Class info
-​ Office hours in andrew young school 661 on mondays 3:30-5:00 PM
-​ Email cboulenger@gsu.edu , not the icollege email
-​ Final exam is 30% of grade (December 5th decided by gsu)
-​ Quizzes are every other week
-​ Four questions
-​ One drop
-​ Quizzes at end of class
-​ All multiple choice
-​ One extra credit opportunity at end of semester
Chapter 1: Fundamentals
-​ Microeconomics focuses on how individuals, governments, and businesses make
decisions when faced with scarcity
-​ Economy of japan in recession? Macro
-​ How many movies a family sees a year and how this affects budgeting? Micro
-​ Categories of resources
-​ Land: “natural resources” used for production
-​ Labor: all workers in the economy
-​ Capital: all machines, tools, equipment, and buildings used for production
-​ Entrepreneurial Ability: technology
-​ Resources are relatively scarce in all countries
-​ Scarcity implies that we must make a choice
-​ You want to buy everything in store but you can’t because you don’t have
unlimited money
-​ Opportunity cost is not the value of everything one has given up, but rather the next best
alternative
-​ If you don’t go to college, the next best alternative is working.
-​ Time is a scarcity
-​ Rational Decision making is based on three things:
-​ Self-interest: what’s best for them
-​ Marginal Decision Making: since people tend to think in small increments, people
“think at the margin”
-​ Optimization: optimizing overall utility, or maximizing our overall benefits
-​ Ex: Should I eat one more slice of pizza?
-​ Marginal benefit: being more full
-​ Marginal cost: more calories and more money
-​ A rational decision results from the comparison of marginal benefit and marginal
cost.
-​ Marginal Benefit and Marginal Cost should both be considered
-​ If eating the pizza is worth being full (MB) despite gaining weight (MC), then do it.
-​ If gaining weight (MC) is not worth being full (MB), then don’t do it.
-​ After periods of time, MB goes down and MC goes up
-​
-​
-​
-​
The second slice of pizza is worth it since you’re still hungry, but the
fourth isn’t since you’re not very hungry anymore
Graphing MB and MC (see slides 9 & 10)
-​ MB always goes on X axis and MC always goes on Y axis
-​ MB looks like demand curve while MC looks like supply curve
-​ Equilibrium is where the two cross
-​ Look at different points to see how heavily MB or MC outweighs the other
-​ In the example of the graph at point 1, 5 (MB) > 1 (MC)
-​ At point 4, 2 (MB) < 4 (MC)
-​ If Michelle wants to purchase a new phone, she will buy it if the MB of the phone
is greater than the MC.
-​ The main significance of the equilibrium between MB and MC is that a rational
decision has been made.
Production schedule examples (CH 1 continued slide)
-​ All points below PPF (production possibilities frontier) are possible but inefficient
-​ All points above PPF are not feasible
-​ All points on PPF are both possible and efficient
-​ PPF illustrates opportunity cost
Calculating opportunity costs
-​ Opportunity cost= (loss/gain)
-​ Ex. Max goes from 0 apples to 50 apples (see opportunity cost example
2)
-​ gain= 50 apples
-​ loss= 300 oranges to 150 oranges (300-150=150 apples)
-​ What is Max’s OC of 50 more apples? 150 oranges
-​ What is Max’s OC of 1 more apple?
-​ 1 apple=(150/50)= 3 oranges (gaining 1 apple for every 3
oranges given up)
-​ Ex. 50 more apples means giving up 150 oranges (see OC example 7)
-​ gain= 50 apples
-​ loss= 150 oranges
-​ What is the OC of 50 more apples? 150 oranges
-​ What is the OC of 1 more apple?
-​ 1 apple=(150/50)= 3 oranges
-​ Ex. What is Alex’s cost for one orange? (see OC example 10)
-​ gain= 300 oranges (0 to 300)
-​ loss= 100 apples (100 to 0)
-​ 1 orange= (100/300)= ⅓ apple
-​ Ex. What is Clara’s opportunity cost of producing an apple? (see Quick
Quiz)
-​ gain= 200 apples
-​ loss= 200 oranges
-​ 1 apple= (200/200)= 1 orange
-​
-​
-​
-​
-​
What about 1 more orange?
gain= 200 oranges
loss= 200 apples
-​ 1 orange= (200/200)= 1 apple
Comparative Advantage: The ability to produce a good or service at a lower relative OC
than another producer
-​ Who has the CA between Alex and Clara? (who gives up less?)
