Macroeconomics Unit 1 COMPLETE Summary - Basic Economic Concepts

hi everybody jacob reed here from reviewecon.com this is the first in a series of videos that will cover all of the macroeconomic concepts you need to know for your exams in macroeconomics this first video is all about unit one it covers basic macroeconomic concepts this video goes alongside the total review booklet from reviewecon.com if you want to support this channel and pick up a copy head down to the links below also don't forget to like and subscribe let's get into the content and away we go first up we've got scarcity pretty simple concept here scarcity is the fundamental problem we have in economics it's everywhere and it's pervasive scarcity is the inability of our scarce resources to satisfy human wants we don't have enough of everything we want in this world we don't have enough cupcakes we don't have enough shoes heck i don't have enough ferraris scarcity is pervasive it's everywhere and it's always the first concept you're gonna learn in economics how do you know if something is scarce well first of all it's likely to have a positive price if you have to pay money for it even if it's a very low amount it's definitely scarce we might have to come up with a system of allocating whatever it is we're talking about organ transplants for example are definitely scarce so we have a very complicated system of deciding who gets the next kidney or heart or liver less is available than is wanted that's simply the basic definition of scarcity opportunity cost is involved in this good if you want it you have to give something up to get it those are some easy tests to determine if an item is scarce now we're not talking about shortage here shortage means that we ran out at a particular price you'll learn more about shortages when you get to unit two here we are also not talking about needs we're talking about once once are unlimited and resources are limited and the reason we have scarcity is because factors of production are limited we don't have enough land land is all the gifts of nature that's our first resource we don't have enough labor either labor is the mental or physical work of human individuals we have alongside that human capital that's the skills and knowledge of the workforce and you learn a lot about that in macroeconomics but it can be important here as well more skilled workers are better workers next we have physical capital that's machines and tools that are used to produce goods and services last of all we have entrepreneurship entrepreneurs take the land labor capital mix it all together take a huge risk and produce a good or service seeking a profit microeconomics focuses a lot on these businesses or firms as we often call them that are started by entrepreneurs seeking a profit that's their goal all of these things lead us to production possibilities we have scarce resources those force us to make choices those choices have opportunity costs and we can organize systems to deal with that scarcity with the command economy or the market economy we can graph all of this with the production possibilities curve the production possibilities curve is a graph that shows the maximum combinations of two different goods or categories of goods that can be produced with fixed resources we may be looking at individuals who can decide whether or not they're going to produce lawn mowers or weed eaters or we could be looking at an entire economy that's producing guns or butter or consumer goods and capital goods let's look at a production possibilities curve here's one for robots and corn since we have a bowed out shape like this that's concave to the origin as this economy produces more and more corn they give up greater and greater amounts of robots we can see that bowed out shape means that we have increasing costs of production what that tells us is that the resources that are used to produce robots are not perfectly adaptable to the production of corn if the resources that are used to make robots were also really good and equally good at making corn then we would see a more straight curve like we have here here we have cakes and cookies in this production possibilities curve we have a straight line and that shows us what's called constant costs when we see a production possibilities curve that looks like this it means that the resources that are used to make both goods are well adapted to each other some might even say perfectly adaptable the resources that are really good at making cookies are also likely to be really good at making cake as a result we would expect a relatively straight curve for those two items if you see a production possibilities curve it's important to remember that any point on the curve is considered efficient a productively efficient use of resources whether you're making only robots and zero corn only corn and zero robots or somewhere in between any point on that production possibilities curve is efficient any points inside the curve are inefficient it means that you're not using resources properly in a macro economy sense any point inside the curve is likely to mean that the economy is suffering from a recession you have unemployed workers who are available to work but they aren't being utilized so you are having less production in this case of robots and corn by producing some somewhere within this production possibilities curve points outside the curve are impossible you cannot produce outside your own production possibilities curve what we can do though through specialization and trade you might be able to consume outside of your production possibilities curve and we'll learn more about that in a minute when we get to our comparative advantage review what shifts this production