Economics 212 Introductory Macroeconomics

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					           Economics 212
    Introductory Macroeconomics
            Professor Cotton
              Spring 2009




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?
       Which government policies effectively decrease smoking or
        obesity?
       What do interest groups buy with political contributions?
       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?
       Which government policies effectively decrease smoking or
        obesity?
       What do interest groups buy with political contributions?
       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
     Ph.D. from Cornell University in 2008
     B.A. in Economic from Michigan State in 2001
     Worked as a consultant between undergrad and grad school


     My research is in Microeconomics, not Macro
     Why did I want to teach Intro Macro?
       The material is essential for understanding current events
       The first macro class that I took as an undergraduate student…
       I will ignore some of the things typically covered in intro
        economics and focus on the topics that will help you carry on a
        conversation about the current state of the US economy
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    What you need
     A copy of the Case and Fair textbook
       Buy a USED copy, it doesn’t even have to be the most current
        edition (look for edition 7 or 8, edition 6 will work in a pinch)

     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.

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     Topic 1: Basic Economic Principals
     Law of Diminishing Returns
     Production Possibilities Frontier
     Supply and Demand




10
     Factors of Production
     •    Factors of production are the inputs used to create outputs
          (goods and services) for consumption

     1. Natural Resources
     2. Labor
     3. Capital Goods (Produced Means of Production)




11
     What if we increase all of the factors of
     production by the same amount?
      Question:
       Suppose 2 farmers working 4 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 4 equally
       competent farmers working 8 equally productive acres of
       land with 2 tractors and 2 bags of seeds?

      Answer:




12
     What if we increase only one of the
     factors of production? Example 1
      Question:
       Suppose 2 farmers working 4 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 4 equally
       competent farmers working 4 acres of land with 1 tractors
       and 1 bags of seeds?

      Answer:




13
     What if we increase only one of the
     factors of production? Example 2
      Question:
       Suppose 2 farmers working 4 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 4 acres of land with 1 tractors
       and 1 bags of seeds?

      Answer:




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     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.)



15
     Law of Diminishing Returns
      Graph:




16
     A scary interpretation
      Thomas Malthus (1798): food production and population
       growth




17
     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



     Preventative checks – Decrease the birth rate



18
       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.
19   However, you should always give credit to your sources, even if it is Wikipedia.
     World Population – graph it




20
     So, what happened?
      What didn’t Malthus account for?




      What happened around the major kink in the graph?




21
       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
22
     Important Questions:




23
     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
24
     Royal Colony of South Carolina, 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 and 900 acres to
         corn production, and the rest to rice production?
        What about a 50-50 split?

25
     Opportunity costs
      Definition: The best alternative we forgo, or give up, when
       making a decision.

      Illustrated by movement along a PPF
      What is the opportunity cost of producing 100 bushels of
       corn?
      What is the opportunity cost of producing 100 additional
       bushels of corn?



26
     What happens to the PPF when…
      A fleet of ships land on the shore with 500 new farmers
         looking to settle in South Carolina?
        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?



27
     Where on the PPF?
      To be on the PPF, need “full employment” of factors of
       production.
      Much of macroeconomics policy is trying to get production
       as close to the PPF as possible.

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



28
     Supply and Demand, intro
      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.


29
     Example: Demand for Bourbon
      Individual Demand for Bourbon
        Barak Obama
        John McCain
        Hillary Clinton
        Mitt Romney


      Demand for Bourbon
        Sum of individual demand




30
     Example: Supply for Bourbon
      Calculated in the same fashion


      Individual Supply of Bourbon
        Jack’s distillery
        Jim’s distillery


      Supply of Bourbon
        Sum over all distilleries




31
     Example: Market for Bourbon
      Bring supply and demand together


      Equilibrium Price and Quantity




      Reality: How do we interview all buyers and sellers?
        We don’t. Although there are ways to estimate supply and
         demand
        It’s a model that helps us better understand market interactions



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     The Invisible Hand
      The “invisible hand”
        If the price is above the equilibrium price…
        If the price is below the equilibrium price…


      Price Ceilings
        Rent in NYC
        Gas during crisis


      Price Floors
        Farm price supports


33
     Elasticity
      Demand for cigarettes
      Demand for ham
      Demand for gasoline
      Demand for apple juice
      Supply for apples


      What determines the shape?




34
     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
35
     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




36
     Labor Market
      Supply is made up of individual workers
      Demand is from firms and organizations
       (counterintuitive?)

      Minimum wage laws




37