PRINCIPLES OF MACROECONOMICS
PRINCIPLES OF MACROECONOMICS ECON 2305
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This 15 page Class Notes was uploaded by Eldora Zemlak Sr. on Thursday October 29, 2015. The Class Notes belongs to ECON 2305 at University of Texas at Arlington taught by Jane Himarios in Fall. Since its upload, it has received 21 views. For similar materials see /class/231265/econ-2305-university-of-texas-at-arlington in Economcs at University of Texas at Arlington.
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Date Created: 10/29/15
2010 Jane Himarios PhD Lesson 3 Chapter 3 Supply and Demand Markets bring buyers and sellers together so they can interact and transact with each other There are two sides to each market the demand side and the supply side Prices communicate a lot of information Our market economy is called the price system Demand Demand the maximum amount of a good or service that buyers are willing and able to offer to buy at each and every price during a speci c time period ceteris panbus Here is a demand curve Notice that each price is associated with a different quantity demanded Price of this good P1 P2 I Demand I Q1 Q2 Quantity demanded ofthis good fthe price of this good changes then the quantity demanded of this good will also change but nothing will happen to the demand for this good The Law of Demand Ceteris paribus as price increases quantity demanded falls and as price decreases quantity demanded rises This is because people will substitute towards relatively cheaper products When the price of this good changes we slide along the existing demand curve notice that demand doesn t change Determinants of Demand Ceteris paribus when a determinant of demand changes the position ofthe demand curve shifts This is called a change in demand The determinants of demand are listed in columns 3 and 4 below 2010 Jane Himarlos PH D Yourjob is to learn to de ne and show on a graph 1 an increase in demand 2 a decr and 4 a decrease in quantity demanded You a ase in demand 2 a decre rease in quantity demanded and a 4 decrease in quantIty ded things that c an inc deman ease in dem ause 1 an incre and 3 an increase in quan t h ve ti y demanded to eam to identify the ase in demand 3 m as in the current market period a We in the current market period one of the following D D D A decrease in An increase In A decrease in demand ded ua man demand is caused by e of the is caused by on following An increase in the number of buyers An increase in tastes or preferences An increase in the price of a substitute good A decrease in the price of a complementary good change in consumer expectations about future conditions that us m 0 want to buy more today An increase in income I this is a normal good or A decrease in income I this is an inferior good A decrease in the number of buyers A decrease in tastes or preferences A decrease in the price of a substitute good An increase in the price of a complementary good A change in consumer expectations about future conditions that cause them to want to buy lesstod y A decrease in income if this is a normal good An increase in income if this is an inferior good 2010 Jane Himarios PhD Supply Supply the maximum amount of a good or service that sellers are willing and able to offer to provide at each and every price during a specific time period ceteris paribus Here is a supply curve Notice that each price is associated with a different quantity supplied Price of this good Supply P2 P1 Q1 Q2 Quantity supplied of this good lfthe price of this good changes then the quantity supplied ofthis good will also change but nothing will happen to the supply for this good The Law of Supply Ceteris paribus as price increases quantity supplied rises and as price decreases quantity supplied falls This is because the higher the price the greater the potential for higher profits and thus the greater the incentive for firms to produce and sell more products When the price of this good changes we slide along the existing supply curve notice that supply doesn t change Determinants of Supply Ceteris paribus when a determinant of supply changes the position ofthe supply curve shifts This is called a change in supply The determinants of supply are listed in columns 3 and 4 below 2010 Jane Hlmarlos PH D Yourjob is to learn to de ne and show on a graph 1 an increase in supply 2 a de 4 a decrease in quanti y that cause 1 an increa supplied You 2 a decrease in sup crease in supply 3 an increase in quantity supplied and t have to learn to identify the things 59 supply ply 3 an increase in quantity supplied and a 4 decrease in quantity supplied S An increase in uan suplied l M n the am 5mm in current market the current market period period An increase in suppl is caused by one ofthe following A decrease in caused by one following supply is ofthe An improvement in production technology A decrease in the price of a resource used to produce this good A decrease in the price of another good that sellers can produce expectations about future conditions that cause sellers to supply ore today An increase in the number of sellers An increase in subsidies to producers A decrease in taxes on producers A decrease in government restrictions not in your text A decrease in production technology An increase in the price of a relevant