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Macroeconomics Unit 1 Summary - Economics
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0:00
Hey econ students this is Jacob Clifford. Welcome to the macroeconomics unit one summary video [Music]. In these summary videos I quickly explain all the concepts you need for your next quiz, unit exam, or your final exam, basically everything you need to get an A in your class. But, I'm going to be going quick. Now I am going to be using the AP curriculum but that's pretty much the same as any introductory macroeconomics course. So if you're a first year college student
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or you're preparing for the a level or CLEP exam it's all the same stuff. This video covers unit one basic economic concepts. Now before we get started let's do a quick activity. I want you to make a fist with your right hand I want you to put your thumb out and put your pinky out so just like this. Here we go this is round one. Okay you got it? All right here comes round two. Same thing on both hands thumbs out pinkies out thumbs out, pinkies out. Try this,
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see how you do. Here comes round three. I want thumb out pinky out thumb out pinky out.
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here are two reasons why we did that activity. The first is, this is a great analogy for what you're going to see in an economics class. Some concepts are super easy like the definition of scarcity. Duh, I get it it's easy. And eventually things get a little harder, like drawing the production possibilities curve or supply and demand. But, they're still pretty easy. But, then things are going to get a lot harder like figuring out comparative advantage or terms of trade. That
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stuff is harder and you're going to feel confused. There's concepts in this class that I'm going to do fast, but you got to slow down you got to practice and it's okay to make mistakes. You just got to keep doing it until you're like yeah okay, I got it. Trust me, it's not enough just to watch me draw the graphs and do the calculations. You're going to have to practice. You're going to have to do it yourself. Now the second reason we're doing this activity is I wanted to find
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out if you're willing to participate. If I had you do this and you didn't do anything round two you didn't do anything round three you're just sitting there with your hands not moving you're probably setting yourself up for failure. If you're not participating then you're definitely not going to get the most out of these videos because every once in a while I'm going to say stop this video want you to draw this graph or do those calculations. I promise you I'm not wasting
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your time. I know the questions your teacher or professor is going to ask you so when I ask you to stop and practice go ahead and try those things because that's what you're going to see on your next exam. And, that's also why I created a study guide that goes along with this video. The Unit 1 study guide is inside my ultimate review packet and it's free. Just sign up for the free preview. The link is in the description below and I just uploaded new study guide so make
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sure you have the most updated version. So here we go, pause this video go download and print the unit one study guide. Have it ready to go and start the video back up. [Music] Okay here we go. You've got your study guide, your video, you got your energy and excitement, let's jump into it let's learn some economics. Let's go! The best place to start is with a quick overview. There are five big picture ideas that you need to understand in macroeconomics unit one. Number one
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economics focuses on scarcity and how it requires individuals businesses and governments to make choices. Number two the production possibilities curve shows the different combinations of two goods that can be produced using all a country's resources to the fullest. Number three the production possibilities curve can shift outward when there's more resources or more productivity from new technology. Number four countries that have a comparative advantage can specialize in
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the production of specific goods and trade with other countries at a lower opportunity cost than if they produce everything on their own. And, number five, changes in markets can be explained using a demand and supply graph. Now that was the big picture, now let's jump into specific topics. Every economics class starts by looking at scarcity the idea that we have unlimited wants but limited resources, which means we're forced to make choices. For example,
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you have to decide who you want to take out on a date on Friday night because you definitely can't take two people out. And, businesses have to decide how many units to produce or how many workers to hire and governments need to decide how many public services to provide or what policies are best to fight inflation or to promote growth. So when you boil it down, economics is a study of
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choices and decision-making. So that's why you're taking this class. Learning economics is going to make you a better decision maker. Just look at the highest paid college majors. Most of the ones at the top are in STEM but take a look right here economics... oh yeah. When I talk about limited resources a lot of students assume I'm talking about money, but money is not a resource. Yes we use money to make transactions but it's not a resource because you can't produce anything with
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it. Instead your teacher Professor is going to talk about the four factors of production, the four things we need to produce stuff: land labor capital and entrepreneurship. Land is anything from Mother Nature like water minerals crude oil or sunlight. Labor is obviously the work that humans do. Everything you did during your summer job. For capital there's two types: there's physical capital and human capital. Physical capital are things like tools
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machines and factories used to produce stuff. Human capital is the knowledge experience and training that makes workers more productive. By the way that's another reason why you're taking economics. You're trying to increase your human capital making yourself more productive and more valuable to employers. And the last factor is entrepreneurship, the person that brings together all the their resources starts the business and takes the risk.
