Economics 212 Introductory Macroeconomics by ewghwehws

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									            Economics 212
    Introduction to Macroeconomics
              Professor Cotton




1
    What do economists study?
     Are NBA referees biased in favor of athletes of their own
        race?
       How does going to college affect your lifetime earnings?
       What do interest groups buy with political contributions?
       Which government policies effectively decrease smoking or
        obesity?
       Why are some countries rich and some countries poor?
       What’s the best way to increase employment or fight a
        recession?


2
    What do economists do?
     Apply rigorous logical and mathematical techniques to
      formally and carefully analyze problems

     Economic Theorists develop models
       A simple model can help us better understand an issue
       Focusing on only the most important aspects of a problem
        allows us to develop the greatest intuition

     Empirical Economists test the models
       Use statistical techniques to test the models
       Econometrics
3
    Most economics questions fit in 1 of 2 categories:

    MICROeconomics                   MACROeconomics
     Individual behavior (e.g.,      Aggregate or average
        firms, people, households)       behavior (e.g., country)
       How many employees will         Total unemployment in the
        GM lay off?                      economy?
       What characteristics            What policies determine
        determine if Joe goes to         the average level of
        college?                         education?
       Joe’s income or GM profit       Gross Domestic Product
       How much of the “pie” do        How big is the entire “pie”?
        you get?                         How do we make it bigger?
4
    Macroeconomics
    Deals with the classic issues in economics:
     Unemployment
     Inflation
     National Output & National Income
     Population Growth
     Economic Growth
     Bond Prices
     Money & Banking




5
    Which questions are Macro?
     Are NBA referees biased in favor of athletes of their own
        race?
       How does going to college affect your lifetime earnings?
       What do interest groups buy with political contributions?
       Which government policies effectively decrease smoking or
        obesity?
       Why are some countries rich and some countries poor?
       What’s the best way to increase employment or fight a
        recession?


6
    Consider Econ if you’re interested in:
     Business including Marketing and Finance
     Government / Political Science
     Law
     International studies
     Sociology
     Psychology
     Statistics / Applied Mathematics


     Some books to read, if interested:
       The Logic of Life by Tim Hartford
       Freakonomics by Steven Levitt and Stephen Dubner
       Super Crunchers by Ian Ayres
7
    About Me
     Prof. Christopher Cotton


     My research involves game theory and competitions
       Interest groups compete for policy reform
       Individuals compete for raises and promotions
       I’m a Microeconomist, not a Macroeconomist


     Why do I want to teach Intro Macroeconomics?
       The material is essential for understanding current events
       The first macro class that I took as an undergraduate student…
       I will focus on the topics that will help you carry on a
8       conversation about the current state of the US economy
    Goals of class
     Understand trade off between inflation and unemployment
     Assess different fiscal and monetary policies
     Why does a downturn in one sector hurt the entire
      economy?
     Prepare for future economics and finance classes
     Be able to read economic policy articles in the Wall Street
      Journal or The Economist




9
     What you need
      Textbook: Parkin’s “Macroeconomics” ninth edition
      Another book: Wheelan’s “Naked Economics”
      Subscription to MyEconLab.com (comes with new Parkin)


      You must be willing to keep up on the material. It is
       challenging, and the lectures will help but only if you
       understand the material from the previous lecture.

      Good skills in Algebra, and the ability to draw and interpret
       graphs given data.

10
     Topic 1: Basic Economic Principals
     Law of Diminishing Returns
     Production Possibilities Frontier
     Opportunity Costs
     Absolute & Comparative Advantage
     Supply and Demand




11
     Factors of Production
          Factors of production are the inputs used to create outputs
          (goods and services) for consumption

     1. Land
     2. Labor
     3. Capital (“produced means of production”)
     4. Entrepreneurship




12
     What if we increase all of the factors of
     production by the same amount?


                 +        +




             =




13
     What if we increase all of the factors of
     production by the same amount?

           +       +      +



                              +    +




               =   ???


14
     What if we increase all of the factors of
     production by the same amount?

           +       +      +



                              +    +




               =




15
     What if we increase all of the factors of
     production by the same amount?
      Question:
       Suppose 1 farmers working 10 acres of land with 1 tractor
       and 1 bag of seeds can produce 1 ton of corn.