Apples
Oranges
Alex 3 oranges ⅓ apple
Clara 1 orange 1 apple
-​ Alex has CA in oranges (⅓ < 1) while Clara has CA in apples (1 < 3)
-​ The theory of CA states that countries gain from trade if each country
specializes in producing the products it is best suited to produce, the
world output can rise.
-​ Ex. Who has the CA? (see Quiz Question 8)
-​ Estonia makes 4 trombones and 400 snowshoes
-​ gain=4 trombones
-​ loss=400 snowshoes
-​ 1 trombone=(400/4)= 100 snowshoes
-​ gain=400 snowshoes
-​ loss=4
-​ 1 snowshoe=(4/400)= 1/100 trombone
-​ Bulgaria makes 2 trombones and 300 snowshoes
-​ gain=2 trombones
-​ loss=300 snowshoes
-​ 1 trombone=(300/2)= 150 snowshoes
-​ gain=300 snowshoes
-​ loss=2 trombones
-​ 1 snowshoe=(2/300)= 1/150 trombone
-​ Estonia has CA in trombones (100 snowshoes < 150 snowshoes)
while Bulgaria has CA in snowshoes (1/150 trombone < 1/100
trombone)
-​ Specialization occurs when two or more partners work together making
what they’re good at.
Circular Flow Model: a model that concisely describes how goods, services, resources,
and money flow back and forth in an economy (see Circular Flow Model 3 slide)
-​ Two markets > resources & products
-​ Resources: households are sellers (sell their labor) & firms are the buyers
-​ Two agents > firms & households
-​ The red arrows are the flow of resources
-​ Firms supply goods and services to the product market which then
supplies resources to household. Household then supplies labor to
-​
resource market where the labor from household is used by the firm to
make goods and services
Flow of money is the gray arrow
-​ Household buys goods and services in the product market, pouring
money from household to product market. Money from the product market
goes to the firm as revenue. Firm uses this revenue to pay the workers for
labor, or to the resource market. The resource market then sends the
wages to the household.
Chapter 2
Gross Domestic Product (GDP): used as a measure of total production in an economy of the
measure of the expenditures of all final goods and services that are produced during a fixed
period of time
-​ Nominal GDP: a measure of GDP in which the quantities produced are valued at current
year prices
-​ Real GDP: same as nominal but uses constant prices
-​ Final Goods and Services: goods and services that are sold to the end user and are not
used to produce another product for subsequent sale.
-​ Final: sold to the end user and is a part of GDP (ex. Latte at starbucks is sold to
the end user)
-​ Intermediate: sold to make the end product and is not a part of GDP(ex. Milk
used to make the latte)
-​ Examples:
-​ Farmers market - sold to consumer for final consumption (final)
-​ Frozen food factory - sold to factory to make microwavable meals
(intermediate)
-​ Other things not included in GDP are:
-​ The sale of used goods (goodwill)
-​ Goods/services produced in previous years
-​ Financial instruments (stocks/bonds)
-​ Items produced in a foreign country (all goods contributing to GDP must be made
in the United States)
-​ Classifying GDP expenditures
-​ Consumption (C): all expenditures made by households on goods and services,
like clothing, food, electronics, and recreations during a given time period
-​ Goods are tangible while services are intangible, but both part of
consumption
-​ Two aspects of goods include Durable Goods (laptop, TV, fridge, or
expected lifespan of around 3 years) and Nondurable Goods (food and
clothing or something that lasts fewer than three years)
-​ Gross Investment (I): the dollar value of all new capital purchased (as
investment) and the expansion
-​
​
-​
-​
Business fixed investment: purchased by firms of new capital goods, such
as offices, factories, tools, and machines
-​ Residential: purchases of new houses which also includes home
improvements (buying a house is not consumption, it’s considered
investment; renting is considered consumption)
-​ Inventory: changes in inventory from one year to the next (positive if firms
produce more than they sell, negative if firms sell more than they
produce)
-​ Government Purchases (G): all final goods purchased by the federal, state, and
local govs during a given time period as well as all final services
-​ Net Exports (NX): the difference between exports (X) (goods made domestically
and purchased by foreign customers) and imports (M) (goods made in other
countries and purchased domestically) (NX=X-M) this is because goods
purchased from other countries don’t count towards GDP
-​ A positive net export value means exports are greater than imports
-​ A negative net exports value means imports are greater than exports
​
Important formula→ GDP = C + I + G + NX ← important formula
Income Approach: an approach measuring GDP that measures the value of all final
goods and services in an economy during a time period using income generated
-​ Expenditures approach: Who bought what?