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Another thing your teacher or professor might talk about early on is the difference between microeconomics and macroeconomics. Microeconomics is the study of small economic units and looks at the decisions of individuals and firms things like the cost of production in the different kinds of markets. Macroeconomic study is the collective decisions of everyone, the entire economy. Macro looks at things like growth unemployment inflation and different policies
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to speed up or slow down the economy. "We are strongly committed to returning inflation to our 2% goal." And that's what we're going to be doing here this is macroeconomics. [First day of school, very very exciting] And in this class we're going to focus on a mixed economy where individuals and the government both play a role. That's different than a centrally planned economy where the government owns the factors of production and decides what to produce, how to produce it, and
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who gets it. Modern economies combine free market capitalism with some government intervention so that's what you're going to learn in an econ class unless of course you're in North Korea.
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That's all I'm going to say about the economic systems. If you want to learn more take a look at the video that I made for the crash course folks or take a look at the video where I went to China and that lady was checking me out. "did you notice that lady check me out" "that means that it has a special government system that allows". Okay that's it for topic 1.1. I know it was super easy go ahead and take out your study guide fill out that section for 1.1
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In topic 1.2 you're introduced to a concept that you're going to use for the rest of your life. It's the idea of opportunity cost. Because of scarcity we're forced to make choices and every choice has a cost an opportunity cost. It's the cost of the next best alternative the thing that you would have done if you didn't make that choice. For example the cost of going to the movies tonight is not just the price of the ticket it's also the time you could
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have spent studying for your economics class, or the money you could have earned by spending that time babysitting instead. So individuals, businesses, and the government all make decisions by factoring in their opportunity cost, the thing they're giving up. And this is when you see the very first graph you see in an econ class, the production possibilities curve. Your teacher might call it the "production possibilities frontier" but it's the same thing. It's a model
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that shows the alternative ways we can use our scarce resources to produce only two goods. It usually starts off with a chart like this showing the different combinations of two goods that can be produced using all of our resources. When you plot these combinations you get the production possibilities curve, the PPC. Now there are three things that your teacher or professor is going to have you do with this graph: first, they're going to ask questions having you explain
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how this graph demonstrates different economic concepts, like efficiency. Any point inside the curve is inefficient because we're not using our resources to the fullest, any point on the curve is efficient, and any point outside the curve is impossible or unattainable because we don't have enough resources. Second, your teacher will ask you to use the PPC to calculate the opportunity cost of moving to different combinations. For example, the opportunity cost of moving from
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combination B to combination C is three bikes and the opportunity cost of moving from combination E to combination D is two computers. The third thing your teacher will have you do is show how changes move or shift the PPC. For example, let's practice. Here is a PPC showing the different combinations of consumer goods and capital goods for the country of CLIFFTOPIA. Show what will happen on this graph when a country goes from having a recession with a lot of unemployment
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to having a strong economy and full employment. Pause the video and see if you can figure it out.
