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Econ Week 4 Notes

by: Parker Thurston

Econ Week 4 Notes ECON 1113-001

Parker Thurston

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notes of week 4, lacks wednesday, sorry, I was sick
Principles of Economics Macro
William Clark
Class Notes
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This 6 page Class Notes was uploaded by Parker Thurston on Saturday February 6, 2016. The Class Notes belongs to ECON 1113-001 at University of Oklahoma taught by William Clark in Summer 2015. Since its upload, it has received 92 views. For similar materials see Principles of Economics Macro in Business at University of Oklahoma.


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Date Created: 02/06/16
Week 3:  Monday:  artificial price ceilings or floors are changes made to the equilibrium that  stops the invisible hand Increase or decrease in demand: changes (increases or decreases) in demand are caused by any changes  in any of the demand determinants other than the price of the good or  service, these shift the entire demand schedule rightward shift is when the demand curve increases in demand for a good  at any price leftward shift is when the demand  curve decreases in demand for a good  at any price at any price, if your costs of production are lower, you can produce a  greater quantity for the same price rightward shift in supply results in higher quantity sold but lower price per  unit rightward shift in demand both quantity sold and price per unit sold  increase Price increases are unambiguous, quantity is ambiguous depending on the size of the shifts changes in quantities demanded or supplied are caused by changes in  prices which are shown by movements along the curve Wednesday: Price ceilings: a price set by law above which transactions cannot legally  occur (promotes black market) price ceiling is below equilibrium price results in excess quantity of demand (shortage of goods) in the case of russia, you spend time in line, and therefore have a high  opportunity cost Price Floors: a price set by law below which transactions cannot legally  occur (still promotes black market) price floor is above equilibrium price results in excess quantity supplied (a surplus) in case of Farm Price Supports Possible solutions for Price Supports: 1. repeal price supports (not going to work due to lobbyists) 2. reduce supplies by paying farmers to not grow anything (not going to work  due to OSU research) 3. undertake demand policy: increase number of foreign buyers  1979: Soviets invade afghanistan and foreign buyers dropped off (russia  was primary buyer) Friday:  Bring #2 Pencil and ID for exam Minimum Wage Laws (chapter 4) legal price floors How do we measure labor? Hours of labor services per week price of labor: wage rates causes gap between jobs offered and jobs wanted this surplus results in unemployed workers (unemployment rate) unemployment concentrated on least skilled workers increases in minimum wage are supported by high skill workers often  organized in unions EXAMPLE 2 unskilled workers @ $6 an hour each 1 skilled worker @14 an hour equally productive employer would choose unskilled workers, is cheaper suppose legal minimum wage is $7.25 an hour => 2 unskilled workers @ 7.25 an hour each 1 skilled worker @ 14 an hour equally productive employer would choose skilled workers, is cheaper CHAPTER 7 unemployment and inflation unemployed: workers seeking a job but not finding one how do we measure it?  unemployment rate: % of labor force looking for a job is without a job The household survey: goes out to 60,000 households members of the household 16 years or older, what was your job  classification last month can be listed as 1. employed (E), responded as having a job 2. unemployed (U), responded as looking but not finding a job 3. Not in the labor force: responded as not having a job but not looking for a  job Labor force= E+U The establishment Survey: survey 160,000 firms, representing 40 million workers ask 1 question: how many workers are on your payroll this month? forms the number of jobs created per month Discouraged workers and the unemployment rate: 95 employed workers + 5 unemployed workers results in 5% unemployment rate 95 employed workers + 4 unemployed workers + 1 discouraged workers results in 4% unemployment rate though the labor force has shrunk demographics and unemployment: unemployment varies substantially by demographic group 3 types of unemployment: 1. structural a. unemployment caused by changes in the structure of labor  demand b. example: early 20th century, sharp decline in demand for  blacksmiths, sharp increase in demand for autoworkers,  resulted in increase in unemployment for blacksmiths, less  unemployment for autoworkers c. these are workers who lack marketable job skills d. structural unemployment is everywhere due to changing  markets e. usual policy to deal with structural unemployment is retraining  programs 2. frictional a. workers who are waiting to start a new job or workers entering or reentering the labor force to become employed or  reemployed b. thought of as desirable c. increase overall productivity of labor force d. frictionally unemployed usually make up about 5% of the labor force 3. cyclical a. unemployment associated with downturns in the business  cycle or recessions economic effects of unemployment: GDP Gap: 1. GDP: the dollar value of all goods and services produce domestically a. is an indicator of overall level of economic activity 2. the difference between full employment GDP minus actual GDP 3. full employment GPD: what the economy could produce with  unemployment at 5% 4. number of good and services not being produced due to involuntary  unemployment Noneconomic affects of unemployment: 1. health/social problems a. drugs b. crime 2. political instability Wednesday: Friday: if inflation is not anticipated it tends to reduce the power of creditors or  lenders and increases the purchasing power of debtors or borrowers Creditor Clark proposes to lend $100 (principal) to be repaid after 1 year (term) at 3% nominal interest rate after 1 year (assuming no default) Clark receives $103 ($100 principal + $3 interest) but what is the real value of the $103? depends on what happened to prices over year (loan term) suppose over the year no inflation (no change) Clark gains 3% purchasing power (only interest) allow real interest rate = r allow inflation = pi allow Nominal Interest Rate=i pi=13% Real return on loan: ­10% r=i­pi rearrange to make loaning easier: i=r+pi (where pi is the expected inflation  rate) (fisher equation) inflation: increase in the general price level (P)  inflation = % change in P >0 Deflation: decrease in the general price level deflation = % change in P<0 disinflation: prices are rising (inflation) but not as fast as before Inflation when high and variable increase uncertainty which reduces  borrowing activity, which results in less economic growth Economic effects of deflation: increase the real value of any asset with a fixed economic value if deflation is not expected, increases purchasing power of creditors and  reduces purchasing power of debtors under a gold standard, the amount of money in circulation is some multiple  of the gold reserves  generally more money in circulation, ceteris paribus, the higher the inflation rate from 1865 to 1896, the money supply grew at about 2% per year (and so  did the gold reserves) however output of goods and services increased by 4% per year prices in general decreased by 2% per year who benefitted from the deflation: 1. creditors 2. big business 3. union army pensioners a. received fixed amount of money per month who lost due to deflation: 1. farmers 2. small businesses 3. industrial workers


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