Economics

Microeconomics

General

  • Actions of buyers and sellers = prices of goods (markets)

  • Supply and Demand

Perfectly Competitive Market

Market: all the buyers and sellers of a particular product or service

  • often informal (ex. local gas stations)

Perfectly Competitive: when the good or service sold is highly standardized, has a large market, and participants are well informed of the price

  • buyers and sellers can buy and sell as they wish without influencing the market price

  • real world markets are characterized by degree of competition and in terms of the perfectly competitive model

Demand: from buyers

  • Law of Demand: inverse relationship between price and demand

    • Demand Schedule: table depicting price and demand relationship

      • Demand Curve: slope for quantity demanded and price

        • Quantity Demanded (point on curve)

        • Demand (entire curve)

      • Y-Axis: Price

      • X-Axis: Demand

    • Market Demand: add up quantity that every consumer may purchase at each possible price (ex. Market = sum of quantity of Nora and Steve)

  • Shifts in Demand Curve

    • Normal Goods: demand is positively correlated with income

    • Irregular Goods: demand is negatively correlating with income (ex. bus tickets)

    • Substitutes: goods whose price decline caused lowered demand for other goods

    • Complements: goods whose price decline caused raised demand for other goods (ex. insurance and cars)

    • Tastes

    • Expectations: personal changes (ex. employment status)

    • Number of Buyers

Supply: from sellers

  • Law of Supply: direct relationship between price and quantity supplied

  • Shifts in Supply Curve

    • Input Prices: things supplies must purchase to supply a product (ex. labor costs)

    • Technology

    • Expectations

    • Number of Sellers: positive correlation between sellers and supplies

  • Profit-Maxxing: increase supply until marginal costs = marginal revenue

Equilibrium: when no participant in a market has reason to change their behavior

  • Where the market supply and demand curves intersect (1 point)

  • When market has natural tendency towards this combo of price and quantity

  • Competitive Markets gravitate towards equilibrium

Competitive Market Equilibrium Characteristics

  • Allocating Goods: deciding amount of supply

  • Consumer Surplus: the amount extra to what a consumer was planning to pay compared to the amount paid (ex. planning to pay $20 but only needed to pay $10. consumer surplus = $10

    • Total Area below Demand Curve

  • Producer Surplus

  • Total Surplus: all Consumer and Producer surpluses sum

    • Max Total surplus = satisfy Pareto efficiency (best for everyone)

  • Elasticity

    • Graph: flatter curve = higher elasticity

    • Price Elasticity of Demand = Percent change in quantity demanded / Percent change in price

      • How responsive consumers are to changes of price of a good

      • Elastic = positive change with increased price

      • Influences: Substitutes, Necessities, Market Definition, Time

    • Price Elasticity of Supply = Percent change in quantity supplied / Percent change in price

      • Influences: Ease, Resource Amount, Time

    • Using

      • Total Revenue = Price x Quantity

Government Policy

  • Price Controls: min wage, social changes (ex. setting all of __ to same price = competition + offset certain classes)

  • Taxes:

International Trade

  • Adding Opportunity to Trade

    • Absolute Advantage: when one is able to produce more amount of a good even compared to others with the same resources

  • Comparative Advantage

    • less lost/traded off = more comparative advantage

Isolated Economy

  • Production Possibility Frontier

    • trade-off relationship where x person’s work dictates/is proportional to x person’s rewards or is dependent on person x

Finding Firm’s Supply Curve

  • Fixed Cost: cannot be changed in short run

  • Variable Costs: can be

  • Marginal Cost: increases in cost due to producing additional output

  • Diminishing returns to scale: diminishing changeable factors due to limited, fixed factors (ex. number of workers vs number of machinery)

  • Marginal Revenue: increase in revenue due to producing additional output

  • Able to diminishing returns to scale, marginal costs will increase with output, and the supply curve will slope upwards

Entry, Exit, and Market Supply Curve

  • 0 economic profits to business owners in a competitive market, but they earn opportunity wage ( they’re content, this is optimal)

  • prices help 1) ration scarce goods 2) allocate productive resources to difference activities (if price exceeds production cost- —> positive economic profit —> produce more with resources

  • graph: something pg 43

Imperfect Competition

markets with few suppliers

  • same objective as perfect: maximize profits

  • difference: amount supplied may affect price, demand curve is downward (supply up, price down)