resource used to produce this good An increase in the price of another good that sellers can produce expectations about future conditions that cause sellers to supply less today A decrease in the num ber of sellers A decrease in subsidies to producers An increase in taxes on producers n increase in A government restrictions not in your text 2010 Jane Himarios PhD Economic profit Total Revenue Total Costs Subsidies Taxes Remember that economic profits sends signals to producers telling them how much to produce When economic profit rises the supply curve will shift rightward and vice versa Technology The knowledge of how to use resources to produce the good being graphed lf technology improves then total costs will fall This will increase economic profits sending producers the signal to produce more Subsidy to producer A payment per unit of production from the government to the producer Subsidies increase economic profits sending producers the signal to produce more Tax on producer A payment per unit of production from the producer to the government Taxes decrease economic profits sending producers the signal to produce less Government restrictions rules or laws that the government makes firms comply with Since compliance is costly an increase in government restrictions decreases economic profits sending producers the signal to produce less Examples quotas licensing requirements Market Equilibrium versus Market Disequilibrium Market Equilibrium Markets that are in equilibrium tend to remain there ceteris paribus Price Supply equilibrium price Demand Q equrll rlum Quantity traded quantity traded At P the quantity demanded by buyers equals the quantity supplied by sellers All market participants are happy There are no shortages or surpluses so there is no signal for anyone to change their behavior Market Disequilibrium Markets that are in disequilibrium will not remain in disequilibrium Markets tend to move towards equilibrium 2010 Jane Himarios PhD 1 What happens when a surplus exists Surplus excess supply A surplus occurs when the price is above the equilibrium price and quantity supplied exceeds the quantity demanded The surplus is a signal telling market participants that the current price is too high Participants will respond by offering to buy or sell at some lower price Notice that the price starts to fall We see the market respond with an increase in quantity demanded and a decrease in quantity supplied That is we see movement along the demand curve and movement along the supply curvell This process continues until the surplus is eliminated Draw this on the graph below Price Supply Phigher than equil price Demand Quantity traded 2010 Jane Himarios PhD 2 What happens when a shortage exists Shortage excess demand A shortage occurs when the price is below the equilibrium price and quantity demanded exceeds the quantity supplied The shortage is a signal telling market participants that the current price is too 0W Participants will respond by offering to buy or sell at some higher price Notice that the price starts to rise We see the market respond with a decrease in quantity demanded and an increase in quantity supplied That is we see movement along the demand curve and movement along the supply curvell This process continues until the shortage is eliminated Draw this on the graph below Price Supply Plower than equil price Demand Quantity traded 2010 Jane Himarios PhD Moving to a New Equilibrium Changes in Supply and Demand Why doesn t a market once it has achieved equilibrium stay at that equilibrium point forever It doesn t stay in equilibrium forever because market forces move the equilibrium point Yourjob is to learn to predict what will happen when one curve shifts 1 When demand increases P will and Q will L 2 When demand decreases P will and Q will X 3 When supply increases P will and Q will X 4 When supply decreases P will and Q will gtlt 2010 Jane Himarios PhD You also have to learn to predict what will happen when both curves shift Here is one way to remember what will happen when both curves shift Shifts in the same direction lm w will change in that same direction that demand and supply both shift price will change in the direction of the largest shift think of which side wins the tug of war When supply and demand both rise DT PTQT ST Pm When supply and demand both fall Di a PiQi Si PTQi Shifts in o osin directions I will change in that same direction that demand and supply both shift quantity will change in the direction ofthe largest shift again think of a tug of war When demand rises and supply falls DT PTQT When demand falls and supply rises ST gt PLQT 2010 Jane Himarios PhD Lecture 2 Chapter 2 Production Economic Growth and Trade Give an example of a technological change that has fueled economic growth A Basic Economic Questions and Problems Economic Systems An economic system refers to the way in which a society decides to answer key economic questions 1 What goods and services will be produced 2 How will the goods and services be produced 3 Who will receive the goods and services that are produced Capitalism Economists have observed that these three key questions are answered as followed in a pure capitalistic society 1 What goods and services will be produced The ones that the market values most highly will be produced 2 