ECON2030 Notes for Test1 PDF

Preview

Summary

All notes for Test 1
Econ for engineering majors...

Description

TODAY’S MENU: Wednesday 27 August 2014 I. BUSINESS A. Practice Problems 1. Questions and Exercises at end of textbook chapters 2. Answers on Moodle 3. Chapter 1: 2-6, 9, 10 4. Chapter 2: 1, 2, 4-6, 9, 10 5. Chapter 2, Appendix A: 1-3, 5, 8 B. Labs DO meet this week: today and Friday Economies – the things a society does to provision itself with a material means of existence  A specific range of human activity that involves provisioning Don’t need to memorize dictionary terms, but know what concepts mean and apply them Economics – abstract, theoretical discipline. But what about the economy? Economy of US? Greece? “the economy of” = money, jobs, Why job and not work? Don’t get paid for work Market – social process where goods and services are exchanged for money. Buy/sell. Money. Does not have to by physical  (seller) Goods Money (buyer)  Buyer is getting good in exchange for money. Seller is giving up good to get paid.  When you buy stuff online, not physical place. II. SUBSTANCE A. The basics 1. What? How? For whom? Consequences?  What are the material means of existence we will use? Clickers, sharpies, computer  How do we provision ourselves? Collective farming, child labor, machine automation  Who will be getting these material means? Recipient lists for organs,  For market, whoever is willing to give up the amt of money asked for  (seller) Goods Money (buyer) o Benefit cost a. Microeconomics – “small” behavior of individual decision makers  people, businesses, markets b. Macroeconomics – consequences for amount of jobs, prices. Looking at society as a whole, jobs/employment, number of goods/services produced 1

B. ECONOMIC REASONING (IN A MARKET SETTING) 1. Opportunity Cost – what you give up in order to do something. The best alternative that is not chosen. When you make a choice to be in class, give up the opportunity to…sleep. Can be monetary or non-monetary. 2. The Margin – the edge, the limit. Small incremental changes. How much/many? Change in the total as we do one more of something. Should I take 12 or 15 hrs of class? The margin is those last 3 hours/that class I’m debating on. 3. Rationality – if rational and benefit >cost, then yes. At the moment you make decision, may not have perfect info—will you make the decision? If you’re rational, will do it if it’s worth it. Will it ever be a good thing, rational, to stop doing something that’s profitable? Yes if the opportunity cost is great enough, if it’s too stressful. Benefits – costs. But what costs are important? C. Examples of Economic Reasoning 1. A question 2. Either/or Choices a. Charles and the Movie Ticket, parts 1 and 2 going to movies, then eating. Or eat first, then see later movie. Should we see “Chef”? No if benefit < costs. Yes if it’s at least as good as “Purple Rose”. No, if “Purple Rose” is at least as good as “Chef.” Either choice you make is rational. Being indifferent Benefit Expected pleasure of “Chef” Save $5.75

Cost Expected pleasure of “Purple Rose” Buy ticket $5.75 – sunk cost (irrelevant to decision)

i. Relevant costs ii. Sunk costs 3. How much/many Choices a. All-you-can-eat buffet – eat as much as you want. Either-ordecision is to eat there or not. Once we pay the $15, it becomes a sunk cost. Can’t return product for refund. Now it’s a how much/many choice. How much should I eat? How many bites? Benefit-great taste. Monetary cost - $0, already paid. Expected pleasure of second bite vs cost? 0 If you’re rational, when do you stop? When benefit = cost. When you’re full. The next bite---just can’t eat anymore. One more bite would make me sick. i. Relevant costs ii. Sunk costs 4. The answer a. Delta and the Mayor the flight is profitable. Non-stop flight btw BRAtlanta. i. Relevant costs 2