       Then how many tons of corn can be produced by 2 equally
       competent farmers working 20 equally productive acres of
       land with 2 tractors and 2 bags of seeds?

      Answer:
       At least 2 tons. (Maybe more, if the farmers benefit from
       working as a team. i.e., Economies of Scale)


16
     What if we increase only of of the
     factors of production?


                +              +




      +               = ????



17
     What if we increase only of of the
     factors of production?


                 +        +




      +      =




18
     What if we increase only one of the
     factors of production? Example 1
      Question:
       Suppose 1 farmers working 10 acres of land with 1 tractor and 1
       bag of seeds can produce 1 ton of corn.

       Then how many tons of corn can be produced by 2 equally
       competent farmers working the same amount of land with the
       same number of tractors and seeds?

      Answer:
       Maybe 2 tons or more, if there are benefits of working together
       (Economies of Scale). But not necessarily. Maybe there is only so
       much work to do, and the new farmer adds nothing


19
     What if we increase only of of the
     factors of production?


                +              +




     +
                      = ????



20
     What if we increase only of of the
     factors of production?


                +         +




 +                  <



21
     What if we increase only one of the
     factors of production? Example 2
      Question:
       Suppose 1 farmers working 10 acres of land with 1 tractor
       and 1 bag of seeds can produce 1 ton of corn.

       Then how many tons of corn can be produced by 200 equally
       competent farmers working 10 acres of land with 1 tractor
       and 1 bag of seeds?

      Answer:
       Definitely not 200 tons of corn. (Maybe not ever 1 ton if the
       additional 199 workers are just getting in the way.)


22
     Law of Diminishing Returns
      If one factor of production is increased, while the other
       factors of production remain unchanged, then eventually, the
       marginal increase in output from an additional unit of input
       will be lower than the marginal increase in production from
       the previous unit of input.

      e.g., the benefit of adding the 101st worker is less than the
       benefit of adding the 100th worker. (Assuming the other
       factors of production are fixed.)



23
     Law of Diminishing Returns
      Graph:




24
     A scary interpretation
      Thomas Malthus (1798): food production and population
       growth




25
     Malthusian Theory of Pop Growth
      The world cannot support a population above a certain level
      Therefore, world population will be kept in line through
       “positive” and “preventative” checks.

     Positive checks – Increase the death rate
        War
        Famine & Disease
     Preventative checks – Decrease the birth rate
        Increased use of contraception
        Increased age of marriage

26
       World Population – graph it
                                  Year                  Population
                               10,000 BC                  1 million
                                 950 AD                  250 million
                                  1600                   500 million
                                  1804                    1 billion
                                  1927                    2 billion
                                  1961                    3 billion
                                  1974                    4 billion
                                  1987                    5 billion
                                  2000                    6 billion
                                  2011                    7 billion

     Note that data and graph are from Wikipedia’s entry on World Population. Just because I use
     Wikipedia for lecture data, does not mean you should use it as a main source for your papers.
27   However, you should always give credit to your sources, even if it is Wikipedia.
     World Population – graph it




28
     So, what happened?
      What didn’t Malthus account for?
        Changes in technology


      What happened around the major kink in the graph?
        Mid-1700s = Industrial Revolution
        Better access to food, medicine, shelter
        Better water supply, sewage




29
       Another example – US Output
                              Year          Total Output        Population
                                             ($ billions)       (millions)
                              1935                73                127
                              1950               295                152
                              1965               719                194
                              1980              2,784               227
                              1995              7,265               263




     Total output is US Gross Domestic Product, as provided by the BEA. Population figures come
     from the US Census
30
     Increase in population also…


              +        +




     +




31
     came with increases in technology


              +        +




     +




32
     came with increases in technology


              +        +




     +




33
         came with increases in technology


                  +        +




     +                +




34
         came with increases in technology


                  +        +




     +                +           +




35
     Important Questions:
      What are the four factors of production?
      What is the law of diminishing returns?
      Why is technology important?
      Why was Thomas Malthus wrong? Might he still be proven
       correct?




     Next concept: Opportunity Costs & Productions Possibilities
      Frontier
36
     Opportunity costs
      Definition: The (value of the) next-best alternative we forgo,
       or give up, when choosing an action.

