Chapter 1,2,3,8,9
Principles Of Macroeconomics (Northeastern University)
Chapter 1,2,3,8,9
Principles Of Macroeconomics (Northeastern University)
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Exam 1 – Cheat sheet (chapter 1,2,3,8,9)
Chapter 1
Scarcity: Situations in which resources are
limited to satisfy unlimited wants
Tradeoff: Refers to the decision to do one thing
is also the decision to not do something else
Economic system (2 extremes)
i.e. how command economy will answer the 4
above questions
– Command economy (central economy)
– Government answers
questions/decide
– Market economy
– Individuals and firms decide
Opportunity cost: The value of the next
best alternatives/ the value of what is given
up when decision is made
Being rational (in sentence)
Using all available informations to
make decision
Doing best one can (optimize)
Being efficient to maximize utilities
People response to economic incentives
Fundamental questions (4)
1. →hat goods/ services will be produced?
2. How will they be produced?
3. →ho will receive the good/ service?
4. Now vs Future? Should society fuels the
current generation or the future generation
(Invest or consume more?)
Types of efficiency (2)
– Productive: least costly
production techniques are used to
produce wanted goods and
services
– Allocative: resources are used for
producing the combination of
goods and services most wanted
by society.
Marginal analysis
Margin = the effect of a small change in
a variables on another variables
Change of A (activity)
Change of T B(total benefit)
Marginal cost from activity = additional
cost from an addition unit of activity
Change of A (activity)
Change of T C (total cost)
MODELS
Characteristic of models
1. Model uses variables things that are
measurable
2. Make assumptions and simplifications
3. Testable
2 Types of variables
1. Endogenous variables: variables
that are measured within the model
[i.e. supply and demand model]
2. Exogenous variables: variables
that are measured outside the
model [i.e. input prices, income
and taste + preference in supply
and demand model]
Limitations of models
– Each model is particularly designed to
answer one question
Formula: Growth rate
1. Approximation
XX
in XX
2. Exact
– 1
XX
in XX
Positive analysis vs Normative analysis
1. Positive analysis: the study of
“what is?”; and/or – statements that
can be tested with data
2. Normative analysis: the study of
“what ought to be?” – based on
value judgements, and cannot be
tested with data
Chapter 2
Tradeoff : producing more of one good requires
producing less of another
PPF : curve showing max possible combinations of
2 goods that society can produce given its limited
resources and technology, at a given point in time
– Shows society’s constraints in
terms of production due to
scarcity
Characteristics of PPF
1. Tradeoff
2. Scarcity
3. Opportunity cost (may be question
that required to calculate
opportunity cost)
Assumption behind the PPF:
– Using all resources
– Society producing 2 goods
– Producing efficiently
– Fixed resources (scarcity)
PPF shape
– PPF bowed out: OC increasing
– PPF straight: OC constant
– PPF bowed inwards: OC decreasing
(non-existent)
Opportunity cost of A and B – Moving
along the curve
– Opportunity cost of x (axis) is __
of y (axis) – and vice versa
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Demand pull inflation (definition)
Consider point H
-> unattainable using current resources and
technology
– If society attempts to get to point H, it will start
an inflationary process -> Demand inflation =
inflation caused society’s attempt to consume
more goods and services than it is capable of
producing
– Demand pull inflation example: when
government prints more money but limited goods
and services -> unit price will be increased
Economic growth
I.e. what is the key to economic growth? –
investment
Definition: Persistent increase in a nation’s capacity
to produce goods and services
1. Process by which increases in
productivity leads in increases in living
standard
2. In terms of the PPF, economic growth
mean expanding the PPF over time
(enlargement by sizes/ area under curve)
Sources of economic growth
1. Productivity
2. Investment
Economic growths occur over time, it
requires:
4. Increases in quantity of resources
5. Increases in the quality of those
resources
6. Development and implement of
better technologies
Physical and human capital are key
Limitation of PPF
– It does not answer all the questions
Efficiency (on the PPF)
– “Maximum” = efficiency
1. Calculate opportunity cost of each
person/ country // calculate how much 1
Maximisation of production
Amount per person x total labour force
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– Society is using all resources, but not in
(underemployment)
Trade: Specialisation, interdependence,
Show how the country/ persons move
– Protect property right [the book focuses
on this]
– →hen promoting equity
