Ch 3

DemandLaw of demandDemand schedule to demand curveLaw of demand and diminishing marginal utilityLaw of demand and the income effectLaw of demand and substitution effectIndividual vs. market demandDeterminants of Demand

TastesNumber of buyersIncome

Normal vs. inferior goodsPrices of related goods

Complimentary vs. substitute goodsExpectations

SupplyLaw of supplyDeterminants of Supply

Factor pricesTechnologyTaxes and subsidiesPrices of other goodsPrice expectationsNumber of sellers

Supply, Demand, EquilibriumSurplusesShortagesChanges in supply and demandPrice ceilings vs. price floors

Black markets, rationing (who should get the few goods remaining?), Rent Controls

Ch 4

Characteristics of the market systemPrivate propertyFreedom of enterprise and choiceSelf-interestCompetitionMarkets and pricesReliance upon technology and capital goodsSpecialization

Division of laborGeographic specialization

Use of moneyActive but limited government

Market System at workWhat will be produced?

Economic costs and profits (normal vs. economic profits)Profits and expanding industriesLoses and declining industriesConsumer sovereignty and dollar votesMarket restraints on freedom

Derived demand for resources: Demand for resources are reliant upon the market’s need for the goods that they help produce

How will the goods and services be produced?Full employment of resourcesProduction of what people want

Who will get the goods and services?Distributed to consumers based upon their willingness and ability to pay

How will the system accommodate change?Guiding function of pricesTechnological advanceCapital accumulation

Competition and the Invisible HandEfficiencyIncentivesFreedom

Ch 5

Households as Income ReceiversFunctional distribution of income

How income is distributed by rents, interest, wages, profitsPersonal distribution of income

How nations money income is divided among individual households2001: lowest 20%: 3.6%; highest 20%: 50.2%

Households as spendersPersonal taxes: 13%Personal saving: 3%Personal Consumption: 86%

Durable goods, non-durable goods, servicesBusiness Population

Plant, firm, industryLegal forms of businesses

Sole proprietorshipPartnershipCorporation

Hybrid StructuresLLC, S-Corp

The Principal Agent ProblemSelf-interest of agents that shareholders hire don’t always coincide with the self-interest of the shareholders

The government’s roleProviding a legal structureMaintaining competitionRedistributing Income

Transfer paymentsMarket interventionTaxation

Reallocating resourcesSpillovers and externalities

Spillover costsCorrection of spillover costs

LegislationSpecific Taxes

Spillover benefitsSubsidize consumersSubsidize suppliersProvide goods via government

Public Goods and servicesPublic goods: Non-rivalrous/non-excludableFree-rider problemTragedy of the commonsQuasi-public goods

Education, streets, police, fire, etc.Promoting stability

UnemploymentInflation

New circular flowInclude government

Federal FinanceFederal Tax Revenues

Personal income tax: 46%Payroll Taxes: 38%Corporate income taxes: 8%Excise Taxes: 4%

State tax RevenuesIncome, sales, property

Ch 6

International LinkagesGoods and services flows

Capital and Labor flowsInformation and technology flows

US and world tradeVolume and pattern

Those nations that are not self-sufficient will participate more in international trade

VolumeUS participation has been growing as % of GDP: 11% right now

With whom do we trade, and for what?Specialization and Comparative Advantage

Comparative costsTerms of trade

The Foreign Exchange MarketGovernment and Trade

Trade impediments and subsidiesProtective TariffImport quotasNontariff barriersExport subsidies

Why government trade interventionMisunderstanding gains from trade

Not always imports bad due to loss of jobs and exports good due to gains of jobs

Political considerationsCosts to society

Multilateral Trade Agreements and Free Trade ZonesReciprocal trade agreements act (1934)

Negotiating authorityGeneralized reductions

Most favored nation clauseGATT

Equal, nondiscriminatory trade treatment for all membersReduction of tariffs by negotiationElimination of import quotas

WTOEUThe Euro ZoneNAFTA

Ch 7

Income MethodNational Income

Compensation of employeesRents

InterestProprietor’s incomeCorporate profits

From NI to GDPIndirect business taxes (general sales taxes, excise taxes, business property taxes, license fees, customs duties)Consumption of fixed capital (depreciation)MINUS Net foreign factor income (take off income earned in other nations)

Disposable Income = (C + S)Personal Income = (DI + Personal Taxes)National Income = (PI + Undistributed corporate profits + Corporate income taxes + Social security contributions)Net Domestic Product = (NI + Net foreign factor income + indirect business taxes)Gross Domestic Product = (NDP + Depreciation)

Nominal vs. Real GDPGDP Price index

Shortcomings of GDPNonmarket activities

Homemakers, people who repair own stuffLeisureImproved product qualityBlack marketGDP and environmentComposition and DistributionNoneconomic sources of well-being

Less crime, better education, world peace, etc.