-​ Income approach: Who earned what?
Calculate Nominal Prices
Good
Quantity
Price
Apples
10
x
2
20
Pizzas
10
x
10
+​ 100
Bottled water
50
x
1
+​ 50
GDP
-​
Market Value
=
170
Calculate Real Prices: use the prices from one year with the year 2 quantities to be able
to compare real production changes (obviously you would need two examples to
compare, I just don’t feel like making more tables) output x prices
Good
Quantity
Price
Market Value
Apples
5
x
2
10
Pizzas
10
x
10
+​ 100
Bottled Water
100
x
1
+​ 100
GDP
=
210
-​
-​
Nominal calcs can change for two reasons - if quantities or prices change. Real
can change when quantities change but not prices (which is a better measure of
new production).
Real GDP per capita: real GDP per person; calculated as real GDP divided by the size of
the population
-​ It’s not a perfect measure for gauging standards of living in a country (it
measures averages and thus masks distributions and hides non-market
transactions)
-​ It does, however, correlate …….
-​ It doesn’t talk about home production, underground economy, intangibles,
resource depletion, or externalities
Chapter 3: Unemployment
Measuring Business cycles
-​ Short run fluctuations around the long run trend
-​ Expansion (trough to peak)
-​ Contraction (peak to trough
Three types of unemployment
-​ Structural: caused by changes in industrial makeup of economy
-​ Industry creation and destruction is often a sign of a growing economy
-​ Ex. store goes bankrupt and people lose their jobs, but new technology with new
jobs usually replace this
-​ Completely healthy form of unemployment for developed economy
-​ Frictional unemployment: caused by time delays in matching available workers and jobs
-​ People don’t always want to accept the first job offer and firms don’t always hire
the first applicant
-​ Ex. recent college grads or spouse of a person who moves for a new job
-​ Internet has decreased length of frictional unemployment
-​ Unemployment insurance:
-​ Provides income to workers who are laid off
-​ Provides people time to find a new job
-​ Prevents economic problems from spilling over to other industries
-​ Reduces incentive to find another job
-​ Cyclical Unemployment: caused by economic downturns (not normal)
-​ Ex. unemployment caused by the Great Recession
The natural rate of unemployment (* means natural rate)
-​ The natural rate of unemployment (u*): the unemployment that prevails when the
economy is healthy
-​ Full employment output (Y*): output by an economy with no cyclical unemployment
Healthy Economy
Recession
u = u*
u > u*
Y = Y*
Y > Y*
Cyclical unemployment is 0
Cyclical unemployment is positive
Unemployment conditions
-​ Labor force: people who are employed or are actively seeking work
-​ The labor force is not:
-​ Jobless people not searching for at least four weeks
-​ Retirees
-​ Students
-​ institutionalized
-​ Unemployment rate= u = (number unemployed/labor force) x 100
Shortcomings of Unemployment Rate
-​ Discouraged workers: people who want a job but get discouraged and give up looking
for work
-​ Not included in labor force and not considered unemployed
-​ Underemployed workers
-​ Part time workers who want full time jobs
-​ Workers who are very overqualified at their job
-​ Considered employed
Chapter 4: The Price Level and Inflation
Inflation: general increase in the price level; measured as the average price level growth rate
-​ Definition: fall in the price level
-​ Inflation is problematic because
-​ Uncertain price changes
-​ Long-term merges and contracts become difficult
Consumer Price Index (CPI): a measure of the price level based on the consumption pattern of
a typical consumer
-​ The goal is to measure the cost of living
-​ Bureau of Labor Statistics (BLS): the government agency that reports inflation and
unemployment data and measures how much “weight” to put on certain consumer prices
-​ Housing: the spending category that takes up the largest portion of the CPI cost
basket
-​
Each month, the BLS collects price info on over 8000 goods and services each month in
211 categories for 38 geographic regions
