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MacroEcon Intro: Classes 1-10

by: George Maxwell Miller

MacroEcon Intro: Classes 1-10 Econ 202

Marketplace > University of Louisville > Econ 202 > MacroEcon Intro Classes 1 10
George Maxwell Miller
U of L
GPA 3.7

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Basic information of Macroeconomics US Economy, Graphs, GDP (Gross Domestic Product) Workforce statistics, Opportunity cost, Optimal choice/decision Outputs/inputs, Production possibilities fron...
Principles of Macroeconomics
Econ, Macroeconomics, Basic information
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This 22 page Bundle was uploaded by George Maxwell Miller on Wednesday March 9, 2016. The Bundle belongs to Econ 202 at University of Louisville taught by Nelson in Spring 2016. Since its upload, it has received 34 views.


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Date Created: 03/09/16
ECON 202 03/09/2016 ▯ Ideas for Beyond the Final Exam  How much does it really cost? o Opportunity cost of a decision is the value of the next best alternative that must be given up. ▯  Attempts to repeal laws of supply & Demand – Market Strikes Back o Price ceilings and price floors ▯  Surprising principle: Comparative Advantage ▯  Trade is a win-win situation: both parties fain from trade ▯  Importance of thinking at the margin o Marginal analysis o Average cost vs. marginal cost of an airline passenger ▯  Externalities – A shortcoming of market cured by market methods o Social costs that affect parties external to the economic transactions that cause them ▯  Trade-off between efficiency and equality ▯  Government policies can limit economic fluctuations – but don’t always succeed o Fiscal policy: control of taxes and government spending o Monetary policy: control of money and interest rates ▯ ▯ ▯ ▯ *****CHAPTER 3 & 4 NEED TO KNOW!!!***** ▯ baumol9e/powerpoint_econ.html ▯ Reasons for disagreement  Sometimes important facts are unknown  Different economists have different values  “If all the earth’s economists were laid end to end, they could not reach an agreement.” ▯ ▯ Graphs used in economics  Two variable diagrams o Shows what happens to one variable when another changes o At the origin the value of both values is zero ▯ ▯ ▯ PRICE always EQUALS Y-AXIS ▯ QUANTITY always X-AXIS ▯ ▯ ▯ Definition and measurement of slope  Straight line o Slope=rise/run o (FIND WITHIN THE APPENDIX) ▯ ▯ 45 degree line is slope of 1 and means that X = Y ▯ ▯ ▯ CHAPTER #2 ▯ ▯ The American economy  Biggest national economy  Population o Just under 320 Million o Working Population: 144 million in 2013  Very rich country o Productivity: $53,000 per person, $116,000 per worker in 2013 ▯ ▯ Think of economy as a machine: Inputs  outputs ▯ ▯ Inputs/factors of productions  Labor, machinery, buildings, natural resources ▯ ▯ Outputs  Goods and services that consumers and others want to acquire ▯ ▯ ▯ US private enterprise  In a free market, consumers and businesses voluntarily buy and sell things  All economics have a mixture of private and public ownership  US one of the most “marketized” economies ▯ ▯ 16% of working population working in government right now ▯ ▯ Gross Domestic Product  Measure of the size of the economy  Total Amount it produces in a year ▯ ▯ Real GDP  Adjusts for changes in purchasing power of money (for inflation) ▯ ▯ How does US GDP compare to other countries?  We are an advanced country, growing slower than others ▯ ▯ ▯ US is a relatively closed economy ▯ ▯ If economy is relatively open (closed)   ▯ ▯ ▯ US is growing economy  2013 GDP = 15.7 trillion, $53,000 per person  GDP 5 times higher in 2013 than in 1960  Per capita GDP, 4 times higher  Purchasing powers increased 9 times over the 20 century (2.5-3% th growth rate/year) ▯ ▯ US is growing economy but with bumps in the road  Economic fluctuation and business cycles  Recession: period during which total economic output falls ▯ ▯ The American Workforce: who is in it?  144 million workers In 2013  71% men / 29% women working in US in 1950  48% men / 52% women working in US in 2013 ▯ ▯ American workforce: what does it do?  70% private industries/services o 21.1 mill: education and health o 18.6 mill: business and professional o 15 mill: retail trade   ▯ ▯ ▯ STUDY THE CIRCULAR FLOW OF GOODS AND MONEY ▯ ▯ ▯ Since resources are scarce we must maker choices ▯ ▯ Principle of opportunity cost  Examines options available to households, businesses, governments and societies  How do people make optimal decisions from among competing alternatives given limited resources  Optimal decision making based on opportunity cost circulation ▯ ▯ Opportunity cost and monetary cost  Difference between opportunity cost and market price  In a well functions market, goods that have a high (low) opportunity cost have a high (low) monetary cost.  Opportunity costs and explicit costs may not be the same o Markets may function poorly o Some valuable items have no price tag o Value your time o “Free” goods ▯ ▯ Optimal Choice: How do people/firms make decisions?  