Econ 224 Notes
Econ 224 Notes ECON 224 002
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This 14 page Class Notes was uploaded by Brianna Dwinnell on Friday September 11, 2015. The Class Notes belongs to ECON 224 002 at University of South Carolina taught by Elizabeth Marie Breitbach in Summer 2015. Since its upload, it has received 155 views. For similar materials see Introduction to Economics in Economcs at University of South Carolina.
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Date Created: 09/11/15
ECON 224 Brianna Dwinnell The Circular Flow System Households 0 Sell resourcesbuy products Land labor capital entrepreneur ability Businesses 0 Buy resourcessel products Resource Market ex job fair 0 Households sellBusiness Buy Ex retailer buys a car to use it to help business Product Market ex Walmart farmers market 0 Businesses sellHouseholds buy ORDER Household to Resource Market to Businesses to Product Market MONEY ORDER Households receive rent wages interest and profits from Resource Market Households then spend their money at the Product Market Money intern goes to the Businesses in form of revenue Business costs Resource Marker o Shareholders earn the profits not the businesses Government is a huge piece missing from this equation Limited money because limited time Resources are limited Economic Perspective Economics tells us how to make the best use of our scarce resources Since resources are scarce we make decision Your opportunity cost next best option what did you give up to get where you are rn o Depends on each individual s situation When you made the decision to go to USC you asked yourself what makes you most happy 0 You weighed the benefitscosts 0 Made the decision that maximized your utility Economics assumes people are rational and selfinterested Not the same as selfish but people make decision to make themselves happy Marginal Analysiswhen weighing a decision one uses marginal analysis 0 What are the costs of this decision 0 What are the benefits of this decision o I stop when the marginal benefit of the next taco is less than the marginal cost 0 My expected utility from the taco is less than the money it costs me to purchase it Micro and Macro 0 Micro small portion of the world one company car brands 0 Macro entire world s economy nationwide anything Positive and Normative Statements not in text book 0 Economists have 2 roles 0 Inform about the economytell the facts whether right or wrong 0 Give advice on improving the economyopinion 0 When economists tell the facts of the economy they are making positive statements 0 When economists give opinions on the economy they are making normative statements 0 We are given the facts so we can make opinions on it later Individual Economic Problem 0 But why don t I o I have limited resources 0 Can only work so many hours in a dayincome constraints 0 The economic problem for an individual is determining which our unlimited wants should be purchased with our limited resources 0 To help understand the economic problem we use a budget line 0 EX Sue s parents give her 60 to spend on food a week 0 Loves to eat pizza and hamburgers and spends her weekly allotment on those two items A slice of pizza is 2 and a hamburger is 5 If sue only buys pizza how many slices of pizza can she buy 6023O slices Hamburgers 60512 burgers Think of a graph straight line on y axis at 30 down to 12 on x axis Anything above the line is unattainable because it will cost too much 0 Any point on the budget line is an efficient point because she s using all of her resources incomemoney o If she didn t buy a hamburger she had 5 dollars which would be her opportunity costwhat would be the next best option 0 Any point on the graph would be a good option for Sue just depends on what she wanted at the time o What happens when prices and income changes Income chanqe Now sue only has 30 a week pizza still 2 burger 5 30215 slices of pizza 3056 burgers Sue s old budget line is now unattainable Price change Pizza 1 burger 5 Society s Economic Problem 0 Our society creates limits because we cannot produce everything that everyone wants 0 Our economic resources are scarce o Landllabor Only so many people willing to work and willing to work so many hours in a day 0 Capitalfarmer buying tractor engineer buying computer etc o Entrepreneurial abilitylimited amount of individuals who have desire to be one Economic Systems 0 A particular set of institutional arrangements and a coordinating mechanism to respond to society s problems 0 Differences in systems exist by 0 1Who owns the factors of production 0 2What method is used to motivate coordinate and direct economic activity The Command System 0 Known as socialism or communism o 1Government ownership owns land labor capital and entrepreneurial ability 0 