In The N E Ws
The role of social custom in the monetary system is most apparent in foreign cultures with customs very different from our own. The following article describes the money on the island of Yap. As you read the article, ask yourself whether Yap is using a type of commodity money, a type of fiat money, or something in between. Fixed Assets, or Why a Loan in Yap Is Hard to Roll Over By Art Pine Yap, Micronesia On this tiny South Pacific island, life is easy and the currency is hard. Elsewhere, the...
In The N Ews Qwd
How to Protect Your Savings from Inflation As we have seen, unexpected changes in the price level redistribute wealth among debtors and creditors. This would no longer be true if debt contracts were written in real, rather than nominal, terms. In 1997 the U.S. Treasury started issuing bonds with a return indexed to the price level. In the following article, written a few months before the policy was implemented, two prominent economists discuss the merits of this policy. Inflation Fighters for...
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a. If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does First National now hold b. Assume that all other banks hold only the required amount of reserves. If First National decides to reduce its reserves to only the required amount, by how much would the economy's money supply increase 10. Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. a. If the Fed sells 1 million of...
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The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices in the economy. The percentage change in the consumer price index measures the inflation rate. Although the GDP deflator also measures the overall level of prices in the economy, it differs from the consumer price index because it includes goods and services produced rather than goods and services consumed....
The Shortrun Tradeoff Between Inflation And Unemployment
Two closely watched indicators of economic performance are inflation and unemployment. When the Bureau of Labor Statistics releases data on these variables each month, policymakers are eager to hear the news. Some commentators have added together the inflation rate and the unemployment rate to produce a misery index, which purports to measure the health of the economy. How are these two measures of economic performance related to each other Earlier in the book we discussed the long-run...
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1. Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. Illustrate your answers with diagrams. a. The Fed's bond traders buy bonds in open-market operations. b. An increase in credit card availability reduces the cash people hold. c. The Federal Reserve reduces banks' reserve requirements. d. Households decide to hold more money to use for holiday shopping. e. A wave of optimism boosts business investment and expands...
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In developing a theory of short-run economic fluctuations, Keynes proposed the theory of liquidity preference to explain the determinants of the interest rate. According to this theory, the interest rate adjusts to balance the supply and demand for money. An increase in the price level raises money demand and increases the interest rate that brings the money market into equilibrium. Because the interest rate represents the cost of borrowing, a higher interest rate reduces investment and,...
Shifts In The Demand Curve
Suppose that the American Medical Association suddenly announces a new discovery People who regularly eat ice cream live longer, healthier lives. How does this announcement affect the market for ice cream The discovery changes people's tastes and raises the demand for ice cream. At any given price, buyers now want to purchase a larger quantity of ice cream, and the demand curve for ice cream shifts to the right. Whenever any determinant of demand changes, other than the good's price, the demand...
Do You Think That Firms In Small Towns Or In Cities Have More Market Power In
Why do you think that younger women experienced a bigger increase in labor-force participation than older women Between 1997 and 1998, total U.S. employment increased by 2.1 million workers, but the number of unemployed workers declined by only 0.5 million. How are these numbers consistent with each other Why might one expect a reduction in the number of people counted as unemployed to be smaller than the increase in the number of people employed Are the following workers more likely to...
Illustrate The Effect Of This Tax On Equilbrium Price And Quantity In The Sock
1. What happens to consumer and producer surplus when 3. the sale of a good is taxed How does the change in consumer and producer surplus compare to the tax 4 revenue Explain. 2. Draw a supply-and-demand diagram with a tax on the 5 sale of the good. Show the deadweight loss. Show the How do the elasticities of supply and demand affect the deadweight loss of a tax Why do they have this effect Why do experts disagree about whether labor taxes have small or large deadweight losses What happens to...
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1. Define the price elasticity of demand and the income elasticity of demand. 2. List and explain some of the determinants of the price elasticity of demand. 3. If the elasticity is greater than 1, is demand elastic or inelastic If the elasticity equals 0, is demand perfectly elastic or perfectly inelastic 4. On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total revenue received by producers. 5. If demand is elastic, how will an increase in price change...