      What’s the opportunity cost of studying for your test on a
       Saturday night?
      Is it higher or lower than the opportunity cost of studying for
       your test on a Tuesday night?

      We can refer to opportunity costs in terms of items forgone,
       or in terms of the monetary value of the items forgone.

37
     Production Possibilities Frontier (PPF)
      Definition: the maximum level of production in an economy,
       given its factors of production
      Graph an example for an economy that can only produce 2
       goods (e.g., guns & butter)



      If the economy is producing along its PPF, it cannot produce
       more of one good without giving up some production of
       another good.
      If the economy is inside its PPF, it can do better
      Can’t be outside of the PPF
38
     Opportunity Cost of
      Illustrated by movement along the PPF.


      What’s the opportunity cost of producing 1000 tubs of
       butter?
      What’s the opportunity cost of making one more tub of
       butter?




39
     French Colony of Louisiana, 1750
      You’re the “economic” advisor. Suppose you have 1000 workers
       with equal sized farms spread across the colony. Your workers can
       either farm rice or corn.
      If you put all of your inputs into corn production, then you
       produce 10,000 bushels of corn
      If you put all of your inputs into rice production, then you
       produce 3,000 bushels of rice

      What happens if you devote 900 workers to corn production, and
       the rest to rice production? Which workers should produce corn?
      What about a 50-50 split?

40
     Rainfall in Louisiana




41
     Opportunity costs
      What is the opportunity cost of producing 100 bushels of
       corn?
      What is the opportunity cost of producing 100 additional
       bushels of corn?




42
     What happens to the PPF when…
      A fleet of ships land on the shore with 500 new farmers
         looking to settle in Louisiana?
        Someone invents a more efficient plow?
        Rice production technology improves?
        Disease kills off 500 farmers?
        A hurricane increases flooding throughout the colony?
        The royal governor outlaws corn production?
        Coastal farmers go on strike, refusing to work?



43
     Where on the PPF?
      To be on the PPF, need “full employment” of factors of
       production.
      Macroeconomic policy making is often aimed at moving
       production as close to the PPF as possible.

      At which point on the PPF does production take place?
        Depends on what people want or need
        Command Economy (government decides, central planner)
        Market Economy (individuals decide own actions)



44
     Next Concept: Comparative Advantage
                       Absolute Advantage
                     Comparative Advantage
         Who should produce what in an efficient economy?



        Unless told otherwise, assume that there are constant
      opportunity costs of production (linear individual PPFs) for
                  questions of comparative advantage.



45
Absolute Advantage
 Someone has an absolute advantage in producing something
  when they can do so more efficiently (using fewer factors of
  production, e.g., less labor) than someone else.
 The person or group that is “better” at producing a good has
  the absolute advantage in doing so.
     Who has the absolute advantage?
      Jokes            Lance Armstrong
      Bikes            Jerry Seinfeld


      Physics          Albert Einstein
      Economics   ?    Prof. Cotton




47
Comparative Advantage
 Someone has comparative advantage in producing something
  when their opportunity costs of doing so are lower than
  someone else.

 Compared to someone else, everyone has a comparative
  advantage in the production of something.

 Comparative advantage does not imply absolute advantage.
     Who has the comparative
     advantage?
      Jokes          Lance Armstrong
      Bikes          Jerry Seinfeld


      Physics        Albert Einstein
      Economics      Prof. Cotton




49
Examples – Individuals
 Scotty and Iris can make both sweaters and beer
                           Sweaters            Beer
     Scotty                  1000              900
     Iris                    1300              1000


 Who has the absolute advantage in each product?
 For each person,
   What is the opportunity cost of making a beer?
   What is the opportunity cost of making a sweater?
Examples – Individuals
 Scotty and Iris can make both sweaters and beer
                             Sweaters             Beer
     Scotty                    1000                900
     Iris                      1300                1000


 Scotty has the lower opportunity cost of beer
   So, Scotty has the comparative advantage in beer
 Iris has the lower opportunity cost of sweater
   So, Iris has the comparative advantage in sweaters
Examples – Individuals
 Scotty and Iris can make both sweaters and beer
                         Sweaters           Beer
     Scotty                1000             900
     Iris                  1300             1000