  • market power: ability to control prices almost directly

Monopoly: single supplier

  • barriers of entry: prevents competitors

    • ownership of key resource

    • government-created: copyright or patent = exclusive rights

    • natural: a firm can sell at lower prices (large fixed prices, ex. railroads)

  • supply

    • profit-maxxing: same, increase supply as long as marginal revenue > marginal cost

    • inverse relationship between price and demand

  • welfare consequences

    • consumer surplus

    • less social well-being

      • can sell at higher price w/o worry

  • dealing

    • Sherman Anti-Trust Act 1890: fed govt legislation increases market competition (reviews/removes competition-decreasers)

    • Regulation

    • Public ownership

  • perfect price discrimination

    • charging customers different prices = to the value they place on said service

    • offer price packages, price difference for age groups…

    • increase monopoly profits, social-welfare, fit perfect market demand curve

Oligopoly: few suppliers

  • challenge: must strongly consider other suppliers’ prices

  • cartel: suppliers agreement to cooperate (max profits, act like monopolist)

    • illegal in US

    • problem: marginal revenue up —> increase production —> value down

Monopolistic Competition

  • where firms produce similar but different products (ex. publishing books)

  • downard-demand curve

  • same-profit maxxing as monopoly

  • one firm profits well —> more competition comes —> firm profit decrease

  • no barriers of entry

    • may increase until profit = 0; lack of product identity

Profit Motive and Sources of Economic Change

  • Entrepreneurs: establish new products, services, or markets

  • Creative Destruction: by Joseph Schumpeter, opportunity to earn economic profits made by entrepreneurs as they invent unique innovations (ex. tech)

Market Failures

  • when markets fail to produce socially desirable outcomes

  • 2 types:

    • Lack of Private Property rights: become public goods

    • Externiality:

      • when an unpaid action of one party affects another party in an unpaid way

      • Ex. concerts & hotels, beekeepers & apple farmers, neighbor house value

      • Effect on Resource Allocation: optimizing/considering external cost allows the market equilibrium between price and quantity be higher

      • create incentives for industries to solve their problems

        • Agreement between industries that externally affect each other to share profits

        • Internalizing activities (ex. Netflix making its own shows)

      • Coase Theorem

      • Problems:

        • poorly defined property rights

      • Government Regulation

        • taxing to prevent negative externialities; best when externiality value can be estimated

        • quota: limit production

Coase Theorem

  • Ronald Coase: as long as involved parties can negotiate w/ each other, the private market should be able to resolve externiality problems

Property Rights

  • private property, etc.

  • externialities better managed when community decides on what to do collectively

Effects of Private Ownership

  • Tragedy of Commons: when nobody takes account for negative externialities (caused by overuse) of something owned by multiple people

Public and Private Goods

  • Rivalry in Consumption

    • Rival Good: a good that is to be competed for (ex. fixed # of pizza slices between your friends)

  • Degree of Excludability

    • ability to control who consumes this good

    • Non-excludable good (ex. national defense, firework display)

  • Private Goods: high degree of rivalry, consumption, and excludability (ex.haircuts, gasoline, food)

  • Common Resources: high rivalry and consumption, low excludability

    • no one really owns, source of externialities

    • public policy and taxes can help regulate

  • Collective Goods: low rivalry, high excludability

    • easy for monopoly to price too high and sell too little, government regulation may be needed

    • ex. pay-to-watch TV

  • Public Goods: low rivalry and excludability

Institutions, Organizations, and Govt

  • Institutions: formal and informal rules on human interaction

    • Cooperation of individuals is important

  • Government

    • Ability to tax citizens

    • Legal monopoly on use of force

    • Broader range support

Pork Barrel Politics

  • proclivity of elected officials to introduce projects that give money to communities

  • Logrolling: legislators trade voters so that their projects can be supported by other legislator (gets voted for)

Rent-seeking

  • socially unproductive activities that seek to direct economic benefits to one set of actors rather than another

  • bribing government official (over policy/regulation)

Proper Role of Government: not essential force that helps support broader range of transactions

Formulas

Macroeconomics

  • national economics

Macroeconomics Issues

Economic Growth and Living Standards

Population increase helped too

  • GDP: Output per capita

    • provides indication for what a typical person consume

  • Output/number of workers employed = average labor productivity

Recessions and Expansions

  • Expansion: a period from an economic trough to peak

  • Recession: a period from a economic peak to trough

  • Depression: severe recession

  • Business Cycle: alternating periods between expansion and recessions

Unemployment

Inflation

  • when all prices rise together

  • reduces purchasing power and makes people worse off

International Trade

Macroeconomic Measurement

  • Aggregation: combination of different things into a single economic variable (aggregates)