2016
2016
2017
2017
Good
Quantity
Unit price
Total cost
Unit price
Total cost
popcorn
1
$6
$6
$8
$8
coke
2
$5
$10
$5
$10
tickets
2
$12
$24
$13
$26
Basket price
$40
$44
Index (EPI)
40/44*100
=100
44/40*100
=110
Basket= 1 popcorn, 2 cokes, 2 tickets
Cost 2016=(1*6)+(2*5)+(2*12)=$40
-​ Calculating CPI: price index=(basket price/basket price in last year) x 100
-​ Using the price levels, we can find inflation with the percentage change formula
-​ In the previous example,
-​ Inflation rate (i)= ((110-100)/100) x 100 = 10%
-​ Inflation rate (i) = year 1 to year 2 = (CPI2 - CPI1)/(CPI1) x 100
-​
-​
Prices don’t all move together
-​ Clearly, most prices rise over time
-​ Travel, education, health care
-​ However, some prices can rise more quickly
-​ Consumer electronics usually due to great technological advancements
-​ If inflation is a general rise in the price level, why have consumer prices fallen
over time?
-​ Increases in technology have greatly reduced production costs for goods
-​ Converting past prices into modern dollar values:
-​ Value in today’s $ = value in past x (CPI today/CPI past)
Concerns about CPI accuracy
-​ CPI overstates true inflation (upward bias) for 3 possible reasons: substitution
bias, changes in quality, and new products & locations
-​
-​
-​
-​
-​
-​
-​
Substitution bias
-​ When price of A rises, consumers buy more B
-​ Since 1999, the BLS used a formula that accounts for price changes and
shifts in goods consumption
-​ Quality changes
-​ Prices may rise because the quality of goods is better
-​ Ex: early 90’s had tube tv’s while now we have flat screen tv’s
-​ Since 1999, the BLS has used a careful adjustment method to account for
quality changes
-​ New goods, services, and locations (flashdrives and ipods)
-​ Previously, the BLS updated CPI after long delays which caused upward
bias for 2 reasons
-​ New product prices drop after a couple of years
-​ New retail outliers (such as online stores) offer better prices than
traditional stores in order to keep track of price drops
-​ In 2002, a now changed CPI was instituted made it more difficult
to measure
-​ The new reports are not based on the changed CPI
The costs of inflation
-​ Future price level uncertainty
-​ Firms often make long-term agreements that involve paying services to
borrowers and paying back loans on capital goods
-​ Uncertain inflation makes long-term contracts riskier
-​ Borrowers fear getting underpaid next year
-​ Lenders fear lending out money today and getting less value back the next year
-​ If long-term contracts don’t transpire, GDP growth is saved
-​ Ex. shoe leather costs
-​ As prices go up, it becomes more costly to hold money
-​ Resources are tested when people change behavior to avoid holding
money
-​ People bear time, effort, and fuel costs when they try to use money
Money illusion
-​ People interpret nominal wage or price changes as real changes
-​ If price and wages go up by 2%, there is no real change in purchasing power;
people with money illusion think they are richer in this case
-​ Suppose nominal wages increase by 3% and prices go up 5%. Money illusion
may cause you to think of yourself as wealthier but your real wages have actually
decreased
Nominal wage: the wage in current dollars
Real wage: nominal wage adjusted for inflation
Menu costs: the costs of changing prices
-​ Ex. a restaurant will have to print new menus for price changes
Uncertainty about price levels
-​
-​
-​ Wage and other input contracts often have long-term commitments
-​ Uncertainty about prices may make a borrowing riskiers
-​ Don’t need to know about wealth redistribution, price confusion, or distortions
Due to printing more money, expansions in the nation’s money suffer
The cost of inflation is a monetary police
-​ However, not all price increases are caused by inflation, when the relative price
of just one good rises, sometimes it can cause inflation
Chapter 6: The Aggregate Demand-Aggregate Supply Model
AD
LRAS
SRAS
Cons: real wealth,
expectational, taxes
Resources
LRAS
INR: investor confidence
Technology
Supply shocks
G: changes in policy
