Unit I Notes

Welcome to the first Unit of Macroeconomics!! Economics is the study of monetary policies, trades, and goods and services. To be more specific, macroeconomics is the field of economics that focuses on major components of the economy. Some examples of macroeconomic concepts are inflation, wage laws, and international trade.

 A short introductory video about macroeconomics and microeconomics.

Now you need to know that there are two different types of economics: positive and normative. Positive Economics is attempts to describe the world at it is (facts). Normative Economics states how the world should be (opinions). An example of positive economics would be something like, "Minimum wage causes unemployment." An example of normative economics would be a statement like, "the Government should raise minimum wage."


The driving forces the economy are your needs and wants. There is a big difference between your needs and your wants. Needs are the basic requirements for survival such as water, food, and shelter. On the other hand, wants are simply desires such as technology, toys, or a car.


The "central economic problem" is also known as scarcity. Scarcity is basically trying to satisfy unlimited wants with limited resources. Related to this issue is an event known as a shortage, which is a situation in which the quantity demanded of a good or service is greater than quantity supplied.

Just a random picture related to economics in case you were getting a little bored! :)

Goods vs. Services:
Goods are a tangible commodity, but there are two main different types of goods: capital goods and consumer goods. Capital goods are items, such as tractors, bulldozers, or factory machines, used to create other goods. Consumer goods are goods that are intended for final use by the consumer like a burger.
Then, services are actions performed for someone else such as shining a shoe.


There are 4 different factors of production.
1) Land - natural resources. Ex: rivers, mountains, lakes, farmland, etc.
2) Labor - human work force (how much work is exerted). Ex: factory workers who run machines, their supervisors, and the janitors.
3) Capital- there are two main types, but capital resources can be called "specialized resources."

• Human - knowledge and skills a worker gains through education and expertise. Ex: how to assemble parts into constructing a good, how to properly wire an air conditioning system, or how to simply run a machine.
• Physical - human made objects used to create other goods and services. Ex: tools such as a hammer, machinery, etc.

4) Entrepreneurship - taking risks; innovation.


Your goods-related graphs consist of the Y-axis being capital goods and your X-axis being consumer goods:

There are three different types of graphs:

1. Production Possibilities Graph (PPG)
2. Production Possibilities Curve (PPC)
3. Production Possibilities Frontier (PPF)

Opportunity cost is what you give up to gain something else; the next best alternative. When there is a scarcity of one resource making a certain product then you have to change the product to the next best thing. You also have to realize that you are limited in your resources. For example, a teenager would have to choose between spending time with their friends or studying for their classes. The law of increasing opportunity cost (also known as the law of diminishing returns) states that when switching production from one product to another, as you increase the production amount, a higher cost will be necessary for the next unit of the good. 

Productive Efficiency are products that are being produced in the least costly way. In the following example, any point on the curve, whether A, B, C, or D, is a point of productive efficiency.

Allocative Efficiency is when producers produce the good that is in a higher demand by society. For example, in the following graph, point A would be a point of allocative efficiency if capital goods were in extremely high demand compared to consumer goods.

(Which ever is in higher demand)

Sometimes, a productions possibility curve will shift to the left. The reason why a PPC graph would shift to the left is because of a permanent loss of productive capacity related to any of the four factors of production. Examples of events that could cause such a loss are wars, taxes, government regulations, decrease in labor force, etc. 

The reason why a PPC graph would shift to the right is an advance in technology or discover of new resources. 

Ex. Guns & Butter

Pt. E = recession (ATTAINABLE and inefficient)
Pt. A = all capital goods no consumer goods (ATTAINABLE and efficient)
Pt. B = mostly capital goods but a little consumer goods (ATTAINABLE and efficient)
Pt. C = producing both at equal amounts (ATTAINABLE and efficient)
Pt. D = mostly consumer goods but a little capital goods (ATTAINABLE and efficient)
Pt. F = UNATTAINABLE

   3 Types of Movement Occur Within The PPC:

1. Inside the PPC:
• unemployment (people)
• underemployed (not using all resources)
2. Outside the PPC:
• technology
• economic growth
3. Along the PPC:
• Ceteris Paribus - all things remain constant

Elasticity of Demand is a measure of how consumers react to a change in price. Elastic Demand is demand that is very sensitive to a change in price. (E>1) The product is NOT a necessity and has several substitutes. Ex: candy, fur coat, steak, and soda.
Inelastic Demand is demand that is not sensitive to a change in price. (E<1) The product IS a necessity and has few or no substitutes. Ex: milk, salt, insulin, and gasoline.
Unitary Elastic just occurs when E=1.

There are 3 parts in figuring out price elasticity of demand:

1. % change in quantity demand
• (new quantity - old quantity) / old quantity
2. % change in price
• (new price - old price) / old price
3. PED:
• (% change in quantity demand) / (% change in price)
• take the absolute value of that!

Total Revenue is Price * Quantity sold = TR

• It is the total amount of money a firm receives from selling goods and services! However, do not confuse this with profit because costs have not been subtracted yet.

A video in case you still don't quite understand what is explained above.

There are three different types of Production Costs:

1. Fixed Costs - costs that do not change no matter how much is produced.
• Ex: employees' salaries, mortgages, and car payments.
2. Variable Costs - costs that fluctuate or change depending upon how much is produced.
• Ex: electricity bills, water bills, the amount of money paid for lemons for a lemonade stand, etc.
3. Marginal Costs - the costs of producing one more additional unit of a good.

However, fixed costs and variable costs are NOT unrelated. They both contribute to the total cost.

TOTAL COST = FIXED COST + VARIABLE COST

Some important equations that you should take note of!

• AFC = TFC / Q (Average fixed cost = total fixed cost / quantity)
• AVC = TVC / Q (Average variable cost = total variable cost / quantity)
• ATC = TC / Q (Average total cost = total cost / quantity)
• ATC = AFC + AVC (Average total cost = average fixed cost + average variable cost)
• Marginal cost = new TC - old TC or new TR - old TR

Thank you so much for viewing my blog about UNIT I the introduction to macroeconomics! I hope you understand everything and this helps you with any confusion you may have had. You can also use this as your study guide for that test coming up soon! :) Come back for more blogs in the future! Thank you.