How will the goods and services be produced In the least costly manner that is with the combination of resources with the lowest opportunity costs 3 Who will receive the goods and services that are produced The people who are willing and able to buy them When people say that capitalism is bad they sometimes mean that they don t like how these questions are answered in a purely capitalistic society Resources Production and Efficiency Productive Efficiency occurs when goods and services are produced at their lowest opportunity cost This frees resources for alternative uses 2010 Jane Himarios PhD Allocative ef ciency occurs when the mix of goods and services produced are just what individuals most desire B Production Possibilities and Growth Production Possibilities Frontier Framework This framework was developed by observing how the world works PPFs are drawn to show us the various combinations of output that can be produced from a fixed set of resources given a speci c level oftechnology The PPF shows all ofthe possible outcomes from our production process It doesn t judge which the best outcome is We concentrate on the possibilities on the frontier because we assume that we want to get the most from our resources in order to overcome scarcity PPFs help us see two important points The first point is that resources are scarce lf scarcity exists then there is a PPF The second point is that resources are specialized lf resources are specialized then the PPF is bowed outward Exhibit 1 A world with no scarcity an unrealistic case Output A Output B Exhibit 2 Two worlds where resources are scarce Output A A Output B 2010 Jane Himarios PhD Exhibit 3 A world where there are constant opportunity costs because resources are perfectly adaptable an unrealistic case similar to figure 2 in your text Output A Output B Exhibit 4 A world where there are increasing opportunity costs because resources are specialized the only realistic case Output A Output B Important things to know Exhibit 4 Output A Z AY Y X9 Aw W BY BW Output B 1 We try to get the most from our scarce resources Therefore this economy is better off at point Y than it is at point X because it is producing more output at point Y than it is at point X 2 This economy doesn t have enough resources to produce the combination of goods shown by point Z 3 The advantage of producing at point W rather than at point Y is the extra amount of Output B that is produced calculated as BW By 4 The opportunity cost of producing at point W rather than at point Y is the amount of Output A that is forgone calculated as AY AW 2010 Jane Himarios PhD 5 The advantage of producing at point Y rather than at point W is the extra amount of Output A that is produced calculated as AY AW 6 The opportunity cost of producing at point Y rather than at point W is the amount of Output B that is forgone calculated as BW By 7 The resources used in Exhibit 3 on the previous page are perfectly adaptable that is that they are equally adept at making each product We can tell because the opportunity cost of an extra unit of Output A is always the same a xed amount of Output B 8 Resources in the real world are not perfectly adaptable they are specialized When resources are specialized the opportunity cost of getting more of one output means giving up successively larger amounts of the other output 9 The law of increasing opportunity costs holds because resources in the real world are specialized The Law of Increasing Opportunity Costs states that as more of a good is produced the opportunity costs of producing it increase Clothing AB C D I FA FB Fc FD FE Food Show the advantage and the opportunity cost of moving from point A to point B What happens to opportunity cost as we incrementally increase the amount of food production from FA to F3 then from FB to Fc then from FC to FD and finally from FD to FE 3 Note that it is not scarcity that causes the law of increasing opportunity costs to hold Exhibit 3 above shows a world where there is scarcity but the law of increasing opportunity costs does not hold in that exhibit 2010 Jane Himarios PhD Economic Growth Economic growth occurs whenever there is an increase in the quantity of resources or an advance in technology Medicine DVD players Add a dotted curve to show economic growth in one industry only Medicine DVD players Important sources of economic growth Business investment Education levels Research and development spending Trade exposure Taxes as a percentage of GDP inversely related Property rights referto the laws regulations rules and social customs that define what an individual can and cannot do in society Economists have observed that a country s system of property rights will affect how resources are allocated what incentives and disincentives exist and how individuals behave See httpwwwcatoorgpubsedbedb4pdf for Craig J Richardson How the Loss of Property Rights Caused Zimbabwe s Collapse Cato Institute Economic Development Bulletin 11142005 C Specialization Comparative Advantage and Trade Voluntary trade is a positivesum game Free trade is good 2010 Jane Himarios PhD NAFTA European Union Should Texas restrict imports from the other states What would this do to our standard of living Who would benefit from such a policy Who would lose
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