Transcript Econ summary

Supply and Demand
 Prices
 Supply
 Demand
 Movements along curves
 Shifts of curves
 Equilibrium and disequilibrium
 Predictions of the S & D model
Supply and Demand
 Supply is the term we
assign to the description of
the relationship between
the quantity supplied of a
good and its price, ceteris
paribus.
 Demand is the term we use
to express the relationship
between the quantity
demanded of a good and its
price , ceteris paribus.
Supply and Demand:
movement along the curves:
 As the price of a good
 As the price of a good
increases, the quantity
supplied increases, ceteris
paribus.
 The above effect is shown
graphically as an upward
movement along the
Supply curve.
increases, the quantity
demanded decreases,
ceteris paribus.
 The above effect is shown
graphically as a downward
movement along the
Demand curve.
Supply and Demand:
shifts of the curves 
 Supply depends on:
 Demand depends on:
 Price of the good
 Price of the good
 Number of Firms
 Income
 Capital Base
 Population
 Prices of the inputs
 Prices of substitutes
 Prices of substitutes
 Prices of complements
 Prices of complements
 Expectations about future
 Expectations about future
prices of all of the above,
and income
 Buyer preferences
prices of all of the above
 Firm Mission
Market in Equilibrium
 The market price is referred to as the
equilibrium price when the quantity
demanded at such price = quantity
supplied at such price.
Market out of equilibrium
comparative statics
When prices exceed the equilibrium price, market
is in excess supply.
When prices are lower than the equilibrium price,
market is in excess demand.
Summary of Macroeconomics
 5 big questions
 8 fundamental ideas
 3 processes to understand the above
5 big questions
1.
2.
3.
4.
5.
What to produce
How to produce
When to produce
Where to produce
Who consumes/produces
8 fundamental ideas
1.
Choices are tradeoffs because of scarcity
2.
Choices are made at the margin because of
incentives

Diminishing marginal returns: “What have you done for me
lately?” “It’s never as good as the last time”
8 fundamental ideas
Voluntary tradeoffs make transacting parties
better off because of rationality
3.

4.
Markets are very efficient ways of organizing
this sort of exchange
When incentives conflict with marginal
choices, markets may fail and alternative
mechanisms designed and employed
(contracts, government, clubs).
8 fundamental ideas
5.
Income = expenditure = gross value
6.
Productivity gains enhance living standards
8 fundamental ideas (4)
7.
inflation occurs when production grows at a
slower rate than the quantity and use of money
in the economy
8.
unemployment is a necessary evil
3 processes used in 2 approaches

Approaches

Tasks:
1.
1.
Positive

Observing and
measuring
How things are
2. Modeling
2. Normative

How things ought to
be
3. Testing
Macroeconomic issues, by approach
 Positive Issues
 Growth
 tradeoff consumption
today for more future
consumption
 Employment
 +/  Inflation
 +/ -
 Budget Deficits
 +/ -
 Normative Issues
 Fiscal Policy
 Monetary Policy
Economics Measurements:
 Stocks versus flows
 A stock is a measurement at a point in time.
 A flow is a measurement over time -per unit of time.
 Example 1: Capital stock and Investment
 Example 2: Wealth and Saving
Expenditure=income=value
 National Income and Product Accounting
 Y=C+I+G+X-M
 Households are … Y - (C + S + T)
 Governments are … G - T + (T - G)
 Firms are (C+I+G+NX) + (S-G-I-(M-X)) - Y
 Rest of the world are (X-M) - (S-G-I)
Measuring GDP
 Expenditure Approach: C+I+G+NX
 Income Approach:
 Employee compensation + Net Interest + Rental
Income + Corporate profits + Proprietor’s Income =
net domestic income @ factor cost + adjustments
from factor cost to market prices + adjustment to
gross product = GDP
Inflation
 CPI = % chg. in price index.
 Tendency for upward bias in consumption
 GDP Deflator = (GDP/realGDP) * 100
 Bias injected via use of CPI in calculation of volume of
goods produced.
Synthesis
 Aggregate Supply (AS)
 Aggregate Demand (AD)
 General Economic Equilibrium
 “Positive” Effects of changes in AS and AD on
Economic Growth
 “Normative” Directions
Aggregate Supply (AS) is ...
 The sum total of all
production activity in
an economy,
expressed as a
relation between:
CPI
AS
 price levels (CPI on
vertical axis) and
 output (GDP on
horizontal axis)
Potential
GDP
GDP
Aggregate Demand (AD) is ...
 The sum total of all
expenditure activity in
an economy,
expressed as a
relation between:
CPI
AD
AS
 price levels (CPI on
vertical axis) and
 output (GDP on
horizontal axis)
Potential
GDP
GDP
General Equilibrium (GE) is ...
 The “consensus” point
between AD and AS,
where production and
consumption sectors
find agreement in the
general level of prices
and output for the
economy at a point in
time.
CPI
AD
AS
GE
Potential
GDP
GDP
Movements along the AS, in the
short run
Short Run, real GDP
increases when …
CPI rises but resource/factor
prices rise at a slower rate, or
do not change.
Short Run, real GDP
decreases when …
CPI falls but resource (factor)
prices fall at a faster rate, or
do not change.
Shifts in short run AS
SRAS shifts to the left when 
SRAS shifts to the right when