They tell you what you can and cannot do you have no say 0 2Decisions made by a central planning board 0 North Korea and Cuba are last remaining examples of largely centrally planned economiesgov has main control The Market System 0 Known as capitalism o 1Private ownership of resources own the factors of production 0 2 Decisions based on markets Characteristics of the market system 0 Private propertv the right of persons to obtain own control employ dispose of and bequeath land capital and property 0 Freedom of enterprise and choice firms have the freedom to produce and sell any goods or services of their choice 0 Selfinterest each economic unit tries to advance their own goal 0 Competition the presence of independent economic buyers and sellers who have the choice to enter or leave the market 0 Market and pricesmarkets bring buyers and sellers together to decide on a common price 0 Technology and capital qoods advanced tech and capital goods are encouraged o Specialization decision of labor Four Fundamental Questions 0 What goods and services will be produced 0 How will the goods and services be produced 0 Who will get the goods and services c How will the system promote progress Production Possibilities Model deciding which products are the most important to use and supply for every day use 0 Land labor capital etc o The production possibilities model shows the set of choices available to an individual firm or society EVERYTHING ON POWER POINT o Assumptions 0 Full Employment 0 Fixed Resources 0 Fixed Technology 0 Two goods The PPF tells us that how much CAN be produced Not how much SHOULD or WILL be produced 0 EX The United States 0 One resource labor measured in hours 0 The US has 50000 hrs a month of labor 0 Produce 2 goods Computers and Wheat Producing one computer requires 100 hrs Producing one ton of wheat requires 10 hrs 0 If they spend all their money on computers they can produce 500 computers 5000010500 comp o If they spend all their money on wheat they can produce 5000 tons of wheat 25000 hrs to produce computers will produce 250 computers 25000 hrs to produce wheat will produce 2500 tons of wheat if we produce 1 computer what are we giving up 100 hours how much wheat could we have produced a 10 tons of wheat Law of Increasing Opportunity Costs 0 In the real world not all resources are created equal 0 Society and individuals are better off when we specialize in what we are good at 0 Our resources can be more productive 0 As production of a good increases the opportunity cost of producing an addition unit rises 0 Not all resources are equally productive in producing a good or service 0 Hard to grow peaches in Midwest o More time consuming to type a paper on a typewriter 0 Doctors shouldn t do their own yard work Unemployment resources not used is going to be an attainable but inefficient point because there are more resources that could be produced but it s not being used A Growing Economy 0 Economic growth drop the assumption of fixed resources and technology 0 Increased resource supply 0 Increased labor force and entrepreneurial ability 0 Stock of capital 0 New sources of resources natural gas 0 Improvements in Resource Quality 0 Better educated work force 0 Advances in Technology 0 New and better goods 0 Improved production methods ex Assembly line 0 Decreasing economy war depression natural disaster Technology Improvement 0 Suppose a new tractor is invented that allows for faster production of wheat o How will this effect the production of wheat o How will this effect the production of computers 0 If we spend all our time producing 0 Wheat there will be an increase in production 0 Computers there will be no change Present Choices and Future Possibilities 0 Society also faces a decision of present or future consumption 0 Should we produce goods for current consumption couches tvs or capital goods 0 If we invest our scarce resources in capital goods EX Production Possibilities Japan has 30000 hours of labor available for production per month 0 Producing one computer requires 125 hours of labor 0 Producing one ton of wheat requires 25 hours of labor 0 By maximizing each option Japan can produce 240 computers 30000125 hrs240 computers 1200 tons of wheat 3000025 hrs1200 tons of wheat OR any combination along the PPF What Should Each Country Produce 0 Absolute Advantage fewer inputs 0 Requires the least amount of time 0 Going back up to the example of US labor producing wheat and computers The US has an absolute advantage in wheat producing a ton of wheat using 10 hrs of labor in the US vs 25 in Japan 0 Who has the absolute advantage in computers 0 US it takes 100 hrs to make a computer compared to 125 in Japan 0 If each country has an absolute advantage in one good and specializes in that good then both countries can