Benefit < Cost $3K $5K D. Note on graphing: Appendix to Chapter 2 E. Opportunity Cost Application: International Trade 1. Questions to Answer a. If “workers in the United States are the most productive in the world,” why do we consume so many imported goods? b. If “trade can make everyone better off,” why is there so much opposition to it? III. NEXT TIME A. Finish Chapter 2: “The Production Possibility Model…”

3

TODAY’S MENU: Wednesday 03 September 2014 I. BUSINESS A. Practice Problems 1. Chapter 2: 1, 2, 4-6, 9, 10 2. Chapter 2, Appendix A: 1-3, 5, 8 II. SUBSTANCE A. Note on graphing: Appendix to Chapter 2 B. Opportunity Cost Application: International Trade 1. Questions to Answer a. If “workers in the United States are the most productive in the world,” why do we consume so many imported goods? b. If “trade can make everyone better off,” why is there so much opposition to it? Productivity isn't what matters. It's something else. Why do you consume so many imp goods? Cause they're cheap. We give up less (opportunity cost) what does better off mean in regards to trade? Frontier – border, limit, edge 2. Tool: Production Possibilities Frontier (PPF) illustrates the limit of producing stuff(?) a. Efficiency b. Numerical Slope = Opportunity Cost c. Optimal Point? – can’t answer it (see why later) d. Economic growth Graph-picture of relationship If producing at an efficient level of output (eg point D), can we produce more food? Yes, but only by producing less clothing. If we want to get more of 1 good, must give up some of another. Opportunity cost will be greater than zero (it exists). At point E, we produce more of both (get people off their ass to work). Don’t need to give up Economic growth – at some time is producing more goods/services than it did previously

4

Which one is optimal? For whom are the material means being produced? C. How Trade Can Benefit All: An example 1. Assumptions a. Two Countries: England, Portugal b. Two Homogeneous Goods: Wine, Cloth c. All workers in a country are equally productive d. Resources: 100 worker/hours in each country 2. Relevant Concepts a. Productivity = output per worker per hour b. Absolute Advantage = highest productivity c. Comparative Advantage = lowest opportunity cost 3. Autarky: production = consumption 4. Specialization and trade according to Comparative Advantage 5. With Trade: consumption > production 6. Conclusions III. NEXT TIME A. Begin Chapter 4: “Supply and Demand”

5

TODAY’S MENU: Wednesday 10 September 2014 I. BUSINESS A. Practice Problems 1. Chapter 4: 3, 4, 6, 7, 10-19, 21 B. First exam: One week from Monday (22 September) Specific amount willing and able to be purchased at a specific price Suppose price of the good decreases PaPb and everything else same. Everytihng else held constant, the demand of the good will increase/decrease/unchanged (A B) Q-quantitiy demand P-price

Benefit – get paid II. SUBSTANCE A. Buyers’ side of market: Demand 1. Determinants of Demand a. Income b. Price of related goods in consumption c. Tastes and preferences (+) d. Expectations i. Future price (+) ii. Future income: normal good (+); inferior good (-) e. Number of buyers (+) 2. Graphically 6

a. Change in Quantity Demanded: movement along curve b. Change in Demand: shift of entire curve B. Sellers’ side of market: Supply (same as demand) 1. Supply – willingness and ability to sell a good or service at a price Not quantity supply- quantity willing to be sold at a specific price 2. Not to be confused with Quantity Supplied – function of the price of the good. Qs = f(P) If there’s a job that pays $7.25/hr minimum 10 hrs/week Price $7.25 Quantity supply 1 (1 person wants this) $15/hr minimum 10 hrs/week Quantity supply 10 More people want to apply to job now Benefit – get paid. Actual price. Cost – give up something of value/worth. A job – give up your time in exchange of getting paid. Reservation price – minimum price at which they’re willing and able to sell the good. What you think it’s worth. You will do something more if benefit goes up or cost goes down Benefit↑ and cost↓ ↑productivity, ↑supply If you think price will go down in future (stock will plummet in future), then get rid fo it now. If you think price will increase in future, hold onto it and sell it later. 3. Determinant of Quantity Supplied a. Price of good (+) i. Link with Reservation Price 4. Determinants of Supply a. Cost of labor (i.e., wages, benefits) (-) Labor is significant cost of business If cost of labor↑ then ↓supply (must sell more to pay them, b. Other input costs (-) Material cost If diesel fuel price doubles, less desirable sellers



c. Productivity (+) – hr Output productivity increase is good. Means more for seller to sell, so more benefit. Increase productivity, increase supply d. Expectations i. Future price (-) e. Number of sellers (+) 7