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You might be thinking, okay we're going to produce more so the curve is going to shift outward. But no that's not what happens. What happens looks like this..... we're going from an inefficient combination where workers aren't being fully utilized to an efficient combination at full employment which is a point on the curve. The curve doesn't shift. It's not like these are new workers that are being added to the economy. These are workers that just
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didn't have a job and now they're working. But if we did have more workers, or better workers, or more physical capital then the entire production possibilities curve would shift outward to the right. Combinations that were impossible would now be possible because we have more resources. Now remember this is a summary video, and I'm going pretty quick on purpose so if you need more help with the PPC take a look at my videos on YouTube. But
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if you can answer the questions in topic 1.2 on your study guide then you totally understand it and you're ready to move forward. So pause this video and fill out that section let's see how you do. Okay, by far the hardest top I in this entire unit is right here we're talking about comparative advantage. "it's not that hard Scott tell him." " it's incredibly hard". The general idea is really simple. Countries have different climates and different resources so they can specialize in
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one thing and trade with other countries that specialize in producing something else. So the concept is easy but the questions you're going to see on your exam those are hard. Your teacher or professor is going to give you a question like this, with two countries, two products, and numbers. In this case, the number of cars or planes the you US and Canada can make in one day. The country's products and numbers might change, but you'll always be asked
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four different types of questions: number one, identify which country has an absolute advantage for each good. Number two, calculate the opportunity cost for each country. Number three identify which country has a comparative advantage in which good. And number four, identify a terms of trade that is mutually beneficial for both countries. That's it. If you can do these four things then you are ready for any question your teacher or professor is going to give you. I
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have a bunch of videos on on YouTube that explain these concepts and let you practice, but right now let's practice these four skills so pause the video here's four questions good luck [Music]. Okay how'd you do? Did you do well? I hope so. Let's go over the answers. A country has an absolute advantage if they're better at producing a product than another country. So all you have to do is look at the raw numbers. The US can produce five planes and Canada can only
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produce two planes so the United States has an absolute advantage in the production of planes. And the US also has an absolute advantage in the production of cars because they can produce more than Canada. So the answer to question one is "no, Canada does not have an absolute advantage in cars because they produce less than the United States." Again it's super easy. Next, it's time to calculate opportunity cost, which is a little harder. For calculating opportunity costs
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we know that when the US produces five planes they can't produce 10 cars but what's the cost of producing only one plane. To figure that out you need the equation for per unit opportunity cost. It's the number of units given up divided by the number of units gained. So for question two if five planes cost the US 10 cars then the opportunity cost of one plane is two cars. And you can flip that to get the opportunity cost for one car. If 10 cars cost the US five planes then the
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opportunity cost for one car is a half a plane. Again what you're calculating is called per unit opportunity cost. Now let's go do the same thing for Canada for Canada each car costs 1/4 of plan plane and each plane costs four cars. By the way, notice there always a reciprocal. If one's four the other one's going to be 1/4 if one's 10 the other one's going to be 1/10th. Okay now we have
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enough information to answer question three and find the comparative advantage. Just ask yourself, "who should produce planes? The country that gives up two cars or the country that gives up four cars?" Obviously it's better to give up less so the United States has a comparative advantage in the production of planes because they have a lower opportunity cost. And Canada has a comparative advantage in Cars. One car cost Canada only 1/4 a plane but it cost United States
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1/2 a plane. So with these numbers Canada should specialize in producing the cars the United States should specialize in producing planes. But we're not done. The last step is by far the hardest. It's finding the terms of trade. We know that each country should specialize and produce only one thing, but how many cars should Canada trade for how many planes. The quick answer is that both countries will be willing to trade if, and only if, they can
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get the other product at a lower opportunity cost than if they produced it themselves. For example, we know that Canada should specialize in cars and if they did make planes it will cost them four cars for each plane. But if they could trade three cars for one plane they'd be better off. They could specialize in producing cars and trade with the United States and get planes at a lower opportunity cost than if they made planes themselves. And it's the same idea for the United
