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Rutgers University

September 5 2013 – INTRO TO MACROECONOMICS RESOURCES: 1. Materials—FACTORS: Capital (Interest) and Land (Rent) 2. Humans—FACTORS: Labor (Wage) and Entrepreneurship (Profit) Theory: Attempt to explain reality in the simplest way possible with the purpose being to predict the occurrence of events; moving into an abstract realm  Distinguish theory from description by avoiding time, dates, temperature —focus on what’s the given issue and how to conclude that issue 3 LOGIC FALACIES: 1. Composition  When you wrongly assume that what’s true for one thing may not be true for another a. Ex. What’s best for GM may not be what’s best for the whole country 2. Division  When you wrongly assume that what is true for the system as a whole is also true for an individual person a. Ex. If you recognize that there is an unemployment issue you decide you should increase your spending by about 25%. Your individual choice will NOT affect the system of unemployment as a whole. 3. False Cause  When you wrongly assume that Event A causes Event B merely because it precedes it. a. Ex. When the flu infects your body its initial symptom is headache, then fever, and then vomiting. To assume that the headache caused the vomiting is a false cause because the flu caused the all- in-all headache and vomiting; Event Headache did not cause Event Vomiting. Scarcity  (RELATIVE concept) What is available, relative to what is wanted. • Resources are scarce because there is never enough available to produce all of the goods wanted • A sacrifice must be made to use the resources Opportunity Cost  (ALL COSTS are O.C) “The opportunity cost in undertaking any given option is the next best alternative action you could have taken.” Ex. You have a choice between a blind date and a house party. You decide to go to the house party. Your opportunity cost was chance of meeting someone on that blind date. Production Possibility Frontier Represents maximum capability of an economy at a given time. ASSUME: -Wheat vs. Cotton - Factors are Given -Technology is Given - You have Full Employment *Opportunity Cost to Produce 10 bushels of Wheat is your 5 bushels of Cotton. Law of Increase in Costs  As you continue to expand the products of one good by equal amounts you find you must sacrifice greater and greater amounts of the alternate good. • Not all factors of production are equal in the production of all goods Marginal Rate of Transformation [Slope of the PP Curve]  The amount of the first good you have to give up for the other good. • There is a parallel shift of the curve if both goods are equally accumulated. There is a breakthrough shift if on good accumulates more than the other. *Started with the same production possibility but the country with the more advanced level of technology had an increased ability to produce Capitalism  An economic system where the factors of production are privately owned and operated for personal gain in a fairly COMPETETIVE ATMOSHERE • When the production is capitalistic a company is motivated to perform better and put their production to good use. • Competition is the key to private ownership; “the guardian to capitalism” {Chapter 4} Market: A system in which buyers and sellers are coming together • “A market exists when the forces of supply (SELLERS) and demand (BUYERS) come together” Demand: An inverse relationship between the price of a good and the quantity demanded Law of Demand: Higher prices will result in a lower quantity demanded with all other things equal ( “centeris paribus”) Substitute Goods: One FOR the other (Kodak vs. Fugii) Complimentary Goods: One WITH the other (Cameras and Film) Change in Quantity Demanded: Movement along the demand curve; occurs ONLY when there is a CHANGE IN PRICE Change in Demand: A change in any of the factors (other than the price) that will cause the demand curve to shift Factors that affect our Ability and Willingness to buy  Price of Item Price of the Substitute Price of the Complementary Income Personal Taste Expectation of Future Prices September 10 2013 – INTRO TO MACROECONOMICS Change in Quantity  Moving along the demand curve – change in price Change in Demand  A change in any one of the variables other than the price of the good itself will cause the demand curve to shift Increase in Demand (shifts to right)  At original price – individual is willing and able to pay for more OR willing to buy at higher price Decrease in demand (shifts to left)  At original price – individual is willing and able to pay for less OR willing to buy only at lower price **Difference between desire and demand (willing and able) Normal Good  Demand for good moves in same direction as income (income increases and demand increases) Inferior Good  Demand for good moves in opposite direction as income (income increases and demand decreases) **To get overall demand curve, take horizontal summation of all individual demand curves A + B = C *At each price, go across horizon and add* Sw = f(Pw, Pf, Prof, technology, Palt, expectation) Sw  supplier of widget F  function of Pw  price of widget Pf  price of factor of production (higher you