Macroeconomics Final Exam Study Guide: Key Concepts and Applications

Opportunity Cost and Scarcity

Opportunity Cost

Opportunity cost is a fundamental concept in economics, representing the value of the next best alternative forgone when making a choice.

• Definition: The value of the next best alternative you give up when you make a choice.

• Example: If you spend time studying for economics instead of working a part-time job, your opportunity cost is the wage you would have earned.

Scarcity

Scarcity refers to the limited nature of society's resources, which forces individuals and societies to make choices about how to allocate them.

• Unlimited wants vs. limited resources: All economies are based on this concept.

• Signals of scarcity: Prices signal scarcity and help allocate resources efficiently.

Macroeconomic Topics and Measurement

Macroeconomic Topics

Macroeconomics studies economy-wide phenomena, including:

• Inflation

• Gross Domestic Product (GDP)

• Unemployment

• Monetary and fiscal policy

• Economic growth

Note: Focus on issues that affect the entire economy, not just individual businesses or persons.

Measuring Productivity

Productivity in the economy is typically measured as output per worker.

• Formula: GDP per worker or output per worker.

Definition of GDP

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country in a given year.

Demand, Supply, and Market Equilibrium

Demand and Supply Curves

• Demand Curve: Shows the relationship between the price of a good and the quantity demanded.

• Supply Curve: Shows the relationship between the price of a good and the quantity supplied.

Shifts in Demand

Factors that shift the demand curve to the right (increase demand):

• Increase in consumer income (if the good is normal)

• Higher price of substitutes

• Lower price of complements

• Consumer preferences and tastes

• Expectations of future price increases

Supply Curve and Technology

Technological improvements lower the cost of production, causing the supply curve to shift right (increase in supply).

Shortage and Surplus

• Shortage: Occurs when quantity demanded exceeds quantity supplied at a given price (price is below equilibrium).

• Surplus: Occurs when quantity supplied exceeds quantity demanded at a given price (price is above equilibrium).

Unemployment and Inflation

Types of Unemployment

• Natural Rate of Unemployment: The long-run average unemployment rate, including frictional and structural unemployment (not cyclical).

Unemployment Rate Formula

• Formula:

$\text{Unemployment Rate} = \frac{\text{Number of Unemployed}}{\text{Labor Force}} \times 100$

Recessionary and Inflationary Gaps

• Recessionary Gap: When actual GDP is less than potential GDP. Graphically, equilibrium is to the left of full-employment output.

• Inflationary Gap: When actual GDP is greater than potential GDP. Graphically, equilibrium is to the right of full-employment output.

Price Ceilings

• Adverse Result: Price ceilings (maximum legal prices) can cause shortages when set below equilibrium price. Example: Rent control can lead to a shortage of apartments.

Fiscal and Monetary Policy

Fiscal Policy

Fiscal policy involves government actions using taxation and government spending to influence the economy.

Monetary Policy and the Federal Reserve

• To slow inflation (contractionary policy):

  • Raise interest rates

  • Sell government bonds

  • Raise reserve requirements

  • These actions reduce the money supply, slowing inflation.

• To increase investment (expansionary policy):

  • Lower interest rates

  • Buy government bonds

  • Reduce reserve requirements

  • These actions increase the money supply, encouraging investment.

Factors of Production and Income

Four Factors of Production

• Land

• Labor

• Capital

• Entrepreneurship

Income and Taxes

• A raise in gross pay increases net income unless taxes/withholdings offset it.

Summary Table: Key Macroeconomic Concepts

Concept	Definition	Key Formula	Example/Application
Opportunity Cost	Value of next best alternative forgone	—	Choosing to study instead of working
GDP	Total market value of final goods/services produced in a country in a year	—	U.S. GDP in 2022
Unemployment Rate	Percentage of labor force unemployed	$\frac{\text{Unemployed}}{\text{Labor Force}} \times 100$	6% unemployment rate
Recessionary Gap	Actual GDP < Potential GDP	—	High unemployment, low output
Inflationary Gap	Actual GDP > Potential GDP	—	Overheated economy, rising prices
Price Ceiling	Maximum legal price	—	Rent control
Shortage	Quantity demanded > quantity supplied at a given price	—	Gasoline lines during price controls
Factors of Production	Inputs used to produce goods/services	—	Land, labor, capital, entrepreneurship

Additional info:

• Some explanations and examples have been expanded for clarity and completeness.

• Graphical references (e.g., recessionary/inflationary gap) are described in text, as images are not included.