Gross Domestic Product (Output)

  • GDP: market value of all final goods and services produced in a country in a specific period of time

  • Market Value: use place’s dollar value

  • Final Goods and Services: end product of a chain of purchases

    • only final is considered in GDP

    • ex. Automobile (chain: parts, refiners…)

    • Intermediate Goods: goods used in production for final good

      • excluding intermediate goods ensures that other factors (vertical integration, double counting

      • ex. tomato sauce (tomato cost isn’t considered for GDP, but the value of the sauce is still valid)

  • Capital Goods: long-lived goods that are produced and also used to produce other goods and services

    • included in GDP in the year they are produced

      • if not included, then x country would have an inaccurately lower GDP than another country that did not invest in capital goods

    • ex. machinery

  • Within x Country: domestic, whatever created in x country

  • Specified Period: x thing is counted if x thing was produced entirely in x time period

    • ex. if house was produced last year but is being sold this year, it would not be counted in this year’s GDP

  • Limitations: difficult to categorize goods, excludes goods and services that aren’t sold (ex. housework, stuff not reported to govt so like cash-purchase only…), ignores non-beneficial factors (crime, natural disastors)

Other Way to Measure GDP

4 purchasing categories

  • GDP = C + I + G + NX

  • Household Purchases/Consumption Expenditures (C)

    • Consumer Durables

      • often require planning, are sensitive to interest rates; ex. cars

      • expenditures on new houses = investment ≠ consumer durables

    • Consumer Nondurables

    • Services

  • Investment (I)

    • Business fixed Investment/Capital Investment: business purchases

    • Residential Fixed Investment: for new houses/apartment

    • Inventories: unsold goods to company inventories

  • Government Purchases (G)

    • fed, state, and local payments of wages, govt purchases

    • transfer payments and debt interest ≠

  • Net Exports (NX)

    • Difference between value of exports and imports

    • Trade surplus: exports > imports

    • Trade deficit: imports greater than exports

Another way to measure GDP

  • GDP = Production = Expenditures = Income

  • basically, when good/service is sold, the revenue is distributed between workers and owners

Real GDP

  • adding up market value of all goods and services during a specified period; adjusted for inflation using base year

    • more accurate portrayal of economic growth and output

  • important to separate effects of price changes from changes in quantity of goods/services produced —> real GDP (isolates to single year)

  • Nominal GDP: using current market value/prices; current-dollar GDP

    • GDP Deflator: (GDP Deflator/100) x (Real GDP)

Measuring Inflation

  • Consumer Price Index (CPI)

    • CPI in a year t = 100 x (cost of bundle in year t) / (cost of bundle in base year)

    • used by US Bureau of Labor Statistics

    • reflects different consumption patterns and purchasing power; measures average changes in prices consumers pay for a “basket” of goods & services; how changes in price affect households’ abilities to maintain level of well-being/enjoyment; indicator of inflation/deflation

    • Rate of Change in CPI = inflation rate

    • Substitution Bias: a household may be able to still live comfortably by substituting with less expensive stuff; factor causing CPI to overstate effects of rising prices

    • Unmeasured Quality Change

    • New Goods and Services

  • GDP Deflator = 100 x (Nominal GDP) / (Real GDP)

    • only reflects prices of domestically produced goods

    • some stuff pg 75

Unemployment

  • indicator of how well the economy is performing

  • Unemployment Rate: percentage of labor force who’d like to work but can’t

    • never 0

  • Labor Force: all employed and unemployed individuals

    • Unemployed, Employed, Out of labor force ( hasn’t worked in past week and didn’t actively seek employment in the last 4 weeks)

  • Labor force participation rate: ratio of those in labor force to working-age population

  • Frictional Unemployment: when new workers enter the workforce, job market is harder for those looking for job

  • Structural Unemployment: available jobs require different skills/attributes

  • Cyclical Unemployment: due to rough cycles in economy

Economic Growth, Productivity, and Living Standards

Circular Flow Model

POP = country population N = labor force

Saving, Investment, and Financial System

  • Bond: certificate that specifies how much debt the borrower is to holder of the bond

    • includes:

      • date of maturity: when the loan will be repaid

      • rate of interest to pay periodically until fully repaid

    • principal: the promise to pay back original value

    • price of bond is inverse with interest rate (attractive to buyers)

    • risk is direct with interest rate

  • Intermediaries: 3rd party that acts as links

    • Banks:

      • can pay borrowers using the money of people that store money there, give interest rate to the store-ers + charge borrowers more

      • low-risk, insured, can withdraw whenever

      • provide checking account —> facilitate buying

    • Mutual Funds:

      • for savers with small funds to purchase bonds and stocks + gives knowledge

  • Saving

    • 84-85

  • How Decisions are Coordinated

    • -87

    • crowding out: tendecy of government to reduce private investment

  • Money

    • Medium of Exchange

    • Unit of Account: yardstick to establish the value of different goods and service

    • Store of Value: item for transferring purchasing power over time (ex. paper currency)

    • Fiat Money: (ex. dollar bill)

    • Commodity Money: item with intrinsic value

  • Liquidity: measure of ease an asset can be converted into the economy’s medium of exchange

  • Measuring Money:

    • M1 and M2

      • M2 = M1 + array of other assets

Federal Reserve System (“the Fed”)

  • Created 1913;

  • 12 regional banks with individual board of directors. Bosses appointed by President and approved by Senate. terms to remove political pressures

    • banks’ bank; oversees commercial banks and clears checks

    • lender of last resort: when a member bank cannot obtain funds

  • Money supply: task of controlling quantity of money

    • Federal Open Market Committee (FOMC)

    • determine changes to monetary policy

      • administered rate: discount and interest rate

      • lower administered rates to stimulate economy. banks will then be less towards holding money and lean more towards loaning money; currency and deposits from public increase

      • ample reverse policy: raised administered rates to reduce inflation

    • Central Banks:

      • limited reserve policy: open market operations to adjust money supply + buying govt bonds

    • Reserves: money that must be kept to pay back depositors

    • Money Multiplier: amount of money each sector creates from money in reserves

    • pg 91-93

  • Bank Run: rush of withdrawls

  • pg 94-111

US Economy in 1920s

Prosperity

Post-World War 1:

  • benefit from supplying goods and credit to Europe w/o as much warfare losses

  • post-economic constraint (for war) = consumers excited to spend = boom

    • supply scare = price up = collapse in prices = recovery = economy expand

Economy

  • structural change; urbanization; machinery = rural work ^^

  • innovation

  • wage-premium: white-collar jobs are increasingly more paird

Stock Market

  • mutual fund: intermediary holds diverse portfolio of securities

  • investment encouraged

Consumer Credit Expansion

Installment Financing: making payments towards buying an item

Consumption Smoothing: can buy more goods via borrowing

  • leveraged households: more debt

Urban Housing Boom

Building and Loan Associations

  • members joined to be eligible for mortgage

Asset Price Bubble: when a certain commodity’s price increases beyond intrinsic value (ex. houses, then cars…)

Global Context: US boom transferred around the world (due to fixed exchange rate gold standard). the Fed banks didn’t increase rates until later twenties, and were partially to blame for depression

Government

Laissez-faire

Local govt (pg 118-120)

Federal Govt

  • Prohibition

  • Immigration and Nationality Act of 1965 - restricting foreigners and other religions

  • Tariffs (tax on imported and exported goods); against globalization

    • Fordney-McCumber Tariff 1922

    • Smoot-Hawley Tariff 1930

  • New Deal: stimulate govt; Franklin D Roosevelt

Stock Market Crash

  • Causes:

    • Buying stocks on margins—> Fed Reserve increased interest rates —> reduced demand —> reduced buying —> stocks fall —> buyers cannot recover money

    • Food production up —> production up so farmers buy more stuff but then stocks/banks in trouble so prices fell —> farmers in debt

    • Banks: Fed Reserve officials lax with helping banks due to distrust due to the banks’ poor decisions + hard to know which banks are smar

    • dropping 50% in prices

  • McFadden Act 1927: prohibited banks from creating branches across state lines

  • Federal Deposit Insurance Corporation: improve bank stability

  • pg 128

1920s Effects:

  • “American Century” coined by Henry Luce

  • The Glass-Steagull Act of 1932: separated commercial and investment banks

  • regulations

  • Dodd-Frank Act in 2010: oversee financial stuff

1937 Recession

WW2, economic crisis ends (Work Progress Administration)