9. Consider How Health Insurance Affects The Quantity Of Healthcare Services
1. An early freeze in California sours the lemon crop. What happens to consumer surplus in the market for lemons What happens to consumer surplus in the market for lemonade Illustrate your answers with diagrams. 2. Suppose the demand for French bread rises. What happens to producer surplus in the market for French bread What happens to producer surplus in the market for flour Illustrate your answer with diagrams. 3. It is a hot day, and Bert is very thirsty. Here is the value he places on a...
Societies Choose What Share Of Their Resources To Devote To Consumption And
1. Most countries, including the United States, import substantial amounts of goods and services from other countries. Yet the chapter says that a nation can enjoy a high standard of living only if it can produce a large quantity of goods and services itself. Can you reconcile these two facts 2. List the capital inputs necessary to produce each of the following 3. U.S. income per person today is roughly eight times what it was a century ago. Many other countries have also experienced...
2 Suppose The Government Borrows 20 Billion More Next Year Than This Year. A
1. What is the role of the financial system Name and describe two markets that are part of the financial system in our economy. Name and describe two financial intermediaries. 2. Why is it important for people who own stocks and bonds to diversify their holdings What type of financial institution makes diversification easier 3. What is national saving What is private saving What is public saving How are these three variables related 4. What is investment How is it related to national saving 5....
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What components of GDP if any would each of the following transactions affect Explain. a. A family buys a new refrigerator. c. Ford sells a Thunderbird from its inventory. e. California repaves Highway 101. f. Your parents buy a bottle of French wine. g. Honda expands its factory in Marysville, Ohio. The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded....
Elasticity And Tax Incidence
When a good is taxed, buyers and sellers of the good share the burden of the tax. But how exactly is the tax burden divided Only rarely will it be shared equally. To see how the burden is divided, consider the impact of taxation in the two markets in Figure 6-9. In both cases, the figure shows the initial demand curve, the initial supply curve, and a tax that drives a wedge between the amount paid by buyers and the amount received by sellers. Not drawn in either panel of the figure is the new...
Computing The Price Elasticity Of Supply
Now that we have some idea about what the price elasticity of supply is, let's be more precise. Economists compute the price elasticity of supply as the percentage change in the quantity supplied divided by the percentage change in the price. That is, Percentage change in quantity supplied Price elasticity of supply --- - - -. For example, suppose that an increase in the price of milk from 2.85 to 3.15 a gallon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per month....
Willingness To Pay
Imagine that you own a mint-condition recording of Elvis Presley's first album. Because you are not an Elvis Presley fan, you decide to sell it. One way to do so is to hold an auction. Four Elvis fans show up for your auction John, Paul, George, and Ringo. Each of them would like to own the album, but there is a limit to the amount that each is willing to pay for it. Table 7-1 shows the maximum price that each of the four willingness to pay possible buyers would pay. Each buyer's maximum is...
The Determinants Of Trade
The Equilibrium without International Trade. When an economy cannot trade in world markets, the price adjusts to balance domestic supply and demand. This figure shows consumer and producer surplus in an equilibrium without international trade for the steel market in the imaginary country of Isoland. The Equilibrium without International Trade. When an economy cannot trade in world markets, the price adjusts to balance domestic supply and demand. This figure shows consumer and producer surplus...
Case Study The Laffer Curve And Supplyside Economics
One day in 1974, economist Arthur Laffer sat in a Washington restaurant with some prominent journalists and politicians. He took out a napkin and drew a figure on it to show how tax rates affect tax revenue. It looked much like panel b of our Figure 8-7. Laffer then suggested that the United States was on the downward-sloping side of this curve. Tax rates were so high, he argued, that reducing them would actually raise tax revenue. Most economists were skeptical of Laffer's suggestion. The idea...