Institutions
Price expectations
NX: incomes abroad
Input prices
Long-Run Equilibrium
-​ The quantity of aggregate demand is equal to the quantity of aggregate supply
-​ The economy is at full employment
-​ The unemployment rate is equal to the natural rate
-​ LRAS=SRAS=AD (Long Run Aggregate Supply and Short Run Aggregate
Supply)
-​ On the AD-AS graph, the price level is on the vertical axis
-​ Suppose we have a technology shock
-​ Which curves shift? Both LRAS and SRAS
-​ In what direction? To the right (increase)
-​ What happens to the equilibrium price level and real GDP? The price level falls
and the real GDP rises
-​
Suppose there is a short-run supply shock caused by an oil pipeline
-​ Which curves shift? Just SRAS
-​ In what direction? To the left (decrease bc of negative shock)
-​ What happens to the equilibrium price level and real GDP in the short run? Price
level rises, real GDP falls
-​ We are not in long-run equilibrium anymore; unemployment rate > u* (natural
rate of unemployment)
-​ Because the supply shock is temporary, eventually the SRAS will shift back to the
right again
-​ Price level, real GDP, and unemployment all return to original level
-​
Suppose that consumer confidence rises and people start spending more
-​ Which curves shift? Aggregate demand
-​ What direction? To the right (increase)
-​ This is called an expansion, but it won’t last because we always have to go back
to full employment output
-​ We are no longer at long-run equilibrium
-​ In the long run, all prices adjust
-​ As they do, SRAS shifts left
-​ We now have a higher price level
-​ For short run AD, shifts from B to A
Chapter 8: Intro to Fiscal Policy
Government Budgets
-​ A budget describes plans for spending and income
-​ Plan for spending and raising funds for the government
-​ Income or revenue: sources of funds
-​ Spending or “outlays”: uses of funds
Outlays and Revenues
-​ The US government spends $3 trillion each year
-​ Transfer payments: payments made to individuals
-​ Gov spending vs. transfer payments
-​ Spending: gov buys goods and services
-​ Transfer: money is moved from one group to another
-​ Gov revenues
-​ Generally raised through taxes
-​ Other small fees as well (national park admittance)
Main Categories of National Gov Spending
-​ Mandatory outlays (most gov spending goes here)
-​ Determined by ongoing programs
-​ Social security or medicare
-​ Cannot be altered during budget process
-​ Altering requires long-run changes to existing laws
-​ Discretionary outlays
-​ Can be altered when annual budget is set
-​ Bridges, roads, wages for gov workers, defense spending
Social Security
-​ Government administered retirement program
-​ Started in 1935 by FDR in Great Depression
-​ In 1930’s: workers paying > retirees on benefits
-​ Few retirees
-​ Lots of workers paying
-​ Tax: 2%
-​ Today: workers paying < retirees on benefits
-​ Millions of baby boomers retiring
-​ Fewer workers paying in
-​ Tax: 15.3%
Medicare
-​ Federal program that funds retiree health care
-​ Established in 1965 by LBJ
-​ Law requires current workers to pay medicare taxes
-​ We have a similar issues with medicare and social security
-​ Addition and expansion of programs
-​ People are living longer
-​ Baby boomers are now entering retirement
Current Fiscal Issues
-​ Increased defense spending following 9/11
-​ Increased spending on social security and medicare
-​ Increased spending because of the Great Recession in 2008
How do federal govs raise revenue?
-​ Most comes from taxes
-​ Payroll taxes
-​ Income, social security, medicare account for 80%
The mechanics of payroll taxes
-​ Progressive tax system
-​ Higher income individuals pay a larger fraction of their incomes in taxes
-​ In this system:
-​ Marginal tax rate: the tax rate paid on the next dollar of income
Outlays and Revenues
-​ Budget deficit
-​ Outlays > revenues
-​ More funds flowing out than in
-​ Budget surplus
-​ Revenues > outlays
-​ More funds flowing in than out
-​ Deficits grow when outlays increase, revenues decrease, and during recessionary
periods
How does fiscal policy work?