At the margin  We assume not simply satisficing ▯ ▯ Optimal decision making  Decisions made best serve objectives of decision maker  EXPLICIT or IMPLICIT COSTS*** comparison with possible…  MARGIN: OPERATE AT THE MARGIN ▯ ▯ Outputs  Goods and services produced by a firm or economy ▯ ▯ Inputs  Resources (labor, raw materials etc.) used to produce outputs ▯ ▯ How does a farmer decide how much of two goods—soybeans and wheat to produce?  Assume farmer has a given technology and fixed resources ▯ ▯ Opportunity cost= What did you have to GIVE UP to produce ________ ▯ ▯ Productions possibilities frontier  Slope of the PPF is the opportunity cost  Note the slope of the PPF is bowed outward. Why? ▯ ▯ Principle of increasing costs  Since resources tend to be specialized, OC’s increase  What would the PPF look like if resources not specialized? ▯ ▯ Why is the principle of increasing cost the norm?  Some inputs that are better suited to making one good rather than the other  Firm must vary proportions of inputs since limited  So PPF typically bows out ▯ ▯ Production possibilities frontier for an economy  Determined by: o Resources, skills, tech o Willingness to work o Past: Construction of factories, research, and innovation  Two goods: Automobiles (civilian goods) and missiles (military goods) ▯ ▯ ▯ ▯ Points on the frontier are efficient  Produces the maximum amount given current… ▯ ▯ ▯ Why would an economy work inefficiently  Unemployment  Inputs assigned to wrong tasks  Goods produced at the wrong scale  Favoritism  Restrictive labor practices ▯ ▯ ***The how, what and for whom do we distribute Division of labor  Break a task into smaller and smaller specialized tasks  Workers become more adept to a particular task ▯ ▯ Principle of comparative advantage  Should a lawyer do her own typing even if she can type faster than her assistant?  No. Her opportunity cost of typing one hour is very high  Basis for international trade ▯ ▯ Principle of Comparative advantage  One country has a comparative advantage over another in the production of a good relative to other goods if it produces that good less inefficiently than it produces other goods, as compared with another country.  US and Korea o US better at making televisions and computers o Much more efficient at computers; slightly more efficient at TV’s o US should specialize in computer production ▯ ▯ ▯ Market mechanism  Division of labor and comparative advantage will increase productivity  Need a system of exchange to improve standard of living  Can barter, but market exchange is much more efficient  Market mechanism decides how much of each good to produce o The role of prices Should a central authority make a determination of prices? ▯ ▯ Market system  Goods go to those most willing and able to pay for them ▯ ▯ Society has many important goals  What does the market do well?  When people cant take care of themselves we take care of them  ▯ ▯ Determinants Determines the location of the demand curve Curve shifts outward when income increases If the price of sliders goes from .60 to .30, they are a normal good and I have been buying 100 of them already, my income goes up. Adam smith and the invisible hand  You’re going to do what is in your interest, but at the same time it will help society. o Self-interest does not mean selfishness o “invisible hand” means not people’s intent ▯ ▯ What happens when we interfere with the market  Usury laws, laws against scalping ▯ ▯ Quantity Demanded  Number of units of a good that consumers are willing and can afford to buy over a specified period of time  Depends on price, other things equal ▯ ▯ MORE ON SLIDE ^^^ ▯ ▯ Shifts of the demand curve  Do not confuse movements along a demand curve with shifts of the demand curve. DOES NOT SHIFT DEMAND CURVE ▯ ▯ What can cause the demand curve to shift?  Consumer income  Population: size and composition  Consumer preferences (tastes)  Prices of related goods o Substitutes o Complimentary goods (they go together) ▯ ▯ ▯ Quantity supplied  Number of units of a good that producers want to sell over a specified period of time  Depends on price, other things equal  As the price rises (falls), quantity supplied falls (rises) ▯ ▯ Supply schedule  Relationship between the price and quantity supplied ▯ ▯ ▯ Supply curve  A graphical representation of a supply schedule  Shows the relationship between price and quantity supplied, holding other determinants constant. ▯ ▯ ▯ What can cause a supply curve to SHIFT-  Industry size: number of firms  Technological progress  Price of inputs  Price of related outputs ▯ ▯ Supply-demand diagram  Graphs the supply and demand curves  Determines the equilibrium price and quantity ▯ ▯ Shortage  Excess quantity demanded over quantity supplied  Buyers cannot purchase what they desire at the current price ▯ ▯ Surplus  Excess quantity supplied over quantity demanded  Sellers cannot sell at current price  Where the is a surplus, the price will eventually decrease ▯ ▯ Equilibrium  Quantity demanded is equal to quantity supplied  No inherent forces that produce change ▯ ▯ The law of supply and demand  In a free market, forces of supply and demand push the price towards equilibrium ▯ ▯ What happens to Equilibrium when the demand curve moves?  