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ECN 150: Week 5 notes

by: Alexis Ibarra

ECN 150: Week 5 notes ECN 150

Marketplace > La Salle University > Economcs > ECN 150 > ECN 150 Week 5 notes
Alexis Ibarra
La Salle
GPA 3.89

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Notes from week 5 of ECN 150
Francis Thomas Mallon
Class Notes
Economics, Macroeconomics, ECN150
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This 5 page Class Notes was uploaded by Alexis Ibarra on Thursday February 18, 2016. The Class Notes belongs to ECN 150 at La Salle University taught by Francis Thomas Mallon in Summer 2015. Since its upload, it has received 20 views. For similar materials see Macroeconomics in Economcs at La Salle University.


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Date Created: 02/18/16
WEEK 5 NOTES   /15/16 Government Intervention to Control Prices     Price Control: The government can intervene and tell a company that their equilibrium price is too high or too low.  Example: Government raises the price of wheat  The buyers of wheat are adversely affected, and anyone who pays taxes is also  adversely affected.   Farmers are favorably affected by this change.      Price support program: Government owns and sets price above equilibrium. Quantity  willing demand will be less then quantity willingly supplied. By stipulating the minimum  price, a surplus will be created.      Crop restriction program: Government pays people to not produce a product. This restricts  the supply to equal the supply demanded so the government doesn’t have to deal with a  surplus.      Price ceiling: Government imposes a price set below equilibrium to deny the market rate to  go above the government price.  Example: If kids drink a quart of milk every day between ages 3­15 they will be twice as  strong and twice as smart. A quart of milk is $5. If you have 4 kids, you spend $140 a  week on milk for just your kids. BUT the guy next door is rich and has 200 cats who  drink the same amount of milk.   The family can’t afford the milk for the kids but the guy next door is able to buy it for his cats.   The government could step in here and restrict the max price of the product. But for the  program to be successful, the government has to ration the supply that will come to exist  at this lower price. The government could dictate that a certain amount of milk will only  be distributed at schools. Then whatever is left over will be put in the supermarkets for  the cats. Economic Goals of Society (report card):  How to we determine how well we are doing in maximizing our standard of living? How do  we assess our degree of success or failure?  GDP (Gross Domestic Product): The dollar value of the final goods and services  produced through the use of domestic resources  The GDP is determined by how it compares to the previous time period  We look for a rising, steady, consistent, satisfying GDP value  A growth of 15% is a lot but it is not good because it is unsustainable!!  We want it to grow, but at a rate that can be maintained.  Unemployment level  Goal is to attain full employment (NOT the same as 0 unemployment)  How stable our price levels are (Inflation)  Our goal is 2%      Calculating GDP     Expenditure approach: Looks at all (a summation) of the spending that’s taking place  within our society.   Spending of household sectors (consumption): C  Spending of business sectors (investment): I  Spending of government= G X  Spending of international sectors (net exports):  n X  GDP= C + I + G +  n     Income approach: Calculates the GDP by summing all incomes in the society.  Wages, rents, interest, profit  GDP= W + R + i + P     Consumption(spending of household sectors)  Consumption accounts for 70% of our society’s spending.  Consumption can be spent on durable or nondurable goods  Durable goods: The types of items that are expected to have extended, useful lives.  Example: refrigerators, washer/dryer, cars  The purchases of durable goods are considered to be a leading economic  indicator because economists believe that these are reflective of the level of  consumer confidence in society  Nondurable goods: The types of items that are not expected to have extended lives.  Example: Clothing  When the amount of debt you’re in exceeds value of asset that the debt is based on, you  are said to be “under water”.  These people took out a loan and spent a lot of money. Then the economy crashed.  These people are now under water. They lose confidence in the economy and their  willingness to spend (consumption) decreases dramatically which results in a decline  of GDP.  Consumer spending decreases due to lack of confidence in economy, and GDP  shrinks.      The word “Marginal”  Means we are analyzing the rate of change  Analyzing the rate of change:  Income Δ I Consumptio ΔC Savings ΔS n 10,000 1000 9,000 750 1,000 250 11,000 9,750 1,250 Change∈consumption 70 =.75  Marginal Propensity to consume (MPC)=  Change∈Income   = 1000 Change∈savings 250  Marginal Propensity to save (MPS)=  Change∈income   = 1000 =.25  MPC + MPS = 1 2/19/2016  If MPC = .9, and MPS = .1, what can you say about the citizens of that society? ­They are aggressively spending. The change in income is being more directed towards  consumption rather than savings. This also gives business people the idea to produce more of their product since people are buying more. (They may need more workers and machinery to  do this).   Investment (spending of business sectors) X  GDP= C + I + G +  n  Investment (I) = Purchases of new machines & equipment plus changes in business  inventories  Inventories= produced goods that have not been sold  Planned Investment ≠ Actual Investment   Actual Investment > Planned Investment = Contraction   When planned investment is different than actual investment, it will prove to be the  stimulus of affecting change in the economy.   Example: You start making basketballs. What is your inventory? Inventory Beginning year 1 0 Sales projection for 1st year 1,000,000 Planned Inventory 100,000 Production year 1 1,100,000 Actual Sales 800,000 Actual Inventory 300,000 Planned Inventory: You aren’t comfortable having 0 basketballs so you want to have 100,000 on hand just in case of a spike  Production: You want to make your projected amount plus the extra that you made Actual sales: You sold 800,000 Actual Inventory: You planned to have 100,000 basketballs extra but you have 300,000 left.  Year 2 Opening Inventory 300,000 0 Planned Sales 800,000 1,100,000 Planned end inventory 100,000 100,000 Production year 2 600,000 1,200,000 Opening inventory: This is what you start year 2 with (300,000 left over from year 1) Planned sales: 800,000 based off of last year’s sales Planned inventory: You want to have 100,000 extra left at the end (in case) Production: You have 300,000, you want 800,000. So you have to make 500,000. But if you  want an extra 100,000 left over you need to make 600,000.  From year 1 to year 2, this business had a sharp reduction in production.  In year 1, Actual investment > Planned investment, so year 2 suffered a contraction.   Example 2: Inventory Beginning year 1 0 Sales projection for 1st year 1,000,000 Planned Inventory 100,000 1,100,000 Production year 1 Actual Sales 1,100,000 Actual Inventory 0 Year 2 Inventory Opening Inventory 0 Planned Sales 1,100,000 Planned end inventory 100,000 Production year 2 1,200,000  From year 1 to year 2, this business produced a lot more.  Actual Inventory < Planned Inventory in year 1, so year 2 had an expansion. 


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