Transcript Law of Supply and Demand

Agenda February 4




Journal
Economics 101
Please return your Great Gatsby Books
Hw: Prepare for Book Club. Remember it will be book club
1 and 2 so you will have to leaders with two sets of Socratic
Questions and two Reader’s Response journals.
Journal: Microsoft, Starbucks, Boeing are the big three
companies that originated in Seattle. They also are the
number one employers for Washington State. Each
announced massive layoffs in the last three weeks. How
does this effect our economy? How does this directly or
indirectly effect you?
Law of Supply and Demand
• The greater the demand for a given supply of a product the
•
•
•
•
higher the market price. The lower the demand for a given
supply of a product the lower the market price.
Likewise the greater the supply of a product given a certain
level of demand the lower the price of the lower the price of
the product. The lower the supply (the scarcer it is) the
higher the price.
Demand is high=increase in production=more
employment =more money in households= more demand
Demand is low=decrease in production=less employment=
less money in households =less demand
Relate the law of supply and demand to Farmers during the
1920s
Elasticity of Demand
• Refers to the change in demand for a good or service
that occurs in response to a change in its price.
Specifically it is the degree at which an increase or
decrease in price will change the quantity of demand
• Sales Tax is a price increase: Which means that the
demand decreases. Suppliers now will take an amount
of goods off the market to meet the lower demand
GDP
 Gross Domestic Product
 Total spending of consumers (c) + total investments (spending on goods




and services) by business (I) + total spending by government (federal,
state and local) (G) + net exports (exports –imports) (Ex- Im)
 C+I+G+(Ex-Im)=GDP
Importance of Exports and Imports (trade)
 Absolute Advantage: arises when a nation can produce a good more
cheaply than another nation
 Net Exports: When net exports are negative GDP decreases. When net
exports is positive GDP increases
GDP Equilibrium Level
 Determined by adding up C+I+G
 Whenever total demand equals total spending the economy is in
equilibrium
 Actual equilibrium point is when the total demand of households,
business and government equals their production
Relate the GDP to the uneven distribution of wealth during the 1920’s
How did the Hawley Smoot Tariff Effect trade and in turn the GDP?
Unemployment
 Rising unemployment = decreasing economic growth
 Sometimes occurs because management cuts back
overtime or more workers from full time go to part time
 Full unemployment rate is about 4%
 Over 6 % is too high
Inflation
 Inflation
 Caused by low unemployment
 A mild recession is the cure
 Demand-Pull Inflation
 Occurs when consumers bid up prices, usually because employment is
strong and incomes are increasing
 Wage-Push Inflation
 Occurs when businesses must raise wages to keep/attract workers in an
environment of low unemployment and then raise their prices
 Cost-Push Inflation
 Can include wage push inflation but also refers to price increase by
business due to increased cost of one or more inputs other than labor
Stagflation
 Stagflation
 Refers to the rising prices in an environment of relatively
slack demand and high unemployment. If usually arises
from cost-push inflation when the cost of one or more
inputs-other than labor- increases
 Resolved by using less of the input or developing
substitutes
Money
 Demand for Money: 3 main Factors
 Prices: When price levels rise, goods and services cost more and people need
more money to purchase them. Therefore the demand for money increase
and vice versa
 Incomes: When incomes rise, consumption rises and people spend more
money and vice versa
 Interest Rates: When interests rates increase the demand for money
decreases. High interest rates increase the opportunity cost of holding (not
investing) money. When interest rates fall demand for money increases
 Money Supply
 Includes money for exchange in goods and services
 Includes near money= liquid assets
 Creation of Money
 When banks have reserves above the amount required by the Fed-excess
reserve- they are allowed to create new deposits.
 These new deposits are created in the form of loans
 So actually the term “money creation” in our economy means expansion of
credit and debt
Federal Reserve System
 The Central Bank of the United States
 Oversees and regulates the commercial banking system
 Formulates and implements monetary policy
 Its Goal is to keep the economy on a path of steady growth with low
inflation and low unemployment
 Functions of the Fed
 Supervise and regulate banking institutions and protect the rights
of the consumers who use credit
 Maintain the stability of the financial system
 Provide certain financial services to the U.S. government, the
public, financial institutions and foreign government institutions
Open Market Operations
 Purchases of the U.S. government securities from the financial
institutions and sales of the U.S. government securities to the financial
institutions by the Federal Reserve. Allows the Fed to increase or
decrease the supply of reserve in the banking system.
 The sale of securities decreases the money supply. Money moves
from the banks to the Fed when the banks pay for the securities.
This raises the Federal Fund Rate and slows the growth of the
money supply
 Changes in the Discount Rate (used less often by the Fed): The
discount rate is the interest rate that the Fed charges on loans to the
member banks. These loans are usually secured by the government
securities and other short term paper loans and are sued by the
banks to meet the reserve requirements
Monetary Policy
 Sluggish Economy
 Calls for an increase in the growth of the money supply
which occurs when the Fed targets a lower Federal Fund
Rates, buys securities through its open market
operations, lowers the discount rate or lowers reserve
requirements
 Inflation
 Monetary policy calls for a decrease in the growth of the
money supply. This occurs when the fed targets higher
Federal Fund Rates, sells securities, raises discount rates
or raises reserve requirements
 What did the Fed do wrong in response to contribute to the beginning of
the Great Depression?
 What should the Fed have done?
Fiscal Policy
 This is the general name for the Federal government's
 taxation and