Notesale: Turn your study into money

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Wednesday, May 20, 2015

Macroeconomics Midterm Prep
Ch
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A part of costs that you
didn't think of
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- Incentives:

Successful innovations that generate economic rewards

People react to incentives
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Facts that can be proven true or
false, but still facts
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Always opinions
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Economic Systems

- Economic System:
a particular set of institutional arrangements and a coordinating mechanism that
responds to the economizing problem

- Economic System Differ as To:
- who owns the factors of production
- the method used to motivate, coordinate, and direct economic activity
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- Two polar extremes:
- the command system
- the market system

The Command System

Government owns most property resources and economic decision making occurs
through a central economic plan

also known as socialism/communism

The Market System

Private ownership of resources and the use of markets and prices to coordinate and
direct economic activity

capitalism

Markets:
places where buyers and sellers come together to buy/sell goods, services,
resources
two people: demander - buyers of goods/services, and suppliers - sellers of
goods/services

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Characteristics of the Market System

- Private Property
- Freedom of enterprise and choice
- Self-interest
- Competition
- Markets and Prices
- Capital and Technology Increases
- Specialization
- Use of Money
- Active but Limited Government

Private Property

Property resources owned by private individuals and firms
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- the right of private property is a part of capitalism
- based on mutually agreeable economic transactions:
- based on legally enforceable property rights
- to gain what someone else has, you must offer something of more value
to them

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Freedom of Enterprise and Choice

Freedom of Enterprise:
ensures that entrepreneurs and private businesses are free to obtain and
use economic resources to produce their choice of goods/services, and
to sell them in their chosen markets

- I can sell anything I want and produce it how I want
- voluntary exchanges

Freedom of Choice:

enables owners to employ/dispose of their property and money as they
see fit
...
Ensures that consumers are free to buy goods/services that
best satisfy their wants and that their budget allows

- I can buy anything I want

Self-Interest

is the motivating force of the various economic units as they express their free
choices

- focuses the economy to societies economic wants and needs
- consumers search for what they want at the highest quality and the
lowest price

- producers try to maximize profits by producing what society wants in
amounts best for society, as prices society is willing to pay, while using
fewest resources
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Comepetition

the basis of competition is freedom of choice exercised in a pursuit of a
monetary return

- many buyers, many sellers
- competition requires:
- two or more buyers and two or more sellers acting independently in
a particular product or resource market

- freedom of sellers and buyers to enter or leave markets, on the
basis of their economic self-interest

- Competition is the basic regulatory force in the market system
Markets and Prices

A market is an institution or mechanism that brings buyers (demanders) and
sellers (suppliers) into contact
Involves demand, supply, price, and quantity

Demand:
a curve that shows the various amounts of a product that consumers are
willing and able to purchase at each of a series of possible prices during
a specified period of time

a statement of buyers plans with respect to the purchase of a product

Technology and Capital Goods

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- to avoid inefficiency a market relies on capital goods

Specialization

using resources of an individual firm, region, or nation to produce one, or a few,
good(s)/service(s) rather than the entire range of goods/services

Use of Money

Money is a medium of exchange that makes trade easier

- barter: swapping of goods for goods
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The first three questions are short term issues (daily, monthly)
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Questions are four and five are dynamic questions involving incentives and creative
destruction
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It “frees up” to produce something else that society
desires
self-interest induces responses appropriate to the changes in society’s wants
competition controls or guides self-interest such that self-interest automatically
and quite unintentionally furthers the best interest of society
the invisible hand ensures that when firms maximize their profits and resource
suppliers maximize their incomes, these groups also help maximize society’s
output and income
Efficiency:
the market system promotes the efficient use of resources by
guiding them into the production of the goods and services most
wanted by society
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Greater work skill and effort = greater production and
higher income = higher standard of living ——- successful
innovation = economic rewards
Freedom:
the major noneconomic argument for the market system is its
emphasis on personal freedom
the market system permits freedom of enterprise and choice
entrepreneurs and worker are free to further their own selfinterest, subject to the rewards and penalties imposed by the
market itself

The Demise of the Command Economy
Two Insurmountable Problems:

- The coordination problem: central planners have to coordinate million of
individual decisions by consumers, suppliers, and producers

- The incentive problem: central planners determine the output mix
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ability

Businesses

- the decision makers
- commercial establishments that attempt to earn profits for their owners by
offering goods/services for sale

- 3 main categories:
- A sole proprietorship: business owned/managed by a single person
- the owner may work alone or have employees
- Partnership: a natural outgrowth of sole proprietorship
- two or more individuals agree to own and operate business together
- Corporation: independent legal entity that can, on its own behalf,
acquire resources, own assets, produce/sell products, injure debts, etc
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Demand, Supply, Price, and Quantity

D INCREASES = PRICE INCREASES, QUANTITY INCREASES
D DECREASES = PRICE DECREASES, QUANTITY DECREASES

S INCREASES = PRICE DECREASES, QUANTITY INCREASES
S DECREASES = PRICE INCREASES, QUANTITY DECREASES

QUANTITY IS ALWAYS THE SAME CHANGE AS DEMAND AND SUPPLY
DEMAND AND Q AND P CHANGES CORRESPOND
SUPPLY AND PRICE CHANGES ARE OPPOSITE

Changes in demand:

- an increase in demand raises: equilibrium price, and equilibrium quantity
- an decrease in demand decreases: equilibrium price, and equilibrium quantity
Changes in supply:

- an increase in supply: reduces equilibrium price, increases equilibrium quantity
- an decrease in supply: increases equilibrium price, reduces equilibrium quantity
Price Ceiling
sets the max legal price a seller may charge

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Price Floor
a min
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When prices are set above equilibrium there is a surplus in production which
takes resources that could have been utilized for other wanted goods, and
when a price ceiling is below equilibrium the market will experience a
shortage of resources and goods
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Benefits emerge relating to three underlying facts

- 1) the distribution of natural, human, and capital resources among nations is uneven;
nations differ in their endowments of economic resources

- 2) efficient production of various goods requires different technologies and not all
nations have the same level of technological expertise

- 3) products are differentiated as to quality and other attributes, and some people may
prefer certain goods imported from abroad rather than similar goods produced
domestically

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Comparative Advantage
if a country can produce a certain good at a lower opportunity cost than another
country

Absolute Advantage
if a country is the most efficient producer of a certain product

Principle of Comparative Advantage
total output will be greatest when each good is produced by the nation that has
the lowest domestic opportunity

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