Profitability 5. Graphically a. Change in Quantity Supplied: movement along curve b. Change in Supply: Shift of entire curve

8

At P=Pc equilibrim balance Buyers = desirability incr D, More something more desirable, price goes up

Sellers = availability decr D, less

increase S, more sell more More available price goes down Rarer-->price up

decr S, less

C. Market Equilibrium and Disequilibrium 1. Equilibrium: quantity supplied = quantity demanded 2. Disequilibrium a. Excess supply: Surplus b. Excess demand: Shortage c. Return to equilibrium if hurricane wipes out oranges in FL, oranges will be more _____ in the US. 9

D. The Method 1. Who is directly affected? sellers 2. How does behavior change? 3. What is the result? III. NEXT TIME A. Chapter 5: “Using Supply and Demand”

10

TODAY’S MENU: Wednesday 12 November 2014 I. BUSINESS A. Practice Problems 1. Chapter 30: 4, 5, 7, 9, 10, 20, 27 B. Third exam: Next time II. SUBSTANCE For illustrative purposes. After tooth fairy: MB = currency in circ + bank reserves Before dep: MB = $100 + 0 TF: $100 = $100 + $0 After dep: $100 = $0 Loan: $100 = $80 + $20 Ms = currency in circ + checking acct deposit (interest and non-interest bearing) TF/Before dep: MB = $100 + 0 After dep: $100 = $0 + $100 Loan: $180 = $80 + $100 Ms = MB x money multiplier TF/Before dep: MB = $100 x 1 After dep: B = $100 x 1 Loan: $180 = $100 x 1.8 If bank loans you $80, MB=1 You buy coffee for $80, and coffee shop gets $80 Coffee shop deposits money into bank  bank has more reserves The banks create checkable balances when you make a deposit The balance in my checking acct is able to fulfill the obligation to pay When you go to grocery, you can swipe debit card transfer funds from checking balance to store’s acct balance Same as getting paid by direct deposit Bank is creating money with these promises Make more loans  more promises  more money No matter what’s done (deposit, loan, withdrawal), that does nothing to monetary base (MB) Behavior of commercial banks making loans or people making deposits doesn’t change MB Our behavior changes money multiplier Multiplier > 1 Multiplier = 1 (Banks not making loans)

11

A. Money: How do banks create it? 1. Model: Money Supply = MB x money multiplier a. MB = Monetary Base = bank reserves + currency in circulation 2. Multiple Deposit Creation: A fairy tale 3. Conclusions a. More deposits, more loans, greater money supply (↑multiplier) b. Fewer deposits, fewer loan, lower money supply Suppose during Christmas shopping season, the public pulls more currency than usual. The public decides to hold more assets as money as opposed to depositing bank. How does this affect MB and MM? Nothing. Public doesn’t affect MB, but it does affect monetary multiplier (↓)—because we aren’t depositing it to bank, so bank doesn’t have that money to loan out. MB was 0 before the tooth fairy (Central bank/fed) showed up Where did the tooth fairy get the money? By magic, they created it. Where does the federal reserve (central bank) get the funds to put in? They create it. How do they create it? How does central bank create [monetary base]? Monetary policy decisions made by central bank influence not only our daily economic lives, but also influence performance of financial markets and economies around the world B. The Federal Reserve (Fed): Structure 1. 12 Federal Reserve Banks (FRBs) Federal Reserve is an odd institution. It’s young (1913). US is divided into 12 different districts, so 12 central banks. Where do you need more banks? Where there’s more economic activity (great lakes areamore popmore economic activity) 12 FRB  7 members BoG (5) + (7) = FOMC 5+7 = FOMC Every yr, one of the 5 presidents votes. They go to fed reserve bank of New York (biggest one). That’s where the action happens. 2nd vote 2. Board of Governors (BoG): 7 members a. 14-year, nonrenewable terms b. Chair: 4-year renewable term

