ECON 201 - Intro to Macroeconomics Tuesday 8:30 AM*Aggregate supply is not the sum of all market supply curves*Savings has a different effect depending

Intro to Macroeconomics Tuesday, April 02, 2013 8:30 AM *Aggregate supply is not the sum of all market supply curves *Savings has a different effect, depending on if its short-run or long run *Adding more money to the economy can help in the short run but can be harmful in the long run *The total effect of all behaviors of all people can compound and interact in possibly unexpected ways Principles of Economics: -Economics: choice among limited options -Micro = individual choice -Macro = social choices (aggregate choices) -There are scarce resources: land, labor, time, physical capital, human capital (inputs). There aren't enough inputs for every possible thing we might want *Can't produce every good we want (trade-offs) -Opportunity cost: choosing more of something for less of something (costs mean everything is a trade- off) -Trade-offs are marginal (the decision is about how you can affect things now) Four Principles- 1. There are scarce resources 2. Everything has an opportunity cost 3. Costs mean everything is a trade-off 4. People choose wisely (people are maximizers, get the best outcome they can, respond to incentives around them) Principles of Interaction: -There are gains from trade (if I have what you want, we can both be better off) -If we specialized, we can produce more -Markets move towards equilibrium: markets settle down around stable outcomes (these are the outcomes where everyone is happy with their choice-at least don't see a way to do better) -Resources should be used efficiently (meaning no wasted opportunities and nothing to do with fairness) -Competitive markets usually are efficient -When markets aren't efficient, governments can help with things like roads, education, health care etc. Principles of Economy-Wide Interactions: -One person's spending is another person's income -Spending isn't always equal to productive capacity (sometimes resources sit idle: recession) -Government can affect spending (direct spending, tax cuts/incentives) Models in Economics: -A simplified version of reality: tells how the economy works in a simplified world -Need a story of how the economy works so that we can see how/what the government can do to help the economy

-Models ignore many important things to focus on some things (can't model on the whole economy, have to ignore some things) -Helps clarify our thinking -Relies on a ceteris paribus assumption (all else equal): assumes that everything not in the model stays unchanged -What can you add to model to improve it Circular-Flow Diagram: -Simple picture of the macroeconomy -Households trade with firms in the factor market (sell their labor in exchange for money) -Consumers trade with firms in the goods market (sell their money in exchange for goods) -Ultimately factor markets determine the economy's income distribution -Can use the model to take a snapshot of the economy (use it to see growth in the economy) -A very simple model of transactions: spells out who trades with who and for what -Households sell in one market and buy in another and firms do the same