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Reduction in quantity due to the tax Reduction in quantity due to the tax deadweight loss It is a loss to buyers and sellers in a market not offset by an increase in government revenue. From this example, we can see the ultimate source of deadweight losses Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. The area of the triangle between the supply and demand curves area C E in Figure 8-3 measures these losses. This loss can be...
Case Study The Minimum Wage
An important example of a price floor is the minimum wage. Minimum-wage laws dictate the lowest price for labor that any employer may pay. The U.S. Congress first instituted a minimum wage with the Fair Labor Standards Act of 1938 to ensure workers a minimally adequate standard of living. In 1999 the minimum wage according to federal law was 5.15 per hour, and some state laws imposed higher minimum wages. To examine the effects of a minimum wage, we must consider the market for labor. Panel a...
Our First Model The Circularflow Diagram
The economy consists of millions of people engaged in many activities buying, selling, working, hiring, manufacturing, and so on. To understand how the economy works, we must find some way to simplify our thinking about all these activities. In other words, we need a model that explains, in general terms, how the economy is organized and how participants in the economy interact with one another. Figure 2-1 presents a visual model of the economy, called a circular-flow diagram. In this model,...
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Will a nation tend to export or import goods for which it has a comparative advantage Explain. Why do economists oppose policies that restrict trade among nations 1. Consider the farmer and the rancher from our example in this chapter. Explain why the farmer's opportunity cost of producing 1 pound of meat is 2 pounds of potatoes. Explain why the rancher's opportunity cost of producing 1 pound of meat is 1 8 pound of potatoes. 2. Maria can read 20 pages of economics in an hour. She can also read...
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Lovers of classical music persuade Congress to impose a price ceiling of 40 per ticket. Does this policy get more or fewer people to attend classical music concerts The government has decided that the free-market price of cheese is too low. a. Suppose the government imposes a binding price floor in the cheese market. Use a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese b. Farmers...
The Role Of Assumptions
If you ask a physicist how long it would take for a marble to fall from the top of a ten-story building, she will answer the question by assuming that the marble falls in a vacuum. Of course, this assumption is false. In fact, the building is surrounded by air, which exerts friction on the falling marble and slows it down. Yet the physicist will correctly point out that friction on the marble is so small that its effect is negligible. Assuming the marble falls in a vacuum greatly simplifies the...
Imagine That Winemakers In The State Of Washington Petitioned The State
1. The United States represents a small part of the world orange market. a. Draw a diagram depicting the equilibrium in the U.S. orange market without international trade. Identify the equilibrium price, equilibrium quantity, consumer surplus, and producer surplus. b. Suppose that the world orange price is below the U.S. price before trade, and that the U.S. orange market is now opened to trade. Identify the new equilibrium price, quantity consumed, quantity produced domestically, and quantity...
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productivity, p. 12 inflation, p. 13 Phillips curve, p. 14 1. Give three examples of important tradeoffs that you face in your life. 2. What is the opportunity cost of seeing a movie 3. Water is necessary for life. Is the marginal benefit of a glass of water large or small 4. Why should policymakers think about incentives 5. Why isn't trade among countries like a game with some winners and some losers 6. What does the invisible hand of the marketplace do 7. Explain the two main causes of market...
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0123456789 101112 Quantity of 3 4 Ice-Cream Cones Market Supply as the Sum of Individual Supplies. The market supply curve is found by adding horizontally the individual supply curves. At a price of 2, Ben supplies 3 icecream cones, and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones. 0123456789 101112 Quantity of 3 4 Ice-Cream Cones Variables That Affect Quantity Supplied Input prices Technology Expectations Number of sellers Represents a movement...
Factors Of Production
Flow of goods and services Flow of dollars production, such as the wages of their workers. What's left is the profit of the firm owners, who themselves are members of households. Hence, spending on goods and services flows from households to firms, and income in the form of wages, rent, and profit flows from firms to households. Let's take a tour of the circular flow by following a dollar bill as it makes its way from person to person through the economy. Imagine that the dollar begins at a...
