How Economic Fluctuations Affect Spending Taxes And The Federal Budget
Economic fluctuations affect both transfer payments and tax revenues. In a recession, in which many people lose their jobs, the federal government contributes larger amounts to state-run unemployment insurance systems and pays more in transfers to the poor, since more families qualify for these types of assistance. Thus, a recession causes transfer payments to rise. Recessions also cause a drop in tax revenue, because household income and corporate profits two important sources of tax revenue...
R Eview Questions
1. What causal relationship does the aggregate demand curve describe Why does the AD curve slope downward What does each point on the AD curve represent 2. Only spending shocks can shift the aggregate demand curve. True or false Explain. 3. List three reasons why a change in output affects unit costs and subsequently the price level. 4. What causal relationship does the aggregate supply curve describe Why does the AS curve slope upward 5. Why does equilibrium occur only where the AD and AS...
The Bright Budgetary Future How Certain
Try your hand at managing the budget by using the National Budget Simulation http socrates. berkeley.edu 3333 budget budget.html . of Congress, not to take positions in political debates. Although some of the CBO's studies have been controversial, its research methods and conclusions are on the whole widely used and widely respected by both Democrats and Republicans. However, just because the CBO's projections are honest does not mean they are reliable. Projections especially those made over...
Changes In Technology
Perfect competition, while it does wonders for society as a whole, is hard on the individual firm. We have seen that economic profit when it occurs exists only fleetingly before being eliminated by the entry of other firms. Similarly, economic loss is eliminated by exit a rather clinical term for thousands of painful business failures each year. But these features of competition make it a powerful engine for satisfying our material desires. In this section, we look at another way in which...
Understanding The Market For Collegeeducated Labor
Students have many motives for attending college, but one of the most important motives is to invest in their own human capital. Put very simply, going to college will enable you to earn a higher income than you would otherwise be able to earn. How much higher In 1998, the average high school graduate aged 25 or older earned 19,735 per year, while the average college graduate earned 36,708.9 The college wage premium is the percentage by which the average college graduate's income exceeds the...
Improving Education
So far in this chapter, we've considered the problem of a consumer trying to maximize utility by selecting the best combination of goods and services. But consumer theory can be extended to consider almost any decision between two alternatives. Economists use the model of consumer theory to understand how people choose between work and leisure, between spending now and investing for the future, and even between honest work and criminal activities. In this section, we apply the insights of...
Bank Failures And Banking Panics
A bank failure occurs when a bank is unable to meet the requests of its depositors to withdraw their funds. Typically, the failure occurs when depositors begin to worry about the bank's financial health. They may believe that their bank has made unsound loans that will not be repaid, so that it does not have enough assets to cover its demand deposit liabilities. In that case, everyone will want to be first in Using the Theory Banks Failures and Banking Panics line to withdraw cash, since banks...
Economic Growth In The Lessdeveloped Countries
In most countries, Malthus's dire predictions have not come true. An important part of the reason is that increases in the capital stock have raised productivity and increased the average standard of living. Increases in the capital stock are even more important in the less-developed countries LDCs , which have relatively little capital to begin with and where even small increases in capital formation can have dramatic effects on living standards. But how does a nation go about increasing its...
Physical Capital And The Firms Investment Decision
The concept of capital was introduced in the first chapter of this book. There, you learned that capital is one of society's resources, along with land and labor. More specifically, capital is any long-lasting tool that people use to produce goods and services. You also learned that we can classify capital into two categories physical capital, such as the plant and equipment owned by business firms, and human capital the skills and training of the labor force. In this section, we'll focus on...
Time To Take A Break
By now, your mind may be swimming with concepts and terms total, average, and marginal cost curves fixed and variable costs explicit and implicit costs. . . . We are covering a lot of ground here and still have a bit more to cover production and cost in the long run. As difficult as it may seem to keep these concepts straight, they will become increasingly easy to handle as you use them in the chapters to come. But it's best not to overload your brain with too much new material at one time. So...
Ongoing Inflation And The Phillips Curve
Ongoing inflation changes our analysis of monetary policy. For one thing, it forces us to recognize a subtle, but important, change in the Fed's objectives While the Fed still desires full employment, its other goal price stability is not zero inflation, but rather a low and stable inflation rate. Another difference is in the graphs we use to illustrate the Fed's policy choices. Instead of continuing to analyze the economy with AS and AD graphs, when there is ongoing inflation, we usually use...
net capital flows into the united states as a percent of gdp
is just what has happened to the United States that the U.S. trade deficit has been caused by the desire of foreigners to invest in the United States. The result was a massive capital inflow and trade deficit that arose in the early 1980s, as illustrated in Figure 10. That capital inflow was unprecedented in size and duration, and it reversed a long-standing pattern of ownership between the United States and other countries. For decades, American holdings of foreign assets far exceeded foreign...
