Chapter 6 Econ 105 Notes PDF

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Chapter 6 Econ 105  

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Microeconomics focuses on how decisions are made by individuals, firms and the consequences of those actions Macro examines the overall behavior of the company o Concerned with general lvl of prices in the economy and how high or how low it is compared to the general lvl of prices last year, rather than with the price of one particular good or service Paradox of thrif o When families and businesses are worried about the possibility of economic hard times, they prep by cutting spending o This action depresses the economy as consumers spend less and businesses react by laying off workers o Therefore, families and businesses may end up worse off than if they hadn’t tried to act responsibly by cutting their spending When families are optimistic about the future, they increase spending which stimulates the economy, causing companies to hire more workers which expands the economy. The combined effect of individual decisions can have results that are different from what any one individual intended

Self-regulating economy  

Before 1930s, economists thought that economies were self-regulating Self regulating economy: o Problems such as unemployment are resolved without government intervention through the working of the invisible hand as the attempts from the government to help the economy would have been ineffective at best and would probably make things worse

John Maynard Keynes  

In 1936, published The General Theory of Employment, Interest and Money which transformed macroeconomics Keynesian economics o A depressed econ is the result of inadequate spending o Keynes argued that government intervention can help a depressed economy through monetary policy and fiscal policy

Monetary policy 

Uses changes in the quantity of money to alter interest rates which in turn affect the lvl of overall spending

Fiscal policy 

Uses changes in taxes and government spending to affect overall spending

Business Cycle

Chapter 6 Econ 105     

Vertical axis shows either employment or an indicator of how much the econ is producing such as production or real gross domestic product (real GDP) Horizontal axis is time Broad based downtown in which output and employment fall in many industries is called a recession (or contraction) When most economic numbers are going up, econ is said to be in an expansion The alteration between recessions and expansions is known as the business cycle

Business-cycle peak 

Point in time where the econ shifs from expansion to recession

Business-cycle trough 

Point in time where the econ shifs from recession to expansion

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Most important effect of a recession is its effect on the ability of workers to find and hold jobs

Unemployment rate  

Most widely used indicator of conditions in the labor market is the unemployment rate High unemployment rate tells us jobs are scarce and a low unemployment rate tells us that jobs are plentiful

Recessions     

Many lose jobs and make it hard to find new ones, which hurts the standard of living of many families Recessions are usually associated with a rise in the # of people living below the poverty line as many cannot pay their mortgages Also bad for business as profits fall and many small businesses fail Many economists adopt the rule that a recession is a period of at least 2 consecutive quarters (quarter being 3 months) during which the total output of the economy shrinks. 2 quarters designed to avoid classifying brief hiccups in the econ’s performance with no lasting significance as recessions

Why are Canadians today able to afford conveniences that they couldn’t afford in the past? 

Long-run economic growth o The sustained rise in the quantity of goods/services the econ produces o Fundamental to many of the most pressing econ questions today  Responses to key policy questions such as the country’s ability to bear the future costs of government programs such as social security and health care, depend in part on how fast the Canadian econ grows over the next few decades o When growth slows, it can lead to a national mood of pessimism

Chapter 6 Econ 105 More urgent concern in poorer countries as these countries are constantly trying to find ways to accelerate long-run growth Long Run growth per capita o A sustained upward trend in output per person is the key to higher wages and a higher standard of living o

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Inflation  

A rising overall lvl of prices Causes o Supply and demand?  Can only explain why a particular good or service becomes more expensive RELATIVE TO OTHER GOODS AND SERVICES  It cannot explain why, for example, the price of chicken has risen overtime in spite of the fact that chicken production has become more efficient and that chicken has become substantially cheaper compared to other goods

Deflation 

A falling overall lvl of prices is deflation

When the economy is depressed and jobs are hard to find, inflation tends to fall: when the economy is booming, inflation tends to rise. In the long run, the overall lvl of prices is mainly determined by changes in the money supply, the total quantity of assets that can be readily used to make purchases.

Pain of inflation and deflation 

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Inflation discourages people from holding onto cash, because cash loses value overtime if the overall price lvl is rising. That is, the # of goods and services you can buy with a given amount of cash falls. In extreme cases, people stop holding cash altogether and turn to barter Deflation can cause the reverse problem. If the price lvl is falling, cash gains value overtime. In other words, the # of goods and services you can buy with the money increases. So holding onto cash can become more attractive than investing in new factories and other productive assets which can deepen a recession

Price stability  

The econ has price stability when the overall lvl of prices changes slowly or not at all Economists regard price stability as something desirable

Open economy

Chapter 6 Econ 105 

An econ that trades goods/services with other countries

Trade deficit 

When the value of goods/services bought from foreigners is more than the value of goods and services it sells to them

Trade surplus 

When the value of goods/services bought from foreigners is less than the value of the goods/services it sells to them

Comparative Advantage  

Exporting goods that a country is good at producing and importing goods they’re not as good at producing This principle does not explain why the value of a country’s imports is sometimes larger than the value of its exports...