pay, less appealing) Prof  productivity of factor Technology application of scientific principles for product Palt  price and profit you could earn from alternative good Pw Quantity $1 1/week $2 2/week $3 3/week $4 4/week $5 5/week Law of Supply  - All other things remain equal – celeris paribus - Positive relationship btw price of good and quantity of supply Change of Quantity of Supply  - Means you moved along supply curve – can only come about as a result of change in price of good itself Change in Supply  - Change in any one of the variables (other than price of good itself) will cause supply curve to shift Increase Decrease S2 ▯ irms is willing and able to provide more at  inal price, firm is willing and able to   original price than before OR willing and able ss of good than before OR firm  to provide at a lower price  willing and able to provide only at higher price  Pf  Decrease in price for factor of production, willingness and ability increases Equilibrium  - When it’s at rest, a system is in state of equilibrium - No net change – remain at rest unless acted on by an external force Stable vs Unstable Equilibrium  - Stable – remove external force that disturbed it, return to original position *When a market is in equilibrium, it has cleared  no unsatisfied quantity demanded and no unsatisfied quantity supplied Price Quantity Quantit Demande y d Supplie d $1 500 100 $2 400 200 $3 300 300 $4 200 400 $5 100 500 Supply constant, Demand increase @ original price  *higher price, higher quantity - Shortage in market – buyers start to bid price up – demand decreases along new demand curve – quantity supplied increases – so, higher price Supply constant, Demand decrease @ original price  *lower price, lower quantity - People are willing and able to buy less but firms willing and able to produce more – surplus in market – price goes down – demand increases – supply decreases and new equilibrium Demand constant, Supply increase @ original price  *lower price, higher quantity - Firms willing and able to supply more – people still wanna buy some – surplus – prices bid down – demand increases – supply decreases – new equilibrium Demand constant, Supply decrease @ original price  *higher price, lower quantity - Firms willing and able to supply less – people still wanna buy same quantity – shortage – prices bid up – demand decreases – supply increases – new equilibrium September 12 2013 – INTRO TO MACROECONOMICS Private sector – individuals who privately own business Economic Role of Gov’t  - Promotion and regulation of private sector - Provision of social goods 5 Ways to Promote and Regulate  1. Provide for stable economic environment a. Defining property rights i. People can understand what they have right to ii. Buying land is buying rights to land iii. If strike oil, can’t drill oil b. Establishing standards for weights and measures c. Define what would constitute a loosely binding contract and upholding it 2. Protecting public wefare a. Through health and safety benefits (i.e. minimum wage, disability) 3. Granting of economic priviledges a. When gov’t tries to provide substance to industry b. Substities and tarrifs 4. Maintain Competition a. Enforcing anti-trust laws 5. Encourage greater efficiency, equity, stability and growth in economy through tax, spending, regulation a. Equity – equitable distribution of income b. Stability – best way to look at is to look at instability i. With instability, lose ability to plan things out – economic activity drops c. Growth – keep it growing so that you can provide goods and services Social Goods  Pure Public Goods:  Exclusion principle – you can be excluded from consuming goods/services if you don’t step forward and offer payment  Ex: national defense, street light, fire fighters/police (can’t refuse them but can refuse to pay so we pay taxes) Merit Goods:  Exclusion principle still holds but merits of good are so significant that more of it should be available than if it was privately provided (Ex: libraries) Spillovers or Externalities  - Market failures – market has failed to result in the correct allocations of resources Negative spillovers/externalities and spillover/external costs:  Occurs when cost incurred by firm in production of goods are less than the cost inflicted on society used to be  Gov’t would dissolve by trying to get firm to have to internalize all costs in production (market method)  Have legislation, regulation (non-market measures)  Ex: pollution Positive spillovers/externalities and spillover/external benefits:  Benefits received by those who consumed the goods are less than benefits received by society as a whole  Subsidize consumers, subsidize manufacturer, public revision  Ex: highway with toll lane Gov’t Spending   Gov’t spending has increased  Reasons: 1. National defense 2. Interest on federal debt 3. Lagging productivity in public sector 4. Increasing demand for goods/services in gov’t ^^PAY THROUGH TAXES Personal vs Corporate Taxes  Personal: Average Tax Rate Marginal Tax Rate Taxes kvddkfj Additional tax paying Taxable Income Additional tax income Income Marginable $0-$10,000 10%
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