possibilities curve well it can move in or out as a result of changes in the quality or quantity of resources here we have growth that's what it looks like if we have increases in productivity or better resources or we just have more resources land labor capital or entrepreneurship that can shift our production possibilities curve outward and we will have more ability to produce in this case corn and robots if we have a loss of resources maybe there's a natural disaster that destroys a lot of factories we might see a shift inward of the production possibilities curve that means we have fewer robots and corn that can be produced with our current lower level of resources if we have new technology that only impacts the production of one of these goods we would see it something like this here we have technology that has increased the production of corn but hasn't changed the production of robots it kicks out the corn side but it doesn't change the robot side here we would see an increase in the opportunity cost for producing robots because we're now losing even more corn if we decide to make robots instead on to comparative advantage this is probably the hardest part of this first unit it can be very tricky and it involves a lot of math but the first part you need to know isn't real difficult it's called absolute advantage absolute advantage is the ability to produce more or using fewer resources than someone else or some other country here let's take a look at amy and eric they can either do a brake job on a car or paint a car since amy can do these things at a lower number of hours that's units of labor here then it means that amy has the absolute advantage in both of these tasks now hours are inputs here we have another problem strawberries and zucchini here we've got tons of strawberries and zucchini that can be produced now instead of looking at using fewer resources which is ours or inputs now we're looking at the finished product this is the ability to produce more strawberries in this case we're looking for the larger number and here we have henry is able to produce more strawberries and more zucchini so henry has the absolute advantage in the production of both of these goods now on to comparative advantage definition of comparative advantage is the ability to produce something at a lower opportunity cost when it comes to inputs which means that we're talking about resources that go into the production of something i use the formula with it over that's the mnemonic that's how i remember it which means that the opportunity cost of a is it a divided by b let's take a look at those numbers for amy and eric again now these are input questions so let's figure out the opportunity cost for amy amy can produce one break job with the opportunity cost of it her number she has for that break job which is one hour divided by the number of hours it takes her to produce a painted car which is one-sixth now the opportunity cost for a painted car is it six divided by one which means six break jobs eric on the other hand we're gonna do the math again for him eric can produce a break job with an opportunity cost of it two hours for the brake job divided by eight hours for a painted car that equals one-fourth of a painted car for every brake job he does for painted cars the opportunity cost is eight divided by two which gives us an opportunity cost of four brake jobs for every painted car that eric does now we're going to take a look at the opportunity costs and circle the goods with the lower opportunity cost amy can produce a brake job with 1 one-sixth of a painted car lost and that is a smaller opportunity cost than eric's one-fourth of a paint job that means amy has the comparative advantage in the production of brake jobs eric on the other hand has the comparative advantage for painted cars because his opportunity cost is four brake jobs well amy's is six and since four is a lower opportunity cost eric has the comparative advantage for painted cars the other type of comparative advantage question you are likely to get is an output question when you see an output question that means the numbers that are talked about in the question are finished products in order to calculate the opportunity cost of an output question i use the other over formula other over is the mnemonic that i use to help me remember this that means the opportunity cost of producing a is the other one b the numbers for b divided by the numbers for a and that will give you the opportunity cost for producing one unit of a you could see output questions using production possibilities curves they're usually straight line or constant cost production possibilities curves you could see it like this if you see it just go to the numbers on those axes those are the ones you're going to be using for calculating you could also see it as a chart or a table as we just saw with the input questions of ours now we're going to calculate these here we have jason and henry these two people are going to either produce tons of strawberries or tons of zucchini so let's take a look at these numbers jason here can produce one ton of strawberries at an opportunity cost of the other one four tons of zucchinis divided by the eight tons of strawberries that gives us half a ton of zucchinis lost for every ton of strawberries that jason produces on the other hand flip it around one ton of zucchinis is going to cost him eight that's the other one eight tons of strawberries divided by the four tons of zucchini gives us two tons of strawberries that jason is going to lose out on every time he produces a ton of zucchini for henry we're going to do this the same way one ton of strawberries the opportunity cost is the other one six tons of zucchini divided by those 