Ch 8

Economic GrowthIncrease in real GDPIncrease in real GDP per capita

Growth as a goalArithmetic of growthRule of 70

FV = PV * (1+r)^tORFV = PV * e^rt

Main sources of growthIncreasing inputs of resourcesIncreasing productivity of resourcesMost economic growth comes from productivity increases

Growth in USImproved products and servicesAdded leisureOther impacts

Better jobs, Less stress in the workplace, etc.Relative Growth rates

The Business CyclePhases

PeakRecessionTroughRecovery

CausationIrregular innovationProductivity changesMonetary phenomenonAnimal Spirits

Durable vs. non-durable goodsDurables hit harder than non-durables

UnemploymentMeasurement of unemployment

# unemployed / Labor forcePart time employmentDiscouraged workers

Types of unemploymentFrictional

Search unemploymentWait unemployment

Structural UnemploymentCyclical Unemployment

Full EmploymentEconomic Costs of unemployment

Okun’s LawGDP Gap = Actual GDP – Potential GDPFor every 1% of unemployment above natural rate, GDP Gap increases by 2%

Unequal BurdensOccupation: Lower-skilled occupations suffer more from unemployment than do higher-skilled onesAge: Younger gets hit harderRace/Ethnicity: Minorities get hit harderGender: DiffersEducation: More = betterDuration: Longer = very bad

Noneconomic costsNot having a job is stressful; stress is bad

International comparisonsUS relatively low for developed world

InflationPrice indices

Laspeyres: Uses current level quantity; overstates inflationPaasche: Uses base year quantity; understates inflationFischer Index: Takes geometric mean of Laspeyres and Paasche sqrt(PL * PP)

Measurement of inflationCPIGDP DeflatorPPI

Types of InflationDemand-Pull

Caused by increases in demand for goods/servicesCost-Push

Caused by increases in price of productionComplexities

When demand-pull looks like cost-pushDemand increases, prices go upPrices that go up include input prices such as labor, land, capitalThis might look like cost-push, but it’s demand-pull

Demand pull will last as long as whatever is causing it stays aroundCost-push is self-destroying

Eventually people will find alternatives

Ch 9

Consumption vs. savings45 degree lineConsumption scheduleSavings scheduleDI = C + SAt low levels of income, dissavings occursAverage and Marginal propensities to save/consume

APC = consumption / incomeAPS = savings / incomeAPC + APS = 1MPC = dC / dIMPS = dS / dIMPC + MPS = 1MPC and MPS are the slopes of the Consumption and savings curves

Non-income determinants of consumption/savingWealth

When value of accumulated savings increases, people will spend more and save less

ExpectationsIf we expect rising prices soon, we will spend more now

Real interest ratesHigher = more savingsLower rates = more purchases and more credit

Household debtMore debt, less C

TaxationTaxes go up, C and S go down

Interest-rate-investment relationshipExpected rate of return

Purchase price = $1000Expected return = $1100Expected rate of return = $100/1000

Real interest rateIf r = 7%Cost of $1000 investment is $70Expected return = $100, cost = $70 = profit of $30; this is a good investmentInvest up to where interest = rate of returnInvestment demand curve

Shifts of investment demand curveAcquisition, maintenance, operating costsBusiness taxesTech changeStock of capital goods on handExpectations

Instability of investmentDurabilityIrregularity of innovationVariability of profitsVariability of expectations

Multiplier EffectMultiplier = change in GDP / Initial change in spendingChange in GDP = Multiplier * initial change in spendingRationale

Infinite geometric summation1/(1-r)r = MPC1-r = MPS1/(1-MPC)1/MPS

Less in realityPeople might pay extra in taxes such as sales/excise

People might buy imports instead of domesticCh. 12

Legislative mandatesEmployment Act of 1946Council of Economic Advisors and Joint Economic Committee

