Info Dhq
The goal of firms is to maximize profit, which equals total revenue minus total cost. When analyzing a firm's behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working in the firm rather than taking another job, are implicit. A firm's costs reflect its production process. A typical firm's production function...
Openeconomy Macroeconomics Basic Concepts
Learn how net exports measure the international flow of goods and services Learn how net foreign investment measures the international flow of capital Consider why net exports must always equal net foreign investment See how saving, domestic investment, and net foreign investment are related When you decide to buy a car, you may compare the latest models offered by Ford and Toyota. When you take your next vacation, you may consider spending it on a beach in Florida or in Mexico. When you start...
Conclusion Vgf
People have long reflected on the distribution of income in society. Plato, the ancient Greek philosopher, concluded that in an ideal society the income of the richest was opposed by many intellectuals. Some members of President Clinton's team quit after the 1996 federal law, over what they considered a betrayal of the welfare state. They argued that most women forced off welfare would become homeless or destitute, since they supposedly are too mentally or physically handicapped or lacking in...
Chapter 12
Page 249 The two most important sources of tax revenue for the federal government are individual income taxes and payroll taxes social insurance taxes . The two most important sources of tax revenue for state and local governments are sales taxes and property taxes. Page 253 The efficiency of a tax system depends on the costs of collecting a given amount of tax revenue. One tax system is more efficient than another if the same amount of tax revenue can be raised at a lower cost. A tax system...
In The N Ews Kio
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...
Info Sah
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...
Info Qhg
1. Which do you think has a greater effect on the consumer price index a 10 percent increase in the price of chicken or a 10 percent increase in the price of caviar Why 2. Describe the three problems that make the consumer price index an imperfect measure of the cost of living. 3. If the price of a Navy submarine rises, is the consumer price index or the GDP deflator affected more Why 4. Over a long period of time, the price of a candy bar rose from 0.10 to 0.60. Over the same period, the...
J Fuk
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....
Why The Aggregatesupply Curve Is Vertical In The Long Run
What determines the quantity of goods and services supplied in the long run We implicitly answered this question earlier in the book when we analyzed the process of economic growth. In the long run, an economy's production of goods and services its real GDP depends on its supplies of labor, capital, and natural resources and on the available technology used to turn these factors of production into goods and services. Because the price level does not affect these long-run determinants of real...
J Yyi
1. Japan generally runs a significant trade surplus. Do you think this is most related to high foreign demand for Japanese goods, low Japanese demand for foreign goods, a high Japanese saving rate relative to Japanese investment, or structural barriers against imports into Japan Explain your answer. 2. An article in The New York Times Apr. 14, 1995 regarding a decline in the value of the dollar reported that the president was clearly determined to signal that the United States remains solidly...
Chapter 33
Page 742 Three key facts about economic fluctuations are 1 economic fluctuations are irregular and unpredictable 2 most macroeco-nomic quantities fluctuate together and 3 as output falls, unemployment rises. Economic fluctuations are irregular and unpredictable, as you can see by looking at a graph of real GDP over time. Some recessions are close together and others are far apart. There appears to be no recurring pattern. Most macroeconomic quantities fluctuate together. In recessions, real...
Simultaneous Equilibrium In Two Markets
We can now put all the pieces of our model together in Figure 30-4. This figure shows how the market for loanable funds and the market for foreign-currency
Conclusion Daj
rate of inflation. The widespread belief that there is a permanent tradeoff is a sophisticated version of the confusion between high and rising that we all recognize in simpler forms. A rising rate of inflation may reduce unemployment, a high rate will not. But how long, you will say, is temporary . . . I can at most venture a personal judgment, based on some examination of the historical evidence, that the initial effects of a higher and unanticipated rate of inflation last for something like...
The Supply Curve In A Competitive Market
Now that we have examined the supply decision of a single firm, we can discuss the supply curve for a market. There are two cases to consider. First, we examine a market with a fixed number of firms. Second, we examine a market in which the number of firms can change as old firms exit the market and new firms enter. Both cases are important, for each applies over a specific time horizon. Over short periods of time, it is often difficult for firms to enter and exit, so the assumption of a fixed...
How Price Floors Affect Market Outcomes
To examine the effects of another kind of government price control, let's return to the market for ice cream. Imagine now that the government is persuaded by the pleas of the National Organization of Ice Cream Makers. In this case, the government might institute a price floor. Price floors, like price ceilings, are an attempt by the government to maintain prices at other than equilibrium levels. Whereas a price ceiling places a legal maximum on prices, a price floor places a legal minimum.