12

How do you become the tooth fairy? Become a part of BoG. One of the BoG people is nominated by pres, ratified by senate, to serve a 4-yr term as chair. Janette Yulette, 3. Federal Open Market Committee (FOMC) a. 12 voting members (7 and 5) b. 2014: NY, CLE, DAL, MIN, PHIL c. 2015: NY, CHI (Chicago), ATL, RICH, SF (San francisco) d. 2016: NY, CLE, BOS, KC, STL (St Louis)

C. Tools of monetary policy 1. Again: MS = MB x money multiplier Money multiplier - controlled by commercial banks and non-banking public) MB - controlled by (FOMC) The open market committee controls open market operations Open market operations control the buying of US gov bonds 2. Open market operations (FOMC) – the tool that the fed uses to set its monetary policy; the fed reserve going to the open market (New York market for US gov bonds) – the fed reserve buying US gov bonds What’s a bond? A type of loan Eg Buy a car and must make payments every month for some period of time. US gov bond is when the government borrows. By doing so, this changes the MB. When the fed reserve at the end of their open market committee meetings, when they set monetary policy, they put out a press release. The fed doesn’t tell us about open market operations, don’t talk about buying/selling gov bonds. The fed tells the world what its monetary policy will be by stating a target for an interest rate. If this interest rate influences the interest rates in economy, it keeps interest rates on checking/saving accts very low. How does the fed control this? What’s the relationship? When it comes to gov bonds, the bonds are bought and sold in markets. Suppose you hear there is a rally on wall street  ↑stock prices went up. Dow Jones index rose 1.5%. There’s a rally on the bond market  ↑bond prices went up. Market price of a bond and market interest rate on the bond are inversely related. ↑ bond market/prices ↓ interest rates ↓ bond prices ↑ interest rates Interest rates on bond influence interest rates throughout economy US gov buying US gov bond (risk of default if gov doesn’t repay is almost 0) Your interest rates will go up too

13

Ms = MB x money multiplier Fed can change MB  change interest rates Open market purchase (sale) of gov bonds (what the fed is doing): fed buying bonds from public Fed decides he wants to buy some bonds. Fed pays $100 for bond (from public) Fed changed assets f>rom hands of public (nice asset, but not very liquid bond.) What happened to MB? (currency in circ + bank reserves) Ms = MB x money multiplier ↑ >$100 +$100 Expansionary monetary policy (expanding monetary base) Fed buying bonds from public: ↑ price of bonds ↓ interest rates ↑ borrowing/spending (When you buy more stuff, ↑ price) What if we reverse this process? Open market sale: Fed sells bonds to public: ↓ monetary base Contractionary monetary policy Puts more bonds in hands of public, no effet on MM, money supply goes down by $100 Sell more  ↓ prices ↑ interest rates Ms = MB x money multiplier ↓ >$100 +$100 Next year, interest rates will ↑ thru open market sales (sell off their bonds  ↓ prices ↑ interest rates) Where did the fed get the funds to make the purchase? The fed created it. Open market purchase is the same as the tooth fairy visit. Instead of buying the tooth, the fed buys government bonds a. Federal funds market b. Government bonds i. Key relationship c. Purchase: expansionary d. Sale: contractionary