Fiscal Policy and AS/ADExpansionary Fiscal Policy

Increase government spendingReduce taxesMixture of both

Expansionary policy will shift AD to right, then multiplier effect will shift it further

Increased Government SpendingIncreased Gov’t spending will increase G component of CIGXAD will shift to rt

Tax ReductionsIf MPC is .75 and taxes are decreased by $20B, then C will increase by $15BThis will shift AD to rtThis is not as efficient as gov’t spending since MPC for personal consumption is not 1It is more economically efficient per dollar spent, though, since Gov’t spending cannot perfectly simulate what personal consumption would be

Mixture of both will include both of these effectsContractionary Fiscal policy works the same way

Financing of Deficits and Disposing of surplusesBorrowing vs. New Money

Borrowing from publicBonds are issued, money collected, money spentBond Illusion, if not true, would limit effectiveness

Printing MoneyNew money printed, gov’t spends itNo worry about lack of bond illusion, but inflation is a problem

Disposing of SurplusesDebt reduction

Use the extra surplus to pay off excess debtGov’t buys back bonds and retires themProblem with this is that adding more money to economy by buying bonds will offset some of the contractionary fiscal policy

ImpoundingJust sit the funds on the sidelines, allowing them to do nothingLess inflationary, more contractionary, more controversial

Automatic stabilizers

Systems that kick in to provide automatic stimulus or lack thereof when neededTax System

Tax system is an automatic stabilizerGov’t spending per year is fixedTaxes are tax ratesIf economy is too weak, the gov’t will spend the money anyway, and any tax shortfall will be made up with deficit spending. This leads to an automatic stimulusThe opposite is true if too much money comes in

Tax ProgressivityIf everyone begins to make more money, people, on average, will pay higher rates of taxes, thus automatically increasing taxes and slowing economic growth

Evaluating Fiscal policyFull Employment Budget

Used to adjust the actual Federal budget deficits and surpluses to eliminate the automatic changes in tax revenuesMeasures wht the Federal budget deficit or surplus would be with existing tax rates and gov’t spending elvels if the economy had achieved its full-employment lvl of GDPThis allows economists to see what the tax revenues and gov’t expenditures would have been if things had been idealThen, we can see if things were above or below this levelUse figure 12.4 as a graph

Problems, Criticisms, ComplicationsProblems of Timing

Recognition lagIt takes a long time to recognize that we are in a recessionIt also takes a long time to recognize when we are out of one

Administrative lagIt takes time to get the wheels of gov’t going to solve the problem or stop solving the problem

Operational LagIt takes time for the solution to take effect or stop taking effect

Political considerationsFuture policy reversalsOffsetting state and local finances

Much state and local financing is pro-cyclicalLaws and constitutions require state and local gov’ts to balance their budgets and thus they spend a lot in good times and spend very little in bad

Crowding Out EffectNet Export Effect

Problem: Recession

Expansionary fiscal policy higher domestic interest rates increased foreign demand for dollars higher value of dollar internationally Lower net exports

Ch 17Supply factors

Increase in quality and quantity of natural resourcesIncreases in quantity and quality of human resourcesIncrease in supply of capitalImprovements in technology

Demand factorsPeople must want the increased production

Efficiency FactorMust use the increased factors in the most efficient way possible

Production possibilities analysisGrowth and production possibilitiesLabor and productivity

Hours of workLabor productivity

Growth in as/ad modelProduction possibilities and ASExtended AS/AD model

Accounting for GrowthLabor inputs vs productivity

Generally the trend has been to have more increases in productivity than labor inputs

Technological advanceQuantity of CapitalEducation and trainingEconomies of scale

Economies of scaleResource allocation

Ch 18

Debt definitionsPublic vs. total debt

Budget philosophiesAnnually balanced budgetCyclically balanced budgetFunctional finance

What causes debtWarsRecessionsLack of fiscal discipline

Quantitative AspectsDebt vs. GDPInternational comparisonsInterest chargesOwnership

Effects on Social SecurityNot so big factors

BankruptcyBurdening of future generations

Most is owed to US citizens, so just transfer from one American to another

Substantive issuesIncome distributionIncentivesForeign-owned public debtCrowding Out effect