Test1 Notes ECN 222 - 005
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Popular in Economcs
This 16 page Study Guide was uploaded by Abigail Johnson on Sunday February 21, 2016. The Study Guide belongs to ECN 222 - 005 at University of North Carolina - Wilmington taught by Adam Talbot Jones in Spring 2016. Since its upload, it has received 141 views. For similar materials see Macroeconomics in Economcs at University of North Carolina - Wilmington.
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Date Created: 02/21/16
2/21/16 5:01 PM WEDNESDAY JAN 20 th Last class we began principles of economics. 1. People face tradeoffs i. Major tradeoff: efficiency vs. equality 2. The cost is what you give up to get instead. Opportunity Cost. 3. Rational people think at the margin. i. Rational People: Do the best they can for themselves. 1. They systematically and purposefully do the best they can to achieve their objectives (assumes self-interest) ii. Making decisions by evaluating cost and benefits of marginal changes: incremental adjustments to an existing plan. Small changes to future-based ideals or plans. 1. Increase in output: compare the costs of labor and materials needed to the end-result, or output iii. Sunk Cost: What happened in the past that is regretted 1. EX: bought an engagement ring, proposed, she said no. Sunk Cost. iv. Examples: 1. Available in Week2Notes v. Marginal Utility: Newspaper stands cost 75cents and the machine fully opens and you can take as many as you want. Soda machine costs $1 and gives you 1 soda. Marginal utility of the newspaper is very low after the first one, whereas all sodas maintain high utility for longer periods of time. vi. Applying the principle: 1. Buy a nice 1996 car of your choice, spend $1,000 on repairs. Transmission dies. Costs $600 to repair the transmission. In either scenario, should you repair the transmission. Why. Explanation in Week2Notes 4. People respond to incentives i. Incentive: induces a person to act. (stimulus in environment) Looking for a reward or avoid a consequence 1. Increase in gas price: buy more hybrids, sell trucks, use less gas 2. Policy: a. Taxes- increase cigarette taxes, teen smoking decreases, overall smoking rates decrease b. Retirement savings averages $100,000 i. Incentives to save more = tax breaks through IRA and other programs ii. Could re-vamp tax code, tax what they earn, don’t tax what they “long-term” save. CURRENT tax code rewards spending and taxes saving 3. Greed is Good speech from movie “Wall Street” with Michael Douglas a. Greed works, especially in free market at equilibrium b. Management has no stake in the company (own less than 3% of company) c. Share holders own 97% of company and can manipulate company in aligned self-interests 4. Seatbelt laws: accidents increased and deaths decreases significantly. Same concept with airbags. Scarcity à Tradeoffs à Opportunity Cost à Rational/Self-Interest à Incentives The Principles of How People Interact • Example in Class: o Available in Week2Notes o Principle: Trading makes everyone better off! 2/21/16 5:01 PM MONDAY JAN. 25 When we change the policy, we change the incentives (rewards/consequences) The Principles of How People Interact (Principles 1-4 available in Week 2 Notes) 5. Principle: Trading makes everyone better off! i. Specialization occurs: labor specialties lead to more efficient production and trading potentials ii. Countries benefit from specialization: 1. Better prices abroad for domestically produced goods a. Ex: Available in Week3Notes 2. Benefit goods from other countries that are cheaper than making them domestically a. Ex: Available in Week3Notes 6. Markets are usually a good way to organize economic activity i. Market: group of buyers and sellers (can be across locations) ii. “Organize Economic Activity” 1. What goods 2. How to produce 3. How MUCH of each 4. Who gets them ($) iii. Market Economy: allocates resources through the decentralized decisions of households and firms. Little regulation, equilibrium driven. 1. Explanations Available in Week3Notes iv. Invisible hand works through the price system à equilibrium 1. Interaction of buyers and sellers to determine $ 2. $ reflects value to both buyer and seller. 