Elasticity Supply Demand Curve
Tax Distortions and Elasticities. In panels a and b , the demand curve and the size of the tax are the same, but the price elasticity of supply is different. Notice that the more elastic the supply curve, the larger the deadweight loss of the tax. In panels c and d , the supply curve and the size of the tax are the same, but the price elasticity of demand is different. Notice that the more elastic the demand curve, the larger the deadweight loss of the tax. Let's consider first how the...
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of Measuring Consumer Surplus with the Demand Curve. In panel a , the price of the good is 80, and the consumer surplus is 20. In panel b , the price of the good is 70, and the consumer surplus is 40. of
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100 to 90 cones. Once again, the tax reduces the size of the ice-cream market. And once again, buyers and sellers share the burden of the tax. Because the market price rises, buyers pay 0.30 more for each cone than they did before the tax was enacted. Sellers receive a higher price than they did without the tax, but the effective price after paying the tax falls from 3.00 to 2.80. Comparing Figures 6-6 and 6-7 leads to a surprising conclusion Taxes on buyers and taxes on sellers are equivalent....
How A Tax Affects Market Participants
Now let's use the tools of welfare economics to measure the gains and losses from a tax on a good. To do this, we must take into account how the tax affects buyers, sellers, and the government. The benefit received by buyers in a market is measured by consumer surplus the amount buyers are willing to pay for the good minus the amount they actually pay for it. The benefit received by sellers in a market is measured by producer surplus the amount sellers receive for the good minus their costs....
How Price Ceilings Affect Market Outcomes
When the government, moved by the complaints of the Ice Cream Eaters, imposes a price ceiling on the market for ice cream, two outcomes are possible. In panel a of Figure 6-1, the government imposes a price ceiling of 4 per cone. In this case, because the price that balances supply and demand 3 is below the ceiling, the price ceiling is not binding. Market forces naturally move the economy to the equilibrium, and the price ceiling has no effect. Panel b of Figure 6-1 shows the other, more...
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Should an economic model describe reality exactly Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if disease kills half of the Use a production possibilities frontier to describe the idea of efficiency. 6. What are the two subfields into which economics is divided Explain what each subfield studies. 7. What is the difference between a positive and a normative statement Give an example of each. 8. What is the...
Case Study The Deadweight Loss Debate
Supply, demand, elasticity, deadweight loss all this economic theory is enough to make your head spin. But believe it or not, these ideas go to the heart of a profound political question How big should the government be The reason the debate hinges on these concepts is that the larger the deadweight loss of taxation, the larger the cost of any government program. If taxation entails very large deadweight losses, then these losses are a strong argument for a leaner government that does less and...
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The forces of supply and demand tend to move the price toward the equilibrium price, but when the market price hits the ceiling, it can rise no further. Thus, the market price equals the price ceiling. At this price, the quantity of ice cream demanded 125 cones in the figure exceeds the quantity supplied 75 cones . There is a shortage of ice cream, so some people who want to buy ice cream at the going price are unable to. When a shortage of ice cream develops because of this price ceiling, some...
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Changes in Welfare from a Tax. This table refers to the areas marked in Figure 8-3 to show how a tax affects the welfare of buyers and sellers in a market. Welfare with a Tax Now consider welfare after the tax is enacted. The price paid by buyers rises from P1 to PB, so consumer surplus now equals only area A the area below the demand curve and above the buyer's price . The price received by sellers falls from P1 to PS, so producer surplus now equals only area F the area above the supply curve...
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A Tax on Sellers. When a tax of 0.50 is levied on sellers, the supply curve shifts up by 0.50 from Sj to S2. The equilibrium quantity falls from 100 to 90 cones. The price that buyers pay rises from 3.00 to 3.30. The price that sellers receive after paying the tax falls from 3.00 to 2.80. Even though the tax is levied on sellers, buyers and sellers share the burden of the tax.