10 tons of strawberries gives us three-fifths of a ton of zucchini for every ton of strawberries he produces one ton of zucchini will equal flip it around it's the reciprocal here 10 6 which is one and two-thirds of a ton of strawberries for every ton of zucchini and reproduces just like before we're going to circle the goods of the lower opportunity costs and then we will see who has the comparative advantage jason has the comparative advantage for strawberries and henry has the comparative advantage for zucchini because one-half is lower than three-fifths and two is greater than one and two-thirds so we circle the lower opportunity costs and that's our comparative advantages the last kind of thing you're going to get with comparative advantage is to figure out mutually beneficial terms of trade terms of trade that will benefit both entities will fall between their opportunity costs let's take a look at the opportunity cost for amy and eric one painted car was worth six brake jobs for amy and four brake jobs for eric that means that a painted car one painted car should be worth between four and six brake jobs flip it around and we can look at the other side one brake job will be worth between 1 4 and 1 6 of a painted car if they trade within those ranges then it will benefit both as a result if we're outside that range somebody is getting ripped off and would be unwilling to trade if they're acting rationally let's take a look at henry and jason again and look at their opportunity costs one ton of strawberries will be worth between half a ton of zucchini and three-fifths of a ton of zucchini the law of demand tells us that ceteris paribus consumers buy more of a good at low prices and less of a good at higher prices that means that we have a downward sloping demand curve when we graph it out because there's an inverse relationship between the price and the quantity demanded so when price rises that causes movement along the curve increases in price cause a decrease in quantity demanded likewise a decrease in price causes a movement down that curve and increases quantity demanded special thing to note is that price changes quantity demanded price does not change demand it's a key thing that pops up over and over again and will trick you if you aren't paying attention price changes quantity not demand remember it there are some things besides price that do shift demand curves here are some of our non-priced determinants of demand or demand shifters as they're often called first we've got tastes and preferences when there's an increase in consumer taste it will shift our demand curve to the right increasing that demand if there's a decrease in tastes and preferences like something becomes unpopular or it falls out of fashion that will cause a decrease in demand or a shift to the left if there are more buyers also called market size that will cause an increase in the demand for a product if there are fewer buyers available that will cause a decrease in the demand the next one we have is prices of related goods when it comes to prices of related goods there are two types that you need to be aware of first of all we've got substitutes when it comes to substitutes when the price of one goes up demand for the other one also goes up substitutes mean that one good can replace the other so when the price of one goes up people buy less of that good and they buy more of the other one instead things like jam and honey i can use either one on my peanut butter and jelly sandwiches or peanut butter and honey sandwiches either one works so in this example they would be substitutes for each other if the price of jelly goes up the demand for honey is going to go up as well for compliments that means one goes with the other when the price of one goes up demand for the other actually goes down here we have the compliments jelly and peanut butter when the price of jelly goes up people buy less jelly but it also causes us to decrease our demand for peanut butter because they go hand in hand bread and butter toothpaste and toothbrushes ice cream and ice cream cones all different examples of complementary goods next we have changes in income for most goods like shoes when you have more income you buy more of that product so an increase in consumer income will increase the demand and a decrease in consumer income will decrease the demand the other type of good is called inferior goods with inferior goods when incomes rise people buy less of those products so incomes rise and demand actually decreases those are things like one ply toilet paper or top ramen or condensed soup when incomes rise people buy less of those products the last one is expectations for the future sometimes guesses about what's going to happen later on impact consumer behavior today that's why when it comes to buying a television i'm going to wait until black friday for when they're on sale so i demand fewer today decrease my demand and then i buy more later so that expectation for the future changes demand today if any of those things change it can cause our demand curve to shift if we have a shift to the right that is an increase a rightward shift is an increase that means there is a higher quantity demanded at all prices not just at one particular price if we have a shift to the left that is a decrease a lower quantity demanded at all available prices shift to the left now let's talk about supply curves supply curves are the opposite of demand curves before there was an inverse relationship between price and quantity with supply there's a direct relationship ceteris paribus producers produce and sell more at high prices and less at low prices it's true so often it's the law of supply it gives us an upward sloping supply curve and when