3. Equilibrium à efficiency 7. Governments can sometimes improve market outcomes i. Enforce Property Rights 1. Property Rights: the ability to own and exercise control over resources a. Without these rights, there will be no economic growth. b. Ex: Available in Week3Notes ii. Can intervene to improve efficiency or promote equality 1. Improve Efficiency: a. When there is Market Failure i. When the market fails to allocate resources efficiently b. What causes market failure? Price system failure c. What causes price system failure? Externalities i. Externalities: when the production or consumption of a good affects bystanders (ex: pollution) 1. Govn’t “should” tax producers of neg. externality the cost of the externality. a. Ex: Available in Week3Notes 2. Govn’t “should” subsidize producers of positive externalities a. Ex: Available in Week3Notes ii. Market Power: a single buyer or seller (monopoly) 2. Promote Equality: a. If the market’s distribution of well-being is not “desirable,” tax or welfare policies can change how the economic “pie” is divided. Take from wealthy and give to the poor. b. Shows up after Natural Disasters. (Katrina) WEDNESDAY JAN. 27 th Class Discussion Why should government be involved in education? • Funding, tax dollars • Equality: race segregation, intelligence segregation, equal access • Avoiding extremes of no science, banning books, segregation, etc. • Push educational ranks past other countries Does government need to provide education? • True education à independent, well-managed thinkers • Gov funded education à indoctrination and propaganda • No gov funding à extremes in education types available • Common Core problem: assume it’s all common, no competition, no variation, what if it’s wrong? (monopoly in education?) • Could subsidize the choice of where they put their kids for school Consider this: grocery stores and food processes are private sector controlled. Those that cannot afford food are subsidized so they may eat. 8. A country’s standard of living depends on its ability to produce goods and services i. Huge variation in living standards across countries and over time 1. Large standard of living variations a. Occupy Wall Street 2. Wealthier today than 100 years ago, across nations 3. The most important determinant of living standards: Productivity- the amount of goods and services produced per unit of labor. a. Need output to increase faster than the population in order to increase the standards of livings. b. Productivity depends on the equipment (capital), skills (labor), and technology available to workers. i. Examples Available in Week3Notes ii. Get continents and countries to grow by establishing incentives to grow. 1. Aid à requesting more aid 2. Incentivize their own growth through access to a market system 9. Prices rise when the government prints too much money i. Inflation: increases the general level of prices 1. In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall 2. The faster the gov. creates/prints money, the higher the inflation rate. 3. Inflation—an increase by 2% of cost each year is stable. Deflation would cause people to stop buying 10. Society faces a short-run tradeoff between inflation and unemployment i. Business Cycle: fluctuation in economic activity, such as employment and production. 1. (short run) 1-2 years and many economic polices push inflation and unemployment in opposite direction ii. more money is available, more willing to buy something, more people out buying, less product available and so cost rises as demand rises.. this is inflation. 2/21/16 5:01 PM MONDAY FEB 1 10 Principles covered in previous Week 2 and Week 3 materials. A model of aggregate supply and aggregate demand GDP (Gross Domestic Product= Ch.10) Measure the quantity and price of everything • Price Level (average price of everything) o CPI (Consumer Price Index= Ch.11) • Consumption à Aggregate Demand o Investments, Individuals buying things, Corporations buying things, Government buying things • (pretty standard supply and demand graph) with long-run and short-run aggregate supply lines. o Long-run aggregate supply line = steady supply levels (Ch.12) § Depends on labor, capitol, resources, and technology § (yn= natural rate of output quantity) § Yn; Full employment output; Natural rate of output; Potential output (all the names for the same thing) § Vertical line; independent of the price level § Independent of price because resources don’t just increase, the labor (population) doesn’t just suddenly increase with higher prices, and technology doesn’t suddenly increase with higher prices either. They are independent of price levels. o Short-run aggregate supply (Ch.20) § Normal supply line we’re familiar with Supply and Demand is a graphic way to explain what’s happening in markets • Why is there a line outside of a store? • Market = a group of buyers and sellers interacting with each other through prices Perfectly competitive markets = lots of buyers and lots of sellers of the same good. Demand: what buyers will buy at any given price. Law of Demand: as the price of a good falls (becomes cheaper), people will purchase more. Inverse relationship. How to remember a list: Available in Week4Notes What determines demand? • Demand of a snickers bar? – Available in Week4Notes Non-Price Determinants st 1 shifter= Population, number of buyers • Number of buyers shifts demand curve, more buyers = more demand (curve shifts right) o Reduce population à curve shifts left nd 2 shifter= income • increase in income normally increases demand, curve shifts right • Normal Goods: as income increases, demand