Macro Exam 1 Review

Exam 1 Review

Chapters 1, 2, 3, 4, 6

Chapter 1:

Scarcity

* Limited resources and unlimited wants.

* Basically, we want all of these goods and services but we don’t have enough resources to accommodate everyone’s wants and needs.

* Resources are scarce for households and scarce for economies.

* All resources are scarce.

Tradeoffs

* To get more of something we like, we have to give up something else that we like. This concept applies to individual people and also society as a group.

* Economists say “there is no such thing as a free lunch” to illustrate the principle that making decisions requires trading one goal for another.

* Examples:

* If you spend money on toys, you may not be able to buy food.

* Guns and Butter: If society spends more money on national defense (guns), then it will have less to spend on social programs (butter).

* Efficiency and Equality (Equity): Policies that make things more equal may take away from their productiveness.

* Ex. Taxes and Welfare: They both make income more equal, but reduce hard work. Less work leads to less production.

* Efficiency means that society is getting the maximum benefits from its scarce resources (minimal waste)

Opportunity Cost

* The cost of something is what you give up to get it (not always monetary). The cost of doing homework instead of going to the movies could be the enjoyment you would have gotten out of going to see the movie.

* The opportunity cost of attending college includes your tuition payment, the value of your time that you could have spent working (your potential earnings). It does not include things that you would have done whether you were in school or not (eat/sleep: room and board payment). It only includes room and board if room and board would be less expensive elsewhere.

* The opportunity cost of going to college is the value of the best opportunity a student gives up to attend college.

Margin...