gain from trade 0 However in this case US has absolute advantage in both goods 0 Now what 0 Comparative Advantage a lower relative opportunity cost 0 Two countries can also gain from trade when each specialize in the good it produces at lowest cost 0 Absolute advantage measures the cost of a good in terms of the inputs required to produce it o Opportunity Cost is still important 0 Which country has the comparative advantaqe in computers 0 To answer this you must determine the opportunity cost of a computer in each country 0 What is the cost of one computer in the US Measure in terms of wheat how much wheat must we give up to produce one computer If producing one computer requires 100 labor hours these hours instead could have produced how much wheat n 10 tons of wheat 100 hrs comp10 hrs wheat 10 tons of wheat o What is the cost of one computer in Japan Measure in terms of wheat how much wheat must we give up to produce one computer If producing one computer requires 125 labor hours these hours instead could have produced how much wheat n 5 tons of wheat 125hrs comp10 hrs Wheat 5 tons of wheat o In this case Japan has the comparative advantage in computers because they can produce them at a lower opportunity cost Japan only loses 5 tons of wheat when they make a computer compared to US where we lose 10 tons of wheat for 1 computer 0 LESSON absolute advantage is not necessary for comparative advantage I o QUICK QUESTION 0 If Argentina and Brazil each have 10000 hrs of labor per month 0 Argentina Producing one pound of coffee requires 2 hours Producing one bottle of wine requires 4 hours 0 Brazil Producing one pound of coffee requires 1 hour Producing one bottle of win requires 5 hours 0 Who has the absolute advantage in Coffee Brazil takes them less time to make coffee 0 Who has the comparative advantage in Wine Argentina because they only lose 2 tons of coffee when making an extra bottle of wine 4hrs wine2 hrs coffee2 compared to Brazil which loses 5 tons of coffee to make 1 bottle of wine 5 hrs wine1 hr coffee5 Trade 0 What determines whether two countries should trade Why might they trade EVERYONE BENEFITS FROM TRADE 0 Isolated nations only consume what they produce If US uses half of its labor to produce each of the two goods they will produce and consume Same if Japan isolated itself it would split labor in half to produce both goods Without trade US consumers get 250 computers and 2500 tons of wheat while Japanese Consumers get 120 computers and 600 tons of wheat o Specializing based on Comparative Advantage 0 Suppose that US produces 3400 tons of wheat How many computers would the US be able to produce with the remaining labor a before US could produce 250 computers and 2500 tons of wheat now we have increased the tons of wheat by 900 25009003400 n producing 3400 tons of wheat requires 34000 labor hours a the remaining 16000 labor hours are used to produce computers 0 US could produce 160 computers 0 Suppose Japan produces 240 computers how many tons of wheat would japan be able to produce with its remaining labor 240 computers 30000 labor hours leaving no hours left for wheat Therefore there would be no wheat produced 0 Terms of Trade 0 Remember the cost of a computer is 10 tons of wheat in US 5 tons of wheat in Japan At any price less than 10 tons of wheat the US should be willing to import a computer At any price more than 5 tons of wheat Japan should be willing to export a computer 0 Gains from Trade 0 Suppose the US exports 700 tons of wheat to Japan and imports 100 computers from japan So japan imports 700 tons of wheat and exports 100 computers 0 If US produced 160 computers and imported 100 from japan they would then have 260 computers If they produced 3400 tons of wheat and exported 700 tons they would be left with 2700 tons of wheat Therefore they are gaining from the trade 0 Comparative advantage 0 Gains from trade arise from comparative advantage differences in opportunity cost 0 When each country specializes in goods in which it has a comparative advantaqe total production in all countries is higher the world production is increased all countries gain from trade Exchange rates 0 Exchange rates can change daily 0 Depreciation a decrease in the value of one currency relative to another Dollar price of foreign currency increasesdollar depreciates relative to the foreign currency foreign currency price of dollar decreases foreign currency appreciates relative to the dollar 0 Appreciation an increase in the value of one currency relative to another Dollar price of foreign currency decreasesdollar appreciates relative to the foreign currencyforeign currency price of dollar increases foreign currency depreciates relative to the dollar If demand for a currency increases people want more of that currency it will appreciate