increases o Steaks, organic fruits/veggies, restaurant visits • Inferior Goods: as income increases, demand decreases o Cafeteria food, Ramen noodles, Spam 3rdshifter= price of related goods • Substitutes: two goods where the price of one leads to a demand in the other o ramen noodles with spaghetti; spam with beef; cheap alcohol with top shelf alcohol • Compliment: two goods where the increase in the price of one leads to a decrease in the demand of the other o Need both together o Peanut butter and jelly; computers and software; printers and ink WEDNESDAY FEB 3 th 4 shifter= Tastes and preferences • taste= Atkins diet (no carbs); the fad changed the preferences of those on the diet • an event must change taste/preferences • Marketing to shift preferences th 5 shifter= Expectations • buy now or later • news à changes expectations (ex: expect rain, buy umbrella) Terminology Matters! • Change in Quantity Demanded: a movement along a fixed D curve, occurs when P changes. Quantity demanded allocates along Demand Curve according to a change in price. Only Price Changes! • Change in Demand: when the whole D curve shifts because of “non- price determinant” changes. Demand Curve shifts left or right because of external factors, so at all prices, buyers either buy more (right shift) or less (left shift) than before the shift. • Demand curve questions o Price of satellite radio decreases, what happens to music downloads? –substitutes, demand curve shifts left o Price of phones decreases, what happens to music downloads? –compliments, demand curve shifts right The Supply Curve • Terms o The quantity supplied of any good is the amount that sellers are willing and bale to sell. o Law of Supply: the claim that the quantity supplied of a good rises when the price of the god rises, all other things equal. o Supply Curve: a graph of the r’ship between price and quantity supplied. • A change in the price causes a movement along the supply curve Non-Price Determinants • Changes in determinants, other than price, shift the supply curve o Input Prices § Increase in input prices supply shifts in/left o Technology § How much of each input is required for a unit of output. § How to produce goods/services § Increases in tech. means fewer inputs per unit of output (higher efficiency) o Number of Sellers § Increase # of sellers, supply shifts out/right o Expectations § Can shift either way § 1) Oil co. in West Texas (desert, on land), a hurricane is coming up through the gulf and oil prices may increase in the future. So, TODAY, you send less product to market, hold off, stock up, and sell more when it gets more expensive. Supply curve shifts in/left. Change in Quantity Supplied: movement along a fixed S curve, occurs when P changes. No other changes. Price increases, supply increases. Change in Supply: a shift in the S curve. Non-price determinants causes a shift left/right. Scenarios • Available in Week4Notes Equilibrium • At equilibrium, Q =S (sDpply=demand) • Surplus= when Q excSeds Q , when Drice exceeds equilibrium price • Shortage= when Q exceDds Q , when pSice is less than the equilibrium price. 2/21/16 5:01 PM MONDAY FEB 8 Price Control Video • After WWII, German economy was worthless • Gov. set prices by law, then nothing was sold as everyone was hoarding • Free market led to more product availability and an economy boom Price Ceilings & Price Floors If markets are efficient, and naturally respond to market “shocks,” then does that mean there’s no need for government intervention in market? • No- there’s a role for market failure scenarios (externalities, public goods, market power); sometimes society may want to sacrifice efficiency for equity (e.g., redistributing with price controls) Price Ceiling: sets the highest price at which it is legal to trade a particular good or service. • To be binding, a price ceiling must be set below the market price. • The ceiling is to keep you from going any higher, set below equilibrium, leading to shortages • A binding price ceiling results in a shortage because the quantity demanded exceeds the quantity supplied. • Lowers price, Lowers quantity (artificial lowering, redistribution) • NOT efficient à Deadweight Loss • Ex: Available in Week5Notes Price Floor: sets the lowest price at which it is legal to trade a particular good or service. • To be binding, a price ceiling must be set above the market price. • Results in a surplus • Ex: Available in Week5Notes [Equilibrium Graph] Available in Week5Notes Consumer Surplus • Difference b/t what consumers are willing to pay and what they actually pay Producer Surplus • Difference b/t what sellers are willing to accept and what they are actually selling at CS + PS = TS MAX (Total Surplus at equilibrium) [P Graph] à ceiling in red ** Available in Week5Notes C • ceiling leads to a shortage • seller can’t charge more than X amount and buyers are willing to pay more for the product • Line straight up from Ceiling (supply) and to equilibrium is deadweight loss & Producer Surplus from equilibrium becomes Consumer Surplus [redistribution effect] [second graph] à wage floors ** Available in Week5Notes • Demand = employers • Supply = workers • X-Axis = quantity (of jobs) • Y-Axis = wage • Current market equilibrium is about $8/hr; Minimum Wage (Floor) is $7.25. This floor is non-binding à doesn’t cause a shortage • If the floor was above equilibrium, at $10/hr, there is now a shortage of available jobs. • Deadweight loss in red • Producer Surplus becomes Consumer Surplus in blue Policy is to incent growth which leads to more firms and more jobs 3-step process for a change in equilibrium 1. Which curve shifts? 