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States. We know they should specialize in planes and if they made one car it'll cost them one half a plane given up. So if the United States can get one car for anything less than one half a plane then they're better off. With trade they can be getting cars at a lower opportunity cost than if they produce them themselves. So to answer question four trading one plane for three cars would be mutually beneficial. It would benefit both countries because Canada can get a Plane
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by only giving up three cars instead of four and the United States can get a car by giving up only a third of a plane instead of giving up one half. Woohoo! that was a lot. I'm telling you this is by far the hardest topic, so here's a video of a puppy running to help you [Music] unwind. Now, hopefully you understood all of that, but we're not done. There's actually two different types of comparative advantage questions. The one you saw was an output question. Now we also
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have to talk about input questions. It's very likely that you'll see both types on your next quiz or exam. Now watch carefully I'm going to convert this output question that I just gave you into an input question. So here we go right now! Notice the country's products and the numbers are the same the only difference is what those numbers mean. Now they represent hours. Look at the top of
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the chart. It says this chart shows the number of hours it takes each country to produce one car or one plane. So in an output question, those numbers represent the number of cars and planes produced. Now we're looking at the hours to produce only one. So now who has an absolute advantage in the production of cars? Well, now it's Canada because it only takes them 8 hours to produce one car and it takes the US 10 hours to produce one car. Now this also changes how you calculate per
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unit opportunity cost. If the US takes 10 hours to produce a car and 5 hours to produce a plane then the opportunity cost of one car is two planes. So when it comes to input questions the opportunity cost is actually the reciprocal, or it's flipped, compared to Output questions. Now after that you just do exactly what you did before. Who should specialize in cars? Well the United States because
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they only give up two planes and Canada gives up four planes. The US has a lower opportunity cost. And, Canada should specialize in planes because each plane costs them 1/4 a car for the United States it's 1/ 2 a car. And trading one car for three planes is a mutually beneficial terms of trade. Now I know I went over that last part fast, but that's on purpose. Remember this is a summary video. I have more videos on YouTube. If you're still lost a little bit go back and watch
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my practice videos or my hacks video they'll give you tons of tips and strategies to make sure that you're getting it. You're going to find out right now if you know how to do this. Take out your study guide look at topic 1.3 I have two sets of questions for you. The ones on the left are output questions, the one on the right those are input questions. So right now pause this video good luck. Okay now we're moving on to demand and Supply you learned this in your class it all
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starts off with some basic definitions demand is the different quantities that consumers are willing and able to buy at different prices and there's the law of demand it shows an inverse relationship between price and the quantity demanded if the price goes up the quantity people want to buy is going to fall the price goes down people are going to want to buy more now this law is shown on a graph with a downward sloping demand curve if the price Falls more people will
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be willing and able to buy if the price goes up less people will be willing and able to buy so a change in the price of the product moves along the demand curve but if something else other than the price changes that could cause the demand curve to shift for example if there's suddenly more consumers in the market that would cause the demand curve to shift to the right so at every single price people are willing and able to buy more but if it was found this product gets
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people sick then the whole demand curve would shift to the left at every single price people will be willing and able to buy less now there are five shifters or determinates of demand there's taste and preferences number of consumers price of related Goods substitutes and compliments income and future expectations let's see if you get it by giving you a practice question what happens to the demand curve for milk if the price of milk Falls [Music]
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nothing the demand doesn't shift remember a change in the price of the product moves along the curve just remember price doesn't shift the curve don't forget price do shift the curve yeah thank you okay new question what happens to demand curve for milk if the price of a substitute Falls this would cause the demand for milk to decrease and shift to the left at every price consumers are willing and able to buy less because the price of a substitute has fallen they're going
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to buy the other good instead now you might be thinking to yourself whoa whoa whoa you just said price didn't shift the curve and also in the price of the substitute that caused the curve to shift yes the change in the price of the product doesn't shift the demand curve but this is talking about a change in the price of a different product a substitute to clarify a change in the price of the actual product moves along the demand curve and that's called a change in quir demanded if
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one of those five shifters change that's a change in demand it seems like the same thing but trust me I guarantee your teacher is going to ask you a question about that now all of this also applies to the supply curve Supply is the different quantities that producers are willing and able to sell at different prices and there's also a lot of Supply showing a direct relationship between price