3. Discounting (FRBs, BoG) a. Financial panics III. NEXT TIME A. Third exam over Chapters 24, 25, 29, 30 14

TODAY’S MENU: Monday 15 September 2014 I. BUSINESS A. Practice Problems 1. Chapter 5: 1, 2, 4, 5, 7, 8, 10, 15 2. Chapter 6: 1-4, 7-10, 12, 14, 15, 18-20 B. First exam: One week from today C. Office hours tomorrow: 9:00-11:45 only Who is directly affected by event? buyers or sellers How is their behavior going to change? more or less Buyers - more or less D (desirability), give up $ in exchange for good Sellers - more or less S (availability), give up good in exchange for $ not change in Qd (quantity demand/supplied) What is the outcome/result? How is equilibrium price changing? How is equilibrium quantity transacted changing? Less buyers, less transaction If stock prices will decrease at end of the week, we will sell it now. If it already decr by 5%, but will continue to decrease, still sell it now. II. SUBSTANCE A. Review market function: The Method 1. Who is directly affected? 2. How does behavior change? 3. What is the result? B. Price controls 1. Price ceiling – maximum allowable price. Price above which it can’t go. Upper bound a. Binding (i.e., effective) b. Non-binding (i.e., ineffective) c. Examples – Anti-gouging laws in state of emergency Ceiling 

Effect on buyers? Does binding price ceiling make buyers better off or worse? o If buyer can find seller, yes because it’s cheaper. No if can’t find seller o Ambiguous for buyers 15



Effect on sellers? Better off, worse off, ambiguous o Worse off! Making less money.

2. Price floor – minimum allowable price. Sets a lower bound. a. Binding (i.e., effective) b. Non-binding (i.e., ineffective) c. Examples  Buyers are buying more and paying less – bad  For sellers that can find buyers, getting higher price so good. But for sellers that can’t find buyers, it’s bad – ambiguous C. Quantity restrictions 1. Binding (i.e., effective) 2. Non-binding (i.e., ineffective)  Result will be opposite 3. Examples Price Floor Romania. Can take bus, trains, or illegal private cabs (hang around the corner near bus stop. Ask ppl at bus stop if they want a ride. Price they charged was around bus fair. Once they had 3 passengers, they left. They could’ve charged less and filled more cars, but they didn’t.) How was this activity able to go on? It’s illegal. They were bribing the police. What happens if you try to undercut these guys (undercut the price floor)? When keeping price higher (2 rides/day), was enough to earn income = to regular worker. You play along with this game, or else. III. NEXT TIME A. Chapter 6: “Describing Supply and Demand: Elasticities”

16

TODAY’S MENU: Wednesday 17 September 2014 I. BUSINESS A. Practice Problems 1. Chapter 6: 1-4, 7-10, 12, 14, 15, 18-20 B. First exam: Next time II. SUBSTANCE A. Elasticity 1. Motivation 2. Price elasticity of demand – action/reaction. Sensitivity or responsive to change How much are ppl going to change their behavior? ED=reaction/action = %∆QD/%∆P x % ∆Q %∆P If cut prices by 10%, customers buy 20% more Disproportionately large reaction is “elastic” Ed=

If cut prices by 10%, customers buy 3% more Disproportionately smaller reaction is “inelastic” ActionReaction %∆P  %∆QD a. Definition b. Measure i. Elastic > 1  How does a customer that’s sensitive to price react? They will notice small changes in price. Why did you charge me more than the price tag? Fight with seller.  Jump all over the place, no brand loyalty ii. Inelastic < 1  Brand loyalty.  Don’t care if the price increased, still buy it. iii. Unit elastic = 1 c. Determinants i. Number and availability of substitutes  options, #choices you have  ↑substitutes, ↑elastic ↑more choices, can react more  ↓substitutes ↑inelastic. If you run out of gas and there’s only one gas station around, will buy it even if $ 17

Ads will diss another product, compare it to theirs. Say that those other products are not substitutes. ii. Necessity or luxury (nice to have, but not essential)  the more pe...