Right (outward) o Equilibrium price rises and quantity rises  Left (inward) o Equilibrium price falls and quantity falls ▯ ▯ Suppose the gov’t imposes a gasoline tax of 10 cents on seller.  Does the price increase by 10? NO  The supply curve moves LEFT o Causing lower in demand, but hike in price! ▯ ▯ Supply-side economics: Reaganomics  Promote trade  Making businesses more efficient ▯ ▯ Recovery underway in 1981 but still high inflation  Result of recession in 1980 caused by the federal reserve system INTENTIONALLY  Federal reserve system deployed Monetary Policy o Actions by Fed. Reserve to influence aggregate demand by changing interest rates  Recovery that started in 1982-83 long lasting o Unemployment fell from 11% to 5.5% o Inflation fell from 10% to less than 3% ▯ ▯ President Bush I  Inflation started to rise  Congress passed deficit-reduction package  Spike in oil prices  1990-91 recession ▯ ▯ Clintonomics: deficit reduction and the “New Economy”  Deficit reduction package, 1993 & 97: Both tax increases and spending cuts  Budget deficit became a budget surplus  At same time economy boomed and inflation lowered  The “new economy” o Globalization o Computers ▯ ▯ Tax cuts and the bush economy  2 ndand 3 quarter of 2001 recession, the first in 10 years  Tax cut 2001 brought back budget deficit  War on terrorism led to an increase in government spending o Associated with a huge tax cut across the board  Federal reserve system (with doctor greenspan) lowered interest rate <2% until 2006  The housing bubble in 2000 and its bursting in 2006 ▯ ▯ Obamanomics and the Great Recession  January 2009, economy was still sinking o Major bankruptcy of huge financial institution(s) o Many banks failed  Jobs disappearing at a rapid pace  More tax cuts o Obama did NOT cut those taxes. The CONGRESS is in control of the budget  A burst of federal spending because the congress appropriated the money  Large-scale aid to state and local governments ▯  Bush, Obama admin., the Fed o Variety of unprecedented emergency measures-to rescue the collapsing financial system  Summer 2009, the Great Recession was OVER  Economy started growing again but unemployment remained HIGH ▯ ▯ Stabilization Policy  Gov’t programs designed to prevent or shorten recessions and contain inflation ▯ ▯ Combating unemployment  Gov’t pushes out aggregate demand o Fiscal policy: increase spending o Lower interest rates CONTROLLING INFLATION: INCREASE TAXES BY FED GOV’T, SURPLUS BY FED GOV’T. THIS WILL MAKE AGGREGATE DEMAND CURVE MORE RIGHT However, unemployment rises After WWII, overall, success of gov’t managing economy has been mixed. US 2.3 UK 1.8% (1870-1979) Labor productivity  Amount of output a worker produces in an hour of labor  GDP per hour of work ▯ ▯ What is the key to the growth of US economy?  PRODUCTIVITY  Only rising productivity will increase the economy From rising productivity  Reduce poverty  Increase leisure time  ▯ ▯ Potential GDP  Theoretical amount economy can produce with its given resources Labor force  Number of people holding or seeking jobs ▯ ▯ Estimate potential GDP  1. Count up available supplies  2. Estimate…. ▯ ▯ ▯ PRODUCTION FUNCTION  Shows volume of output that can be produced from given inputs ▯ ▯ ▯ GDP= Consumption + Investment + Gov’t Spending + (Xp-Imp) ▯ ▯ Nominal GDP: dollar value for that year ▯ ▯ Real GDP: takes inflation into account ▯ ▯ Goods and services that pass through ACTUAL organizations count for GDP ▯ ▯ Real wage= (Nominal value/Price level)*100 ▯ ▯ Inflation + real interest rate = Nominal interest rate ▯ ▯ Hyperinflation= what happens when your money becomes “too worthless too quickly” ▯ ▯ Consumer Price index= basket/base year basket ▯ ▯ Stagflation: the simultaneous occurrence of inflation and growth in the economy. GDP falls, but inflation/unemployment go up. ▯ ▯ KHAN ACADEMY ▯ ▯ Aggregate demand/supply:  X-axis=Real GDP=whole economy productivity  Y-axis=Level of prices in economy o Downward sloping curve ▯ If prices are high, GDP will contract ▯ If price is low, GDP will expand ▯ Why is the Aggregate demand downward sloping?  Wealth Effect o Prices Drop (rise), but nothing else does (income, savings, emotions, etc.)  Savings/Interest rate Effect o If things were low price, people could spend LESS and save MORE.  This means that the supply of money that can be lent increases, which makes the price (interest) of borrowing money go down. This means more investing, making the economy grow  VISE-VERSA  Foreign Exchange Effect o Prices go down, then interest rates go down  People then convert out of the currency to make more on interest ▯ ▯ SHIFTS IN AGGREGATE DEMAND ▯ What causes this and how?  GDP=Y= consumption+investments+gov’t spending+ (exports- imports) o Tax cuts (people would demand more causing consumption to go up) shift it right o Tax increase shifts to left o Investment (tax benefits, newly discovered resources, etc) o Direct government (more spending) shifts to right o Exporting increases, which makes the aggregate demand to increase and VISE-VERSA for imports ▯ ▯


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