 Graph the PPF for an economy made up of Scotty and Iris.
Examples – Countries
 The French and Irish can make both wine and beer
                            Beer              Wine
    France                   500              1000
    Ireland                 1000               100


 Who has the absolute advantage in each product?
 For each country,
   What is the opportunity cost of making beer?
   What is the opportunity cost of making wine?
Examples – Countries
 The French and Irish can make both wine and beer
                              Beer               Wine
     France                    500                1000
     Ireland                  1000                100


 France has the lower opportunity cost of wine
   So, France has the comparative advantage in wine
 Ireland has the lower opportunity cost of beer
   So, Ireland has the comparative advantage in beer
Examples
 If Aidan specializes, every week he can brew 12 gallons of
  beer, or he can bake 6 pizzas
 If Sally specializes, every week she can brew 6 gallons of beer,
  or she can bake 12 pizzas
 Pizza and beer go together, so people must consume 1 gallon
  of beer for every 1 pizza they eat.
 Assume constant opportunity costs


 Draw Aidan’s PPF
 Draw Sally’s PPF
     Example
      If they produce alone, how many pizzas and how much beer
       do they each consume?
          4 pizzas and 4 gallons of beer


      Draw the joint PPF when they work together
      Working together, how many pizzas and how much beer do
       they each consume?
          6 pizzas and 6 gallons of beer


      GAINS FROM TRADE


56
Examples
 Abby, Bruce and Carlos can make cheese and bread
                              Cheese        Bread
     Abby                      500           600
     Bruce                     200           700
     Carlos                    600           300


 As always with comparative advantage problems in this class,
  assume linear PPFs for each producer.
 Who has the absolute advantage in each product
   Carlos has it in Cheese
   Bruce has it in Bread
Examples
 Abby, Bruce and Carlos can make cheese and bread
                            Cheese       Bread
    Abby                       500        600
    Bruce                      200        700
    Carlos                     600        300


 Who has the comparative advantage in Cheese?
   Abby v. Bruce?  Abby
   Abby v. Carlos?  Carlos
   Bruce v. Carlos?  Carlos
   Carlos > Abby > Bruce
Examples
 Abby, Bruce and Carlos can make cheese and bread
                         Cheese          Bread
    Abby                  500                 600
    Bruce                 200                 700
    Carlos                600                 300


 Graph the PPF for the economy with trade.
Comparative Advantage Summary
 Use the concept of comparative advantage to argue in favor
  of companies moving production from US to China or India.

 Who gains?
   On average, US citizens are better off.
   Are all US citizens better off?


 Consider the exchange of goods and services. Which does the
  US have comparative advantage in compared to most other
  countries?
     Next Concept: Supply & Demand




61
     Auction for a Coke
        At $0.25, _____ people would like to buy a Coke
        At $0.50, _____ people would like to buy a Coke
        At $0.75, _____ people would like to buy a Coke
        At $1.00, _____ people would like to buy a Coke
        At $1.25, _____ people would like to buy a Coke
        At $1.50, _____ people would like to buy a Coke
        At $1.75, _____ people would like to buy a Coke
        At $2.00, _____ people would like to buy a Coke
        At $2.25, _____ people would like to buy a Coke
        At $2.50, _____ people would like to buy a Coke
        At $2.75, _____ people would like to buy a Coke
        At $3.00, _____ people would like to buy a Coke
        At $3.25, _____ people would like to buy a Coke
        At $3.50, _____ people would like to buy a Coke
        At $3.75, _____ people would like to buy a Coke


62
     Demand for Coke
      The numbers on the previous slide represent the DEMAND
       for Coke at each price
      Graph it




63
     Supply of Coke
      How much Coke is available (i.e., supplied) at each price
      Usually supply is increasing price. Producers are willing to
       sell more of something when the price is high.
      What about in our class? The vending machine down the hall
       means that supply is a vertical line at $1.25.




64
     Supply & Demand
      Key model for analyzing the market economy


      Supply– How much of a good or service firms are willing to
       supply at different prices
      Demand– How much of a good or service individuals want
       to buy at different prices
      Equilibrium (“market-clearing”) Price– The price at which
       the number of goods supplied equals the number of goods
       demanded.


65
        Imagine if….
     Each person       Each person
     on this side of   on this side of
     the classroom     the classroom
     has been given    hasn’t.
     one set of
     coasters each.