If supply of a currency increases people want to sell more of that currency it will depreciate EX slide 7 of lesson 3 O 1When the increase in demand for British goods and services increases exchange rates rise and the pound appreciate and the dollar depreciated 2When the US income increases faster than Britain the demand increases exchange rates ride and the pound appreciates and the dollar depreciates 3The US inflation rate is higher than British so demands have increased exchange rates rise and pounds appreciate and the dollar depreciates 4US real interest rates are higher than Britain supply increases exchange rates fall and the pound depreciates while the dollar appreciates 5Return on investments in Britain is higher US has to demand more poundsdemand increases exchange rates rise and the pound appreciates and the dollar depreciates Add extra column after appreciation and depreciation for DemandSupply for US dollars a 1 Supply increases a 2 Supply increase a 3 Supply increase a 4 Demand increase a 5 Supply increase 0 Exchange rate manipulation O Governments intentionally adjust money supply to affect the exchange rate of its currency 0 PeggedFixed Exchange Rates 0 0 Exchange rates that are fixed at a certain level through gov acUons Chinese Yuan Bahamian Dollar 0 Flexible or Floating exchange rates 0 Exchange rates that are determines by supply and demand for currency 0 US dollar British Pound Euro Real World Exchange Rates The Chinese government pegs the exchange rate between the US Dollar and Yuan between 14 and 17 When the Chinese gov observes the value of the Yuan rising against the dollar they print more Yuan The newly minted Yuan are used to purchase more US dollars and treasure securities Increases the supply of Yuan lowers the exchange rate depreciates the Yuan IMPACT 0 Lower prices for Chinese exports 0 Lower real wages for Chinese citizens 0 Higher prices for US exports Government and Trade Trade Protection and Subsidies o Tariffstax on any imported good Direct Effects on Tariffs a Purchase fewer imported goodsless coming in n Domestic producers receive a higher price a Governments receive tax revenue n Consumers pay higher pricesmost important we have to pay cost of product but also have to pay portion of tax Prices for consumers go UP when there is a tariff on a product Indirect Effects of tariffs n Hurt domestic producers using the imported product as an inputthey pay higher price as well as consumers Every person using that product pays a higher price for it a Foreign country purchases fewer US goods I Subsidies inefficient firms 0 Import quotasgov sets amount of a given product that a country can import Only X amount of pounds of sugar can come into US at a time Limitingreducing amount of imports o Nontariff barriers another restriction of import that firms have to meet before countries can import goods A form of restrictive trade where barriers to trade are set up and take a form other than a tariff o Voluntarv export restrictions firms voluntarily limit the exports to decrease taxes DO NOT PUT TARIFF ON ITEM 0 Export subsidies reverse of a tax Government pays you US firms are producing and when we decide to sell abroad the US gov gives us money to do so Make American firms more competitive on world market trying to make goods look cheaper because gov is paying portion of the price a Makes US look more competitive abroad Three Arguments for Protectionism 0 Increased Domestic Employment very small increase in new jobs 0 If every country created tariffs we would go back to the isolated world 0 Not specializing our factors of production 0 Less production 0 Consumption cannot move past the PPF 0 Cheap foreign Labor Argument 0 Cheaper wages abroad UShigher wages higher prices health care Mean higher prices at stores and increased wages 0 Protection Against Dumping 0 We can produce skills on a mass scale and take those and feed the worldBUTputs farmers in third world out of biz Put our farmers at a monopoly and they can charge whatever they want Would dump the rest of farming population Recent US Trade Deficits 0 Increased income 0 Wealthy nationcan consume a lot of goods Domestic and foreign goods 0 Lower personal savings rates 0 We save a very small portion of our incomes relative to china and other countries 0 Not savinggtspending Importing more goods relative to China because we are spending more 0 Invest in capital goods when we save 0 Larger government budget deficits o Gov loves to spend money on domestic and foreign goods Doar amount of one product might be the same in 2 countries but which country has the better opportunity cost Ex China has more workers so they will be able to produce 1 product faster than US US is using their opportunity cost so that they can make other things for more 8202015 22500 PM