Test 1 Lecture Notes.docx - Class Notes Chapter 2 A...

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Class Notes: Chapter 2: A. Microeconomics: study of individual units that make up the economy a. Micro choices: times, groceries B. Macroeconomics: study of overall economy a. Macro choices: healthcare, education C. Trade = voluntary exchange a. Trade helps both sides b. Trade creates value c. Trade is a positive-sum game d. Differences are helpful D. Scarcity → Choices → Tradeoffs a. Thomas Sowell: A Conflict of Visions i. Unconstrained vs constrained ii. Unconstrained vision: we have the resources necessary to satisfy everyone iii. Constrained vision: we have limited resources and unlimited desires b. Scarcity: society’s resources are limited, fall short of wants/desires c. Resources: 1. Land: natural resources 2. Labor: workers and their skills 3. Capital: tools E. Opportunity cost: highest valued foregone alternative F. Trade Creates value (PPF) Ch. 3, Incentives Affect Behavior, GDP - 3% Three fundamental Questions: 1. What will be produced? 2. How will it be produced? 3. For whom will it be produced? A. Markets: individuals choose ←-------------------------------------→ socialism: central planning B. Demand: the buying/consuming side of the market a. Factors that influence D: 1. (-) Price: a. Law of demand: all else equal, Qd falls when price rises & vv b. Movement ALONG 2. (+) Consumer income (normal vs inferior) 3. (+) Price Expectations (when expect higher p in future, buy more now) 4. (+/-) Tastes and Preferences 5. (-) Taxes C. Supply a. Factors that influence S:
1. (+) Price: a. Law of supply: all else equal, Qs rises when price rises, & vv b. Movement ALONG 2. (-) Cost of inputs/resources 3. (+) Technology 4. (-) Price Expectations 5. (-) Taxes D. Market Equilibrium: when plans of buyers match plans of sellers, Qs = Qd a. If P > P* Qs > Qd = surplus b. If P < P* Qs < Qd = shortage E. Why do gas prices usually rise mid-year: increase in tastes/prefs as weather warms up F. What happens to the price of gasoline when crude oil prices fall? Input cost down, so supply shifts out so P down and Q up II. The Market System A. Markets: bring buyers and sellers together for exchange B. Market system: an economy based on voluntary exchange via markets for individuals goods and services C. PRICES ARE SIGNALS a. Earthquake reduces supply of key resources: supply shifts back, people use less b. New use for a commodity: firms up commodity output D. Adam Smith (1776): The Wealth of Nations a. Real GDP up 1.9% after fourth quarter of 2016, avg: 3% Ch. 6 GDP III. GDP Intro A. National Income Accounting B. GDP: gross domestic product: the market value of final goods and services produced in a country in a year a. Market value: used to add different goods, look at price, mkt value = Q*P b.

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