Basic Macro Economic Concepts

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Basic Macro Economic Concepts

• By
• Jarred Gidley
• Joe Dempsey
• 2009

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Bonus Question 5
Circular Flow
Market Equilibrium
State of Economy
Comparative/Absolute Adv.
Supply/ Demand
PPF
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3
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Draw a Production Possibilities Frontier Curve
without any points

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PPF Curve
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How is this possible?

• B

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It is not possible, unless there is a long run
shift in the economies output. The point
represents a place beyond possible production
levels at current long run equilibrium.
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How is point A possible?

• B

• A

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The point is a level of inefficiency. The
country is not at productive efficiency. Some
resources are not being used.
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Name all ways this is possible.
Capital Goods
PPF1
PPF2
Consumer Goods
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Increase in TechnologyChange in Quantity or
Quality of Resources-Change in Infrastructure
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What does the government collect?
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Taxes
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What are the two types of markets at work?
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• Factor Market
• Goods Market

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What does the circular flow diagram demonstrate?
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• The linkage between businesses and households
  through the goods and factor markets as well as
  through the government.

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Draw and label the circular flow diagram.
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Supply and Demand

• Define
• Law of Demand

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Law of Demand

• The quantity demanded rises as price falls, but
  only for normal goods, all else being constant

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Demand

• What can cause a shift in the Demand Curve???

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Demand Shifts
Demand Shifts

• Demand Shifts can be caused by many things
  including
• 1. Price of Good
• 2. Change in Income
• 3. Change in price of complement/substitute
• 4. Change in taste/desires
• 5. Expected income/ PL

Price Level
Supply
D2
D3
Demand
Quantity
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Supply

• Define
• The Law of Supply

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Law of Supply

• As price increases, the quantity of a good
  supplied in a given period will increase, other
  things being equal

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Supply Shifts and Movements

• What can cause a shift or movement in the supply
  curve?

S2
Price Level
S
S3
D
Quantity
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Supply Shifts/Movements

• A change in the price is represented by movements
  along the supply curve. So then the quantity
  supplied is changed according to the price
  changes-Movement
• Shifts
• Changes in prices of inputs used in production,
  Change in Technology, Change in supplier
  expectations about future pricing, change in
  taxes/subsidies

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Market Equilibrium

• What is the Invisible Hand Theory

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Invisible Hand Theory

• Prices will adjust to achieve equilibrium, this
  pricing mechanism coordinates individuals
  decisions so that scarce resources can be put to
  their best possible use

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Market Equilibrium

• What is created when the quality supplied exceeds
  the quantity demanded?

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Surplus
QS
Price Level
QD
PLe
PL2
Q2
Quantity
Qe
Surplus
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Market Equilibrium

• What happens to the price when the quantity
  demanded exceeds quantity supplied, which is a
  shortage?

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Shortages

• Prices will rise

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Market Equilibrium

• Where do the supply and demand curves intersect
  when the market is at equilibrium

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• Where quantity demanded equals quantity supplied

Market Equilibrium
Price Level
S
Pe
D
Quantity
Qe
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Please Define

• Absolute Advantage

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Absolute Advantage

• The ability of a party to produce a good or
  service using fewer real resources than another
  entity producing the same good or service

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Comparative Advantage

• Please Define Comparative Advantage

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Comparative Advantage

• The ability of a person or country to produce a
  good or service with a lower marginal and
  opportunity cost then an opposing person/country

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Who has Abs. Advantage
Country 1
Country 2
3 Apples2 Oranges
5 Apples 1.5 Oranges
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Absolute Advantage

• Country One has Absolute Advantage in Oranges
• Country Two has Absolute Advantage in Apples
• These are because each country can just produce
  more period.

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Who has the Comp. Adv.

• Country 1 can produce 2 apples to every 4
  oranges
• Country 2 can produce 1 apple to every 3 oranges
• Who has comparative advantage?

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Country 1
Country 2
1 A 3 O
2 A 4 O
1 Apple 3 Oranges
1 Apple ½ Orange
1/3 Orange 1 Apple
1 Orange 2 Apples
Country 1 has a comparative advantage in making
oranges because they can produce one orange, but
only have to give up 2 apples of production, when
country 2 has to give up 3 apples, and what they
give up is their opportunity cost.
Country 2 has the comparative advantage in
producing apples because they only have to give
up 1/3 of an orange while the other has to give
up a ½ so it has a lower opportunity cost thus
giving 2 the comparative advantage.
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Labor Force

• What is considered the labor force?

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• All people who are working and all the people who
  are searching for a job.

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Okun's Law

• Make and Explain the Okuns Equation

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• 2 (UA-UN) x (GDP) (Dollars Lost of Real Output)
• UA is the actual unemployment
• UN is the Natural rate of unemployment

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Unemployment

• What are the 3 types of unemployment? Explain
  each.

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• Cyclical
• Caused by the fluctuations of the business cycle
• Structural
• Have skills that no one wants
• Frictional
• Have skills but not the job (fired, quit, or 1st
  job)

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Business Cycle

• Draw it!

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BONUS QUESTION(all parts must be correct for
full credit)
State who has the absolute advantage and then the
comparative advantage
And the terms of trade
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Absolute Advantage Venezuela for both rice and
pudding
Comparative Advantage Chad for Rice (1R1/3
P) Venezuela for Pudding (1P2R)
Terms of Trade 1P2.5R Note (not necessary for
points) Venezuela will want more than 2 rice for
each Pudding. Chad will want to give up less than
3 rice for each pudding
Click to Continue
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Good Luck on the Exam