Elasticity And Its Application
Learn the meaning of the elasticity of supply Imagine yourself as a Kansas wheat farmer. Because you earn all your income from selling wheat, you devote much effort to making your land as productive as it can be. You monitor weather and soil conditions, check your fields for pests and disease, and study the latest advances in farm technology. You know that the more wheat you grow, the more you will have to sell after the harvest, and the higher will be your income and your standard of living....
Evaluating Price Controls
One of the Ten Principles of Economics discussed in Chapter 1 is that markets are usually a good way to organize economic activity. This principle explains why economists usually oppose price ceilings and price floors. To economists, prices are not the outcome of some haphazard process. Prices, they contend, are the result of the millions of business and consumer decisions that lie behind the supply and demand curves. Prices have the crucial job of balancing supply and demand and, thereby,...
Economists In Washington
President Harry Truman once said that he wanted to find a one-armed economist. When he asked his economists for advice, they always answered, On the one hand, . . . . On the other hand, . . . . Truman was right in realizing that economists' advice is not always straightforward. This tendency is rooted in one of the Ten Principles of Economics in Chapter 1 People face tradeoffs. Economists are aware that tradeoffs are involved in most policy decisions. A policy might increase efficiency at the...
The Supply Schedule And The Supply Curve
a table that shows the relationship between the price of a good and the quantity supplied a graph of the relationship between the price of a good and the quantity supplied Consider how the quantity supplied varies with the price, holding input prices, technology, and expectations constant. Table 4-4 shows the quantity supplied by Ben, an ice-cream seller, at various prices of ice cream. At a price below 1.00, Ben does not supply any ice cream at all. As the price rises, he supplies a greater...
Using The Demand Curve To Measure Consumer Surplus
Consumer surplus is closely related to the demand curve for a product. To see how they are related, let's continue our example and consider the demand curve for this rare Elvis Presley album. We begin by using the willingness to pay of the four possible buyers to find the demand schedule for the album. Table 7-2 shows the demand schedule that corresponds to Table 7-1. If the price is above 100, the quantity demanded in the market is 0, because no buyer is willing to pay that much. If the price...
Ceteris Paribus
Whenever you see a demand curve, remember that it is drawn holding many things constant. Catherine's demand curve in Figure 4-1 shows what happens to the quantity of ice cream Catherine demands when only the price of ice cream varies. The curve is drawn assuming that Catherine's income, tastes, expectations, and the prices of related products are not changing. Economists use the term ceteris paribus to signify that all the relevant variables, except those being studied at that moment, are held...
Opportunity Cost And Comparative Advantage
There is another way to look at the cost of producing potatoes. Rather than comparing inputs required, we can compare the opportunity costs. Recall from Chapter 1 that the opportunity cost of some item is what we give up to get that item. In our example, we assumed that the farmer and the rancher each spend 40 hours a week working. Time spent producing potatoes, therefore, takes away from time available for producing meat. As the rancher and farmer change their allocations of time between...
Case Study Lines At The Gas Pump
As we discussed in the preceding chapter, in 1973 the Organization of Petroleum Exporting Countries OPEC raised the price of crude oil in world oil markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. Long lines at gas stations became commonplace, and motorists often had to wait for hours to buy only a few gallons of gas. What was responsible for the long gas lines Most people blame OPEC. Surely, if OPEC had not raised the...
The Economist As Scientist
Economists try to address their subject with a scientist's objectivity. They approach the study of the economy in much the same way as a physicist approaches the study of matter and a biologist approaches the study of life They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories. To beginners, it can seem odd to claim that economics is a science. After all, economists do not work with test tubes or telescopes. The essence of science, I'm a...
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A Three-Step Program for Analyzing Changes in Equilibrium 2. Decide which direction the curve shifts. 3. Use the supply-and-demand diagram to see how the shift changes the equilibrium. A Three-Step Program for Analyzing Changes in Equilibrium How an Increase in Demand Affects the Equilibrium. An event that raises quantity demanded at any given price shifts the demand curve to the right. The equilibrium price and the equilibrium quantity both rise. Here, an abnormally hot summer causes buyers to...