2. Which direction? 3. New equilibrium point (price and quantity) Policy to incentivize growth • Demand curve shifts • Shifts right • More jobs, more surplus, new equilibrium 2/21/16 5:01 PM MONDAY FEB 15 What causes surpluses/shortages? • Market changes faster than equilibrium has moved • Floors and Ceilings can cause these • Binding price floor à surplus • Binding price ceiling à shortage Price floor picture ** Available in Week6Notes • Minimum wage: move from $7 to $15 an hour. o Pro: not in poverty anymore § QD(workers who keep jobs with pay raise) win • Con: more people are willing to work for 15/hr than 7/hr. This difference is a surplus of labor (i.e., unemployment) o Q -0 (Dob losses) lose • QD= hired at $15/hr • Q = original equilibrium 0 • Qs= those willing to work at 15/hr • Q0-Q Dloss of jobs (entry level jobs are mostly lost) Price ceiling picture ** Available in Week6Notes • Gasoline Market • Equilibrium is $2, Ceiling is $1 (new law)à shortage • Pros: those who can get gas win • Cons: oil companies lose, those who can’t get gas lose • Q = demand at only $1 D • Q0= original equilibrium • Qs= supply at only $1 • Q -Q = true loss from equilibrium 0 D • QD-Q S shortage Shortageàrationing 1. Long lines- first come first served 2. Discrimination according to sellers’ biases/preferences (connected individuals) • Inefficient: goods do not necessarily go to the buyers who value them most highly • Let prices change: the rationing mechanism is efficient, potentially not fair (or equitable) Changes in equilibrium (3-Steps) • Does Demand or Supply shift at all? Which one or both? • Which way does the curve shift? • Draw in new S&D lines and see what happens to price and quantity (plus new equilibrium point) [Price increase/decrease; Quantity increase/decrease] **Go through the 3-step process for any given problem BEFORE looking for the answer. Graph of D&S combinations WEDNESDAY FEB 17 Retake times (form to sign-up on BB): Wed 5, 8pm CH 212 Thursday 8am CH 231, 3:30pm CH 212 Friday 1pm CH 212 Monday 8am CH 211 Use the 3-step method to analyze the effects of each event on the equilibrium price and quantity of music downloads. 1. Event A: A fall in the price of CDs • Demand • Demand shifts left (decrease) • decrease price, decrease quantity 2. Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell. • Supply • Supply shifts right (increase) • Decrease price, increase quantity 3. Event C: Event A & B both occur. • Price decrease, quantity ? Use the 3-step method to determine the cause of each: 1. Gas prices over last 8 months; Pdecrease, Qincrease • supply increase 2. Gas prices in the summer; Pincrease, Qincrease • demand increase 3. Tickets to superbowl; Pincrease, Qsame • supply ? (technically), demand increase • supply is fixed Ch. 10 (Measuring a Nation’s Income) GDP: measures total income of population • Also measures total expenditure • Income = expenditure (Every dollar a buyer spends is a dollar of income for the seller) Income doesn’t = happiness, but it can buy other rewarding aspects of life Gross Domestic Product: The market value of all final goods and services produced within a country in a given period of time • Market Value: the weighted value of individual products within a market (dollars) o Anything without a “market value” is not included • Final: the end user, last person to buy the good, the true “consumers” o Assumption that the final good includes the price/cost/value of any intermediate goods (inputs) • Goods: physical, tangible items • Services: intangible items (phone service, dry-cleaning, etc.) • Produced: includes currently produced goods (annual, fiscal, etc.), not produced in the past • Within a Country: within the borders of a given country. Physical. • In a Given Period of Time: usually yearly or quarterly (3 months) Consumers (C) + Firms/Investments (I) + Government (G) [Exports- Imports (NX) net exports] = Y (GDP ) US Y=C+I+G+NX • Consumption: total spending by households on goods and services o Exception: housing costs § Renters: rent payment § Homeowner: imputed rental value (“as if” renting the home), not purchase price or mortgage payment.
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