Finding Equilibrium Gdp With A Graph
To get an even clearer picture of how equilibrium GDP is determined, we'll illustrate it with a graph, although it will take us a few steps to get there. Figure 6 begins the process by showing how we can construct a graph of aggregate expenditure. The lowest line in the figure, labeled C, is our familiar consumption-income line, obtained from the data in the first two columns of Table 4. deriving the aggregate expenditure line Real Aggregate 8,ooo-Expenditure Billions 7,000 -6,000 -5,0004,000...
The Four Market Structures A Postscript
You have now been introduced to the four different market structures perfect competition, monopoly, monopolistic competition, and oligopoly. Each has different characteristics, and each leads to different predictions about pricing, profit, non-price competition, and firms' responses to changes in their environments. Table 1 summarizes some of the assumptions and predictions associated with each of the four market structures. While the table is a useful review of the models we have studied, it...
How The Cpi Is Used
The CPI is one of the most important measures of the performance of the economy. It is used in three major ways As a Policy Target. In the introductory macroeconomics chapter, we saw that price stability or a low inflation rate is one of the nation's important macro-economic goals. The measure most often used to gauge our success in achieving low inflation is the CPI. To Index Payments. A payment is indexed when it is set by a formula so that it rises and falls proportionately with a price...
The Classical Model A Summary
You've just completed a first tour of the classical model, our framework for understanding the economy in the long run. Before we begin to use this model, this is a good time to go back and review what we've done. We began with a critical assumption All markets clear. We then used the first three Key Steps of our four-step procedure to organize our thinking about the economy. First, we focused on an important market the labor market and identified the buyers and sellers in that market. We...
Elasticity And Straightline Demand Curves
In Figure 5, we drew the demand curve for laptops as a straight line. Along this demand curve, each time price rises by 500, the quantity of laptops demanded decreases by 100,000 per month. This behavior remains constant regardless of the price at which we start. Does this mean that the price elasticity of demand for laptops is the same for any interval along this demand curve Absolutely not To see why, let's compare what happens when the price of laptops rises by 500 along two different...
Shifts In The Consumptionincome Line
As you've learned, consumption spending depends positively on income If income increases and taxes remain unchanged, disposable income will rise, and consumption spending will rise along with it. The chain of causation can be represented this way In Figure 4, this change in consumption spending would be represented by a movement along the consumption-income line. For example, a rise in income from 7,000 billion to 8,000 billion would cause consumption spending to increase from 5,000 billion to...
The Resource Cost Of Inflation
In addition to its possible redistribution of income, inflation imposes another cost upon society. To cope with inflation, we are forced to use up time and other resources as we go about our daily economic activities shopping, selling, saving that we could otherwise have devoted to productive activities. Thus, inflation imposes an opportunity cost on society as a whole and on each of its members When people must spend time and other resources coping with inflation, they pay an opportunity cost...
How The Stock Market Affects The Economy
What do households do when their wealth increases Typically, they increase their spending. In our short-run macro model, we would classify this is an increase in autonomous consumption an increase in consumption spending at any level of disposable income. The link between stock prices and consumer spending is an important one, so economists have given it a name the wealth effect. And the wealth effect works in both directions Just as an increase in stock prices increases autonomous consumption,...
bilateral arbitrage
Millions of British Pounds per Month Millions of British Pounds per Month Initially, the price of the pound is 1.20 in New York panel a and 1.80 in London panel b . Traders take advantage of this exchange rate differential by buying pounds in New York and simultaneously selling them in London. As they do so, the demand curve shifts rightward in New York, and the supply curve shifts rightward in London. Arbitrage continues until the exchange rate attains the same value 1.50 per pound in both...
the effect of higher stock prices on the economy
Higher stock prices have a wealth effect on spending, increasing consumption spending at any level of real GDP. In panel a , the wealth effect of higher stock prices shifts the aggregate expenditure line upward, raising equilibrium GDP from Y, to Y2. Panel b shows a more complete way of illustrating the wealth effect Higher stock prices shift the aggregate demand curve rightward, increasing both equilibrium real GDP and the price level. any change in government policy this shift of the AD curve...
Why The Fed Allows Ongoing Inflation
Since the Fed can choose any rate of inflation it wants, and since inflation is costly to society, we might think that the Fed would aim for an inflation rate of zero. But a look back at panel a of Figure 1 shows that this is not what the Fed has chosen to do. In recent years, with unemployment very close to its natural rate, the Fed has maintained annual inflation at around 2 or 3 percent. Why doesn't the Fed eliminate inflation from the economy entirely One reason is a widespread belief that...