66
        Imagine if….
     Each person       Each person
     on this side of   on this side of
     the classroom     the classroom
     has been given    hasn’t.
     one set of
     coasters each.    (I like the other
                       side better)




67
     How much $$$
     would you
     require to give
     up your
     coasters?




68
     How much
     would you be
     willing to spend
     to buy some
     coasters?




69
     Price    Total # of sellers   Total # of buyers
     $0.00    0                    20
     $1.00    2                    18
     $2.00    4                    16
     $3.00    6                    14
     $4.00    8                    12
     $5.00    10                   10
     $6.00    12                   8
     $8.00    14                   6
     $9.00    16                   4
     $10.00   18                   2
     $11.00   20                   0


70
     Graph it.




71
     US Market for Bourbon
      What is the equilibrium price and quantity?
      What happens when the price of bourbon is too high?
      What happens when the price of bourbon is too low?




72
     US Market for Bourbon
      What happens to the market for bourbon when…
        …the Jack Daniel’s distillery burns to the ground?
           Decreases supply
        …someone invents a more cost-effective way to make bourbon?
           Increases supply
        …a highly publicized study shows that people who drink
         bourbon live longer happier lives?
              Increases demand
        …Scotch becomes trendy?
           Decreases demand




73
     US Market for Bourbon
      Assume that the equilibrium price of bourbon is $20 per
       bottle
      What happens when…
        …the US government passes a law saying that the price of
         bourbon cannot exceed $10 per bottle?
               This is a price ceiling, resulting in a shortage
        …the US government passes a law saying that the price of
         bourbon cannot fall below $30 per bottle?
               This is a price floor, resulting in a surplus




74
     Details
      Substitutes and complements
      What determines the shape of supply and demand?
      The invisible hand of the market place
      Price ceilings and floors




75
     Substitutes and Complements
      Substitutes – A good that can be used in place of another
       good
      Complements – A good that is used in conjunction with
       another good

      Complements can be in either consumption (i.e., pizza &
       beer) or production (i.e., dough and cheese)
      Substitutes can also be in either consumption (i.e., pizza or
       tacos) or production (i.e., sugar or corn syrup)


76
     Substitutes and Complements
      What are some substitutes and complements of…
        …Pickup truck?
        …Pen?
        …Movie ticket?
        …Orange?
        …Bourbon?
        …Cigarette?
        …Gasoline?




77
     Shape of Supply & Demand
      The availability of substitutes determines the shape
       (steepness) of the supply and demand curves

      Demand for cigarettes
      Demand for ham
      Demand for gasoline
      Demand for apple juice
      Supply for apples




78
     The Invisible Hand
      The “invisible hand”
        If the price is above the equilibrium price, there is a surplus.
         More people want to sell than buy at that price. In an effort to
         sell their goods, suppliers will decrease prices in an effort to
         undercut other suppliers so they are not left with a surplus. This
         tends to drive the price towards equilibrium
        If the price is below the equilibrium price, there is a shortage.
         More people want to buy than sell at that price. Buyers will
         increase their price offers in an effort to entice sellers to sell to
         them. This tends to drive the price towards equilibrium



79
     Price Ceilings and Floors
      Price ceilings keep the market price from going above a fixed
       level
      Price floors keep the market price from falling below a fixed
       level
      Keep the market from achieving equilibrium
      Examples
        Rent ceilings in NYC
        Price gouging laws during a gasoline panic
        Farm price supports



80
     Shifts in supply and demand
      Market for Coke
          Price of Pepsi increases (substitute)
          Price of pizza decreases (complement)
          New health reports show it’s bad for you
          Sugar increases in price
          Trade reform make it easier to import soda from Mexico
          Government sends stimulus check to all citizens

      Hot dog market when bun price increases
      Miller Beer market when Bud price increases
      Sport coat market when UM requires them in class
      Milk market when price of hay increases
81
     Shifts in supply and demand
      Shifts in demand
        Complement or substitute price change
        Shifts in taste
        Shifts in income


      Shifts in supply
        Input price change
        Change in technology




82
     Labor Market
      Supply is made up of many individual workers
      Demand is from firms and organizations
       (counterintuitive?)

      Minimum wage laws




83

								
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