-​ Monetary policy
-​ Use of the money supply to influence the economy
-​ Fiscal policy
-​ Use of government spending and taxes to influence the economy
-​ Must be legislated and approved by congress
-​ Expansionary fiscal policy
-​ Government increases spending or decreases taxes to stimulate or expand
economy
-​ Shift AD right to stimulate the economy in recessions (G up, T down)
-​ Contractionary fiscal policy
-​ Government decreases spending or increases taxes to attempt to slow economy
-​ Pay off government debt
-​ Keep economy from expanding beyond long-run capabilities
-​ Shift AD left to contract the economy during expansions (G down, T up)
Deficits and Debt
-​ How is an increase in G or a decrease in T financed?
-​ Borrowing
-​ Ex.
-​ Government increases G by $500 billion to increase AD
-​ During a recession, incomes fall and unemployment rises
-​ Tax revenues decrease
-​ Deficit and debt rise by more than $500 billion
Contractionary fiscal policy
-​ Decrease AD by decreasing G or increasing T in order to:
-​ Pay off debt that was accrued due to expansionary fiscal policy during bad times
-​ Slow down economy that is “overheated” from too much spending, leading to
inflation
-​ Not sustainable in long run
-​ Try to reduce the upward pressure on price level
-​ Still interested in “smoothing” out cycles
Multipliers
-​ Two multiplier concepts
-​ Spending by one person becomes income to others
-​ Increases in income lead to increases in consumption
-​ Marginal propensity to consume (MPC)
-​ Portion of additional income that is spent on consumption
-​ MPC= (delta)consumption/(delta)income
-​ MPC is not constant across all people (0_< MPC _<1)
-​ MPC multiplier illustration
-​ Suppose MPC is 0.75
-​ If government increases G by $100 billion
-​ Workers get $100 billion in income, spend $75 billion
-​ Other people get $75 billion in income
-​ They spend $56.25 billion
-​ MPC of the rich and poor
-​ Poor people need more tax cuts because they will spend more on consumption
than a rich person
-​ Spending multiplier
-​ Total impact on spending from an initial amount
-​ m^s= 1/(1-MPC)
-​ In example where MPC=0.75
-​ m^s=1/(1-0.75)=4
Crowding out
-​ Private spending falls in response to government spending
-​ Individuals may just let federal spending substitute for their own spending
-​ If the government buys a good for you, you won’t have to buy it yourself
-​ Implication
-​ Overall spending may not increase
-​ Government now has higher deficit and debt
Savings shifts
-​ Fiscal policy can also be rendered less effective by individual’s savings behavior
-​ When there is an increase in G or a decrease in T
-​
-​
-​
Recognize that the government has borrowed funds
Individuals save to pay for higher future taxes which reduces consumption
Mitigates the initial purpose of the increase in G or the decrease in T
Missing Notes? 10/31/18
Open market operations
-​ The FED buys bonds to put more money in circulation
Monetary policy (works through investment)
-​ Expansionary monetary policy
-​ The central bank buys bonds to:
-​ Increase reserves
-​ Decrease interest rates
-​ Encourage business owners to take out loans
-​ Increase investment and AD
-​ Increase GDP and decrease unemployment
-​ In the short run, expansionary policy increases real GDP, reduces
unemployment, and raises the price level
-​ In the long run, we go back to full employment output but with higher prices;
printing more money increases inflation in the long run
-​ Contractionary monetary policy
-​ Central bank takes action to reduce the money supply
-​ Often done during times of rapid expansion in order to curb potential inflation
-​ The central bank sells securities to:
-​ Decrease reserves
-​ Raise interest rates
-​ Discourage business owners from taking out loans
-​ Decrease investment and AD
-​ Decrease GDP and raise unemployment rate
Economic Growth
-​
Standard of living: the level of overall well-being enjoyed by an average individual,
group, or society
-​ Economic growth: an increase in real GDP or real GDP per capita
-​ Can occur if we obtain additional resources (land, labor, capital, and
entrepreneurial ability)
-​ Can occur if we invent new technology
-​ Can occur if existing resources become more productive
Measuring economic growth using real GDP
-​ Growth rate: the rate of change of a variable over a specified period of time; usually
expressed as a percentage change
-​
-​
-​
Growth rate= (variable2-variable1)/variable1 x 100 (same if substitute variable for
GDP)
Growth rate (per capita)= 1%