S U M M A R Y
The model of supply and demand is a powerful tool for understanding all sorts of economic events. For example, governments often intervene in markets either by creating price ceilings or price floors, or by imposing taxes or subsidies. Supply and demand enables us to predict how these interventions affect the price of a good and the quantity exchanged. Another powerful tool is the price elasticity of demand, defined as the percentage change in quantity demanded divided by the percentage change...
Using Price Elasticity Of Demand
Knowing the price elasticity of demand for a good and understanding the link between elasticity and total expenditure or revenue is helpful in many different contexts. For example, producers of goods and services doctors, bakers, theater owners, manufacturers, and others can use price elasticity of demand to predict how a price change will affect their total sales revenue. And government policy makers can and do use demand elasticities to price many government services, to make tax policy, and...
Price Floors
Sometimes, governments try to help sellers of a good by establishing a price floor a minimum amount below which the price is not permitted to fall. The most common use of price floors around the world has been to raise prices or prevent prices from falling in agricultural markets. Price floors for agricultural goods are commonly called price support programs. In the United States, price support programs began during the Great Depression, after farm prices fell by more than 50 between 1929 and...
Problems And Exercises
1. The market for rice has the following supply and demand 2. The demand for bottled water in a small town is as schedules follows To support rice producers, the government imposes a price floor of 50 per ton. a. What quantity will be traded in the market Why b. What price will prevail in the market after the price floor is imposed c. What other steps will the government have to take to enforce the floor price Is this a straight-line demand curve How do you know Calculate the price elasticity...
Are We Saving Lives Efficiently
Brief physician antismoking intervention Single personal warning from physician to stop smoking Sickle cell screening and treatment for African-American newborns Intensive physician anti-smoking intervention Physician identification of smokers among their patients 3 physician counseling sessions 2 further sessions with smoking-cessation specialists and materials nicotine patch or nicotine gum Mammograms Once every 3 years, for ages 50-64 Mammograms Annually, for ages 50-64 Exercise...
Crossprice Elasticity Of Demand
A cross-price elasticity relates the change in quantity demanded for one good to a price change in another. More formally, we define the cross-price elasticity of demand between good X and good Y as The percentage change in the quantity demanded of one good caused by a 1-percent change in the price of another good. A cross-price elasticity of demand tells us the percentage change in quantity demanded of a good for each 1-percent increase in the price of some other good, all other influences on...
How To Study Economics
As you read this book or listen to your instructor, you may find yourself nodding along and thinking that everything makes perfect sense. Economics may even seem easy. Indeed, it is rather easy to follow economics, since it's based so heavily on simple logic. But following and learning are two different things. You will eventually discover preferably before your first exam that economics must be studied actively, not passively. If you are reading these words lying back on a comfortable couch, a...
Profit Maximization Using Graphs
Both approaches to maximizing profit using totals or using marginals can be seen even more clearly when we use graphs. In Figure 2 a and b , the data from Table 1 have been plotted the TC and TR curves in the left panel, and the MC and MR curves in the right one. Note the important relationship between the MR and TR curves. MR tells us the change in total revenue as output increases. Thus, as long as the MR curve lies above the horizontal axis MR gt 0 , TR must be increasing, and the TR curve...
Scarcity And Individual Choice
Think for a moment about your own life your daily activities, the possessions you enjoy, the surroundings in which you live. Is there anything you don't have right now that you'd like to have Anything that you already have but that you would like more of If your answer is no, congratulations Either you are well advanced on the path of Zen self-denial, or else you are a close relative of Bill Gates. The rest of us, however, feel the pinch of limits to our material standard of living. This simple...
An Imaginary World
To understand why wages differ in the real world, let's start by imagining an unreal world, with three features 1. Except for differences in wages, all jobs are equally attractive to all workers. 2. All workers are equally able to do any job. 3. All labor markets are perfectly competitive. In such a world, we would expect every worker to earn an identical wage in the long run. Let's see why. Figure 1 shows two different labor markets that, initially, have different wages. Panel a shows a local...
The Market For Day Care Changes In Both Supply And Demand
So far, we've considered the consequences of a change in a single variable only. But what happens to the market equilibrium when two or more variables change simultaneously Figure 11 illustrates how we would analyze such a situation, using the market for day care services. SIMULTANEOUS SHIFTS OF SUPPLY AND DEMAND As more young mothers sought day care, the demand curve shifted right from D1990 to D2000. Simultaneously, more firms entered the market, increasing sup- P y from 5,990to s2000. As a...