A Formula For The Spending Multiplier
A little high school algebra permits us to derive a formula for the size of the multiplier effect that arises from consumer spending. An important number in this formula is the marginal propensity to consume MPC the fraction of extra income that a household consumes rather than saves. For example, suppose that the marginal propensity to consume is 3 4. This means that for every extra dollar that a household earns, the household spends 0.75 3 4 of the dollar and saves 0.25. With an MPC of 3 4,...
J Otc
1. The chapter suggests that the economy, like the human body, has natural restorative powers. a. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand aggregate-supply diagram. What happens to total output, income, and employment b. If the government does not use stabilization policy, what happens to the economy over time Illustrate on your diagram. Does this adjustment generally occur in a matter of months or a matter of years c. Do you think the natural...
N The News 1
According to the Phillips curve, when unemployment falls to low levels, wages and prices start to rise more quickly. The following article illustrates this link between labor-market conditions and inflation. Tighter Labor Market Widens Inflation Fears By Robert D. Hershey, Jr. Remington, Va. Trinity Packaging's plant here recently hired a young man for a hot, entry-level job feeding plastic scrap onto a conveyor belt. The pay was OK for unskilled labor a good 3 or so above the federal minimum...
Rational Expectations And The Possibility Of Costless Disinflation
Just as Paul Volcker was pondering how costly reducing inflation might be, a group of economics professors was leading an intellectual revolution that would challenge the conventional wisdom on the sacrifice ratio. This group included such prominent economists as Robert Lucas, Thomas Sargent, and Robert Barro. Their revolution was based on a new approach to economic theory and policy called rational expectations. According to the theory of rational expectations, people optimally use all the...
Con The Central Bank Should Not Aim For Zero Inflation
Although price stability may be desirable, the benefits of zero inflation compared to moderate inflation are small, whereas the costs of reaching zero inflation are large. Estimates of the sacrifice ratio suggest that reducing inflation by 1 percentage point requires giving up about 5 percent of one year's output. Reducing inflation from, say, 4 percent to zero requires a loss of 20 percent of a year's output. At the current level of gross domestic product of about 9 trillion, this cost...
The Basic Model Of Economic Fluctuations
model of aggregate demand and aggregate supply the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend a curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level Our model of short-run economic fluctuations focuses on the behavior of two variables. The...
Monopolistic Competition
Analyze competition among firms that sell differentiated products Compare the outcome under monopolistic competition and under perfect competition Consider the desirability of outcomes in monopolistically competitive markets You walk into a bookstore to buy a book to read during your next vacation. On the store's shelves you find a John Grisham mystery, a Stephen King thriller, a Danielle Steel romance, a Frank McCourt memoir, and many other choices. When you pick out a book and buy it, what...
Case Study Two Ways To Reduce The Quantity Of Smoking Demanded
Public policymakers often want to reduce the amount that people smoke. There are two ways that policy can attempt to achieve this goal. One way to reduce smoking is to shift the demand curve for cigarettes and other tobacco products. Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on television are all policies aimed at reducing the quantity of cigarettes demanded at any given price. If successful, these policies shift...
Expectations And The Shortrun Phillips Curve
At first, the denial by Friedman and Phelps of a long-run tradeoff between inflation and unemployment might not seem persuasive. Their argument was based on an appeal to theory. By contrast, the negative correlation between inflation and unemployment documented by Phillips, Samuelson, and Solow was based on data. Why should anyone believe that policymakers faced a vertical Phillips curve when the world seemed to offer a downward-sloping one Shouldn't the findings of Phillips, Samuelson, and...
Info Gkk
a Higher Interest Rate Raises Saving b Higher Interest Rate Lowers Saving a Higher Interest Rate Raises Saving consumption when young and, thus, higher saving. b Higher Interest Rate Lowers Saving
The Effects Of A Shift In Aggregate Supply
Imagine once again an economy in its long-run equilibrium. Now suppose that suddenly some firms experience an increase in their costs of production. For example, bad weather in farm states might destroy some crops, driving up the cost An Adverse Shift in Aggregate Supply. When some event increases firms' costs, the short-run aggregate-supply curve shifts to the left from AS to AS2. The economy moves from point A to point B. The result is stagflation Output falls from Y1 to Y2, and the price...
Info Fca
Explain how buyers' willingness to pay, consumer surplus, and the demand curve are related. Explain how sellers' costs, producer surplus, and the supply curve are related. In a supply-and-demand diagram, show producer and consumer surplus in the market equilibrium. 4. What is efficiency Is it the only goal of economic policymakers 5. What does the invisible hand do 6. Name two types of market failure. Explain why each may cause market outcomes to be inefficient.
Pro Policymakers Should Try To Stabilize The Economy
Left on their own, economies tend to fluctuate. When households and firms become pessimistic, for instance, they cut back on spending, and this reduces the aggregate demand for goods and services. The fall in aggregate demand, in turn, reduces the production of goods and services. Firms lay off workers, and the unemployment rate rises. Real GDP and other measures of income fall. Rising unemployment and falling income help confirm the pessimism that initially generated the economic downturn....
Chapter18
Page 401 The marginal product of labor is the increase in the amount of output from an additional unit of labor. The value of the marginal product of labor is the marginal product of labor times the price of the output. A competitive, profit-maximizing firm decides how many workers to hire by hiring workers up to the point where the value of the marginal product of labor equals the wage. Page 402 A brain surgeon has a higher opportunity cost of enjoying leisure than a janitor because the...
The Benevolent Social Planner
To evaluate market outcomes, we introduce into our analysis a new, hypothetical character, called the benevolent social planner. The benevolent social planner is an all-knowing, all-powerful, well-intentioned dictator. The planner wants to maximize the economic well-being of everyone in society. What do you suppose this planner should do Should he just leave buyers and sellers at the equilibrium that they reach naturally on their own Or can he increase economic well-being by altering the market...
Pigovian Taxes And Subsidies
Instead of regulating behavior in response to an externality, the government can use market-based policies to align private incentives with social efficiency. For instance, as we saw earlier, the government can internalize the externality by taxing activities that have negative externalities and subsidizing activities that have positive exter-Pigovian tax nalities. Taxes enacted to correct the effects of negative externalities are called Pigov- a tax enacted to correct the effects of ian taxes,...
Should The Central Bank Aim For Zero Inflation
One of the Ten Principles of Economics discussed in Chapter 1, and developed more fully in Chapter 28, is that prices rise when the government prints too much money. Another of the Ten Principles of Economics discussed in Chapter 1, and developed more fully in Chapter 33, is that society faces a short-run tradeoff between inflation and unemployment. Put together, these two principles raise a question for policymakers How much inflation should the central bank be willing to tolerate Our third...
Info Tqm
Long-Run Growth and Inflation in the Model of Aggregate Demand and Aggregate Supply. As the economy becomes better able to produce goods and services over time, primarily because of technological progress, the longrun aggregate-supply curve shifts to the right. At the same time, as the Fed increases the money supply, the aggregate-demand curve also shifts to the right. In this figure, output grows from Y1980 to Y1990 and then to Y2000, and the price level rises from P1980 to P1990 and then to...
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...
J Jfp
1. Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that can be used to describe the four situations listed below. Label the point that shows the position of the economy in each case a. Actual inflation is 5 percent and expected inflation is 3 percent. b. Actual inflation is 3 percent and expected inflation is 5 percent. c. Actual inflation is 5 percent and expected inflation is 5 percent. d. Actual inflation is 3 percent and expected inflation is 3...
The Deadweight Loss
We begin by considering what the monopoly firm would do if it were run by a benevolent social planner. The social planner cares not only about the profit earned by the firm's owners but also about the benefits received by the firm's consumers. The planner tries to maximize total surplus, which equals producer surplus profit plus consumer surplus. Keep in mind that total surplus equals the value of the good to consumers minus the costs of making the good incurred by the monopoly producer. Figure...
Info Tht
Consumer Surplus Producer Surplus Government Revenue Total Surplus The area D F shows the fall in total surplus and represents the deadweight loss of the tariff. Changes in Welfare from a Tariff. The table compares economic welfare when trade is unrestricted and when trade is restricted with a tariff. Letters refer to the regions marked in Figure 9-6. Once the government imposes a tariff, the domestic price exceeds the world price by the amount of the tariff. Consumer surplus is now area A B....
Political Instability And Capital Flight
In 1994 political instability in Mexico, including the assassination of a prominent political leader, made world financial markets nervous. People began to view Mexico as a much less stable country than they had previously thought. They decided to pull some of their assets out of Mexico in order to move these funds to the United States and other safe havens. Such a large and sudden movement of funds out of a country is called capital flight. To see the implications of capital flight for the...
Hint The Government Took Such An Action In The 1980s
a. If the company were to build the bridge, what would be its profit-maximizing price Would that be the efficient level of output Why or why not b. If the company is interested in maximizing profit, should it build the bridge What would be its profit or loss c. If the government were to build the bridge, what price should it charge d. Should the government build the bridge Explain. 9. The Placebo Drug Company holds a patent on one of its discoveries. a. Assuming that the production of the drug...
Conclusion The Origins Of Aggregate Demand And Aggregate Supply
This chapter has achieved two goals. First, we have discussed some of the important facts about short-run fluctuations in economic activity. Second, we have introduced a basic model to explain those fluctuations, called the model of aggregate demand and aggregate supply. In the next two chapters we look at each piece of this model in more detail in order to understand more fully what causes fluctuations in the economy and how policymakers might respond to these fluctuations. Now that we have a...
How Monetary Policy Influences Aggregate Demand
The aggregate-demand curve shows the total quantity of goods and services demanded in the economy for any price level. As you may recall from the preceding chapter, the aggregate-demand curve slopes downward for three reasons The wealth effect A lower price level raises the real value of households' money holdings, and higher real wealth stimulates consumer spending. The interest-rate effect A lower price level lowers the interest rate as people try to lend out their excess money holdings, and...
The Cost Of Producing Stereo Systems Has Fallen Over The Past Several Decades
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...
Info Anp
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...
Q
Total Revenue. The total amount paid by buyers, and received as revenue by sellers, equals the area of the box under the demand curve, P X Q. Here, at a price of 4, the quantity demanded is 100, and total revenue is 400. How Total Revenue Changes When Price Changes Inelastic Demand. With an inelastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately smaller. Therefore, total revenue the product of price and quantity increases. Here, an...
Draw Budget Constraint Assuming That You Pay No Taxes On Your Income
budget constraint, p. 465 indifference curve, p. 466 marginal rate of substitution, p. 467 perfect substitutes, p. 470 perfect complements, p. 470 normal good, p. 473 inferior good, p. 473 income effect, p. 475 substitution effect, p. 475 Giffen good, p. 479 1. A consumer has income of 3,000. Wine costs 3 a glass, budget constraint. What is the slope of this budget and cheese costs 6 a pound. Draw the consumer's constraint 2. Draw a consumer's indifference curves for wine and cheese. Describe...
Using The Supply Curve To Measure Producer Surplus
Just as consumer surplus is closely related to the demand curve, producer surplus is closely related to the supply curve. To see how, let's continue our example. We begin by using the costs of the four painters to find the supply schedule for painting services. Table 7-4 shows the supply schedule that corresponds to the costs in Table 7-3. If the price is below 500, none of the four painters is willing to do the job, so the quantity supplied is zero. If the price is between 500 and 600, only...
The Various Measures Of Cost
Our analysis of Hungry Helen's Cookie Factory demonstrated how a firm's total cost reflects its production function. From data on a firm's total cost, we can derive several related measures of cost, which will turn out to be useful when we analyze production and pricing decisions in future chapters. To see how these related measures are derived, we consider the example in Table 13-2. This table presents cost data on Helen's neighbor Thirsty Thelma's Lemonade Stand. The first column of the table...
Info Byn
between food and nonfood consumption however he pleases. By contrast, if the government gives Paul an in-kind transfer of food, then his new budget constraint is more complicated. The budget constraint has again shifted out. But now the budget constraint has a kink at 1,000 of food, for Paul must consume at least that amount in food. That is, even if Paul spends all his money on nonfood consumption, he still consumes 1,000 in food. The ultimate comparison between the cash transfer and in-kind...
Catherines Demand Curve
Catherine's Demand Schedule. The demand schedule shows the quantity demanded at each price. Catherine's Demand Curve. This demand curve, which graphs the demand schedule in Table 4-1, shows how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward. a graph of the relationship between the price of a good and the quantity demanded a Latin phrase, translated as other things being equal, used as a...
In The N Ews Kwj
If an economy is to allocate its scarce resources efficiently, goods must get to those consumers who value them most highly. Ticket scalping is one example of how markets reach efficient outcomes. Scalpers buy tickets to plays, concerts, and sports events and then sell the tickets at a price above their original cost. By charging the highest price the market will bear, scalpers help ensure that consumers with the greatest willingness to pay for the tickets actually do get them. In some places,...