Prices of factors of production
Prices of factors of production
(resources) rise  faster than the (resources) fall  faster than the
CPI (prices at which the goods
CPI (prices at which the goods
sell in the economy)
sell in the economy)
Amount (stock) of resources in
the economy decreases (LF, K,
Natural)
Protections of intellectual
property are forgone globally.
Amount (stock) of resources in
the economy grows (LF, K,
Natural)
Technological innovation
occurs.
Intellectual property becomes
better protected globally.
Movements along the AD, in the
short run
Quantity of real GDP
demanded increases if
…
The general level of prices
(CPI) decreases, ceteris
paribus … because of wealth
and substitution effects
Quantity of real GDP
demanded decreases if
…
The general level of prices
(CPI) increases, ceteris
paribus … because of wealth
and substitution effects
Shifts in AD
AD DECREASES IF AD INCREASES IF 
Expected Y, inflation, Expected Y, inflation,
or profits 
or profits 
Gov't Demand ,
Taxes , Transfers 
(Fiscal Policy
changes)
Money , and/or
Interest Rates 
(Monetary Policy
changes)
Gov't Demand , Taxes
, Transfers 
(Fiscal Policy changes)
Exchange rates 
Exchange Rates 
Foreign income 
Foreign Income 
Money , and/or
Interest Rates 
(Monetary Policy
changes)
Normative directions in policy
 Is AD “flat” or “steep” --i.e., is demand responsive to
changes in CPI or not in the short run?
 Is AD “flat” or “steep” --i.e., is demand responsive to
changes in CPI or not in the long run?
 Which is more effective in the short run, Monetary or
Fiscal policy?
 Which is more effective in the long run, Monetary or
Fiscal policy?
Money
 Definition
 Uses
 Medium of exchange
 Unit of Account (“numeràire”)
 Store of value
 Measuring money (M1, M2, …)
Financial intermediaries
 Firms that manage the flow of financial funds
from households and firms to other households
and firms.
 Commercial banks
 S&L’s
 Savings Banks and Credit Unions
 Money Market Mutual Funds
Money and Banking
 Liabilities
+ Net worth = Assets
 (deposits + owner’s equity = loans made)
 deposits = reserves + loans made
 reserves = vault cash + FRB account
Economic functions of
financial intermediaries
 Create ‘liquidity’
 Minimize the ‘cost of obtaining funds’
 Minimize the ‘cost of lending funds’
 Pooling risks in order to maximize profits
Regulation
 Deposit insurance
 FDIC
 Balance sheet rules
 capital requirements
 reserve requirements
 deposit rules
 lending rules
Money “creation”
 The deposit-loan-reserve chain.
 International Effects:
 Reverse Repurchase Agreements -
Foreign Official and International
Accounts
Repurchase Agreements
 A Repurchase Agreement is a
contract to sell an asset and repurchase
it in the future. It is a money-market
instrument . For the party on the other
end of the transaction , (buying the
security and agreeing to sell in the
future) it is a Reverse Repurchase
Agreement. RRAs are usually used to
raise short-term capital.
Reserve Balances
11% of deposits at U.S. Banks
Balances are the sum total of all
reserves held by the Fed for
Banks in the Banking System
Liquidity Swaps
 A swap arrangement involves two transactions.
 A foreign central bank draws on (obtains funding under)
the swap line, thus selling a certain amount of its currency
to the Federal Reserve at the prevailing market exchange
rate in exchange for dollars. This market rate becomes the
swap exchange rate.
 At the same time, the Federal Reserve and the foreign
central bank enter into a binding agreement for a second
transaction in which the foreign central bank is obligated
to repurchase the foreign currency at a specified future
date. The second transaction is done at the swap exchange
rate—that is, the same exchange rate as in the first
transaction
Short term AD - AS efffects
 Shifts AD right or left
Long term AD - AS effects
 Shift of the SAS right of left