Double Shift Rule: If TWO curves shift at the same time, EITHER price or quantity will be indeterminate.