prices go up we see an increase in the quantity supplied shown as movement up that supply curve if price goes down it shows movement down that curve which gives us a decrease in the quantity supplied special note just like with demand price changes quantity or quantity supplied in this case price does not change supply make sure you know that it will trick you on your test but there of course are things that do shift supply we call those non-price determinants of supply these are your supply shifters first of all we've got input prices those are the things that go into the production if the price of a resource that goes into production goes up it will decrease supply if it goes down it will increase supply then we've got government tools taxes per unit taxes decreased supplies we've got subsidies subsidies increase supply and the last thing is regulations regulations will generally depending on the type of regulation decrease supply the third thing we've got is the number of sellers all right sometimes people say competition for this one an increase in the number of businesses that are producing a product will increase the supply a decrease in the number of businesses producing a product will decrease the supply the next one we've got is technology increases in technology also increase supply prices of other goods can sometimes impact supply as well if the price of wheat goes up farmers may make more wheat and decrease their supply of corn as a result the last one is producer expectations just like with consumers the future impacts what businesses do today if businesses expect a high price they may increase their supply today if any of those things change it actually causes a shift in the supply curve rightward shift just like with demand is going to be an increase make sure you understand the left and right instead of up and down because a downward shift for supply is actually a rightward shift and that's an increase on the other side a leftward shift is going to be a decrease we're talking about lower quantities supplied at every price the next thing we're going to do is talk about market equilibrium we find market equilibrium when we mix supply and demand on the same graph where the two curves intersect gives us our equilibrium price and equilibrium quantity it's the price where the quantity supplied equals the quantity demanded the market seeks that equilibrium price and quantity sometimes prices are above equilibrium and that causes quantity supplied to be greater than quantity demanded that means we have a surplus and prices will eventually fall back to equilibrium sometimes we have a price that's below equilibrium when that happens we will have a shortage where the quantity supplied is less than the quantity demanded prices will eventually rise seeking that equilibrium point of course the equilibrium price and quantity can change when there's a shift in either demand or supply an increase in demand causes the equilibrium price to increase and the equilibrium quantity to increase a decrease in demand causes the equilibrium price and equilibrium quantity to both decrease an increase in the supply will cause the equilibrium price to decrease and the equilibrium quantity to increase a decrease in the supply will cause the equilibrium price to increase and the equilibrium quantity to decrease now i don't suggest you memorize all these shifts just when in doubt graph it out sketch out your little graph and see what happens to equilibrium price and equilibrium quantity on your paper most of the time when you get a question one variable will change and one curve will shift occasionally you could have two variables change when that occurs it is possible you could have two curves shifting double shifts get a little bit tricky because one of the axes will be indeterminate here we have a decrease in supply that caused the price to go up and the quantity to go down so we move from one equilibrium point to another equilibrium point if we add another shift an increase in demand here we now have a third equilibrium point how does this combined double shift impact the price and quantity well both shifts increased the price that means we know for sure that the price is going to be increased but on the x-axis there the first shift decrease the quantity and the second shift increase the quantity since these shifts contradict it really depends on the size of the shifts as to where the final equilibrium quantity is and as a result that axis will be indeterminate here's another example of a different double shift we're starting off with an increase in demand this time which causes the equilibrium point to move increasing the price and increasing the quantity if we add another shift this time it's a increase in supply we now have a third equilibrium point and here on that x-axis the quantity increased on both shifts whereas the price increased with one shift and decreased with the other shift equilibrium quantity will be determined as an increase but the equilibrium price will be indeterminate we made it through it now that's everything you need to know for that unit if you already knew all of that stuff you are on your way to doing really well on your next exam if you still need some help head down to the links below and head over to reviewecon.com where there are lots of games and activities to help you practice and relearn those skills that you need to know if you want to support this channel please like and subscribe below and then head over to reviewecon.com and purchase the total review booklet with all of the skills you need to ace your next exam thank you i'll see you next time

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Length: 24min 52sec (1492 seconds)

Published: Fri Oct 09 2020