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and the quantity Supply when the price goes up producers want to produce more when the price goes down producers are going to produce and sell less this is because when the price goes up producers are going to make more profit so they want to sell more when the price goes down eh I'm going to sell less because why bother so that means there's an upper slope supply curve which also has its own shifters the price of resources or inputs the number of producers technology government
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intervention like taxes subsidies and Regulation and expectations of future profit again let's practice show what happens to the supply curve for milk if the price of milking machines [Music] increases milking machines are a key resource for producing milk so the supply of milk is going to shift to the left at every price milk producers are going to be willing and able to sell less milk okay now's a good time to stop to make sure you're getting everything take out your study
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guide fill out topics 1.4 and [Music] 1.5 now it's time to put supply and demand together so right here is the equilibrium price and quantity this is the only price where the quanti demanded equals the quantity supplied and we assume that's where're going to be in a competitive market when the price is too high and above equilibrium then there's a surplus and eventually prices will fall
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because sellers have all these extra units they're going to lower the price so people will buy them and when the price is below equilibrium and there's a shortage eventually prices will go up because consumers will bid up those prices the point is always assume we're at equilibrium unless something weird is going on in the market now probably the most important skill in this unit is this next part showing changes in a market you want to talk about a supply
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and demand problem I sell ice for a living when it comes to these questions there's Three Steps step one is draw supply and demand and label the original equilibrium price and quantity step two is analyze the change is it going to affect Supply or demand what's the shifter draw and label that new curve and don't forget to draw an arrow and step three is the most important one identify the new equilibrium price and quantity and say what happened did price go up or down
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did quantity go up or down and remember that's what we're doing here we're trying to predict what's going to happen when there's a change in the market what's going to happen to price and quantity oo that's a rough business to be in right now I mean that is really that's unfortunate let's practice draw market for for ice cream and show what'll happen if the price of cream and input significantly [Music] decreases you start with a graph showing the original equilibrium we're
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analyzing ice cream and the price of an input fell so that's going to affect the supply the supply is going to shift to the right so make sure to draw and label that and have an arrow now label the new equilibrium price and quantity and the bottom say price went down and the quantity went up now I know it seems like there's a lot going on here but remember there's only four things that can happen
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demand can increase demand can decrease Supply can increase or Supply can decrease it's easy except when there's double shifts sometimes you might see a question that explicitly tells you that both demand and Supply shifted when you see that remember the double shift rule when two curves shift at the same time either price or quantity is going to be indeterminate in other words you won't
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be able to tell it could go up or it could go down let's practice assume you have a question that says the demand's going to fall and the Supply is going to fall what's going to happen to price and [Music] quantity to get the answer just draw the graphs remember when in doubt graph it out a decrease in demand will cause the price to go down and the quantity to go down and a decrease in Supply will cause the price to go up and the quantity to go down so no matter what happens the
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quantity is definitely going to decrease the price might go up it might go down so that's the one that's indeterminate or your teacher might use the term ambiguous either way you don't know it might go up might go down you can't tell but remember this is only for double shifts when it comes to single shifts you know exactly what's going to happen either price goes up or down quantities is going to go up or down double shifts something's going to be indeterminate now your teacher
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Professor is going to ask you some questions about supply and demand on your next Quiz or your unit exam but the real reason you have to practice these and get super comfortable supply and demand cuz you're going to need it in future units but right now let's see what you know fill out all of topic 1.6 covering everything you need for supply and demand in your study guide good luck okay now you're done with your study guide so what are the next steps the next thing you
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should do is the unit practice multiple choice questions I have in the ultimate review packet yes you are going to have to draw a supply and band but make sure you can also answer multiple choice questions and when you're ready take a look at the unit one free responses inside the ultimate review packet try those questions on your own then look at the answer key and if you need more help watch the video where I go over all the answers okay that's it for macroeconomics unit 1
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if this video helped you please give it a like and leave a comment below and please consider subscribing thanks for watching until next time don't forget Bryson ship the carve yard
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