A Change In Labor Supply
Shifts in labor supply typically happen slowly. A look back at Table 4 shows why. While tastes for different jobs can and do change, the changes are usually very gradual. The cost of acquiring human capital can change more rapidly, but this will not shift a labor supply curve until some time later. For example, a drop in the price of going to law school will shift the labor supply curve rightward three years later when those who enter law school now finally get their degrees and begin to enter...
Changes In Quantity Supplied
Sellers' choices about how much to sell are affected by many different variables. One of these variables the price of the good causes sellers to move along a given supply curve. The other variables cause the entire supply curve to shift. Economists use the same language convention for supply that we discussed earlier for demand. Look once again at Figure 4. Notice that when the price of maple syrup rises from 2.00 to 4.00, the number of bottles supplied rises from 4,000 to 6,000. This is a...
Positive And Normative Economics
The micro versus macro distinction is based on the level of detail we want to consider. Another useful distinction has to do with the purpose in analyzing a problem. Positive economics deals with what is with how the economy works, plain and simple. If we lower income tax rates in the United States next year, will the economy grow faster If so, by how much And what effect will this have on total employment These are all positive economic questions. We may disagree about the answers, but we can...
Pv
But what if the payment of Y were to be received two years from now instead of one Then we can use the same logic to find the present value. In that case, each dollar lent out would become 1 i dollars after one year, and then when the dollar plus the earned interest was lent out again for a second year it would become 1 i 1 i 1 i 2 dollars at the end of the second year. Thus, the PV will satisfy
Goals And Constraints
How does the firm decide how many workers to hire As always, we view the firm as an economic decision maker, that is striving to maximize profit. However, the firm faces constraints as it makes its employment decision. These constraints can be simple or complex, depending on how much freedom the firm has to select its inputs. For now, we'll simplify our discussion by assuming that the firm can vary only its labor, and is stuck with given quantities of capital and other inputs. This assumption...
O N S
She concludes that the market defies the law of demand. Is she correct Why or why not 3. While crime rates have fallen across the country over the past few years, they have fallen especially rapidly in Manhattan. At the same time, there are some neighborhoods in the New York Metropolitan Area in which the crime rate has remained constant. Using supply and demand diagrams for rental housing, explain how a falling crime rate in Manhattan could make the residents in other neighborhoods worse off....
Buyers And Sellers
A market is composed of the buyers and sellers that trade in it. But who, exactly, are these buyers and sellers When you think of a seller, your first image might be of a business. Indeed, in many markets, you'd be right The sellers are business firms. Examples are markets for restaurant meals, airline travel, clothing, banking services, and video rentals. But businesses aren't the only sellers in the economy. In many markets, households are important sellers. For example, households are the...
Competition In Markets
A final issue in defining a market is how individual buyers and sellers view the price of the product. In many cases, individual buyers or sellers have an important influence over the market price. For example, in the market for cornflakes, Kellogg's an individual seller simply sets its price every few months. It can raise the price and sell fewer boxes of cereal, or lower the price and sell more. In the market for windshield wiper motors, Ford Motor Company an individual buyer can influence...
The Concept Of Opportunity Cost
The total cost of any choice we make buying a car, producing a computer, or even reading a book is everything we must give up when we take that action. This cost is called the opportunity cost of the action, because we give up the opportunity to have other desirable things. Opportunity cost The value of The opportunity cost of any choice is all that we forego when we make that the best alternative sacrificed choice. Opportunity cost is the most accurate and complete concept of cost the one we...
To Understand The World Better
Applying the tools of economics can help you understand global and cataclysmic events such as wars, famines, epidemics, and depressions. But it can also help you understand much of what happens to you locally and personally the worsening traffic conditions in your city, the raise you can expect at your job this year, or the long line of people waiting to buy tickets for a popular concert. Economics has the power to help us understand these phenomena because they result, in large part, from the...
Changes In Quantity Demanded
Markets are affected by a variety of different events. Some events will cause us to move along the demand curve for a good. Other events will cause the entire demand curve to shift. It is crucial to distinguish between these two very different effects on demand, and economists have adopted a language convention that helps us keep track of the distinction. Let's go back to Figure 1. There, you can see that if the price of maple syrup rises from 2.00 to 4.00 per bottle, the number of bottles...
Scarcity Choice And Economic Systems
Opportunity Cost for Individuals Opportunity Cost and Society Production Possibilities Frontiers The Search for a Free Lunch Specialization and Exchange Resource Allocation Resource Ownership Types of Economic Systems Using the Theory Are We Saving Lives Efficiently What does it cost you to go to the movies If you answered eight or nine dollars, because that is the price of a movie ticket, then you are leaving out a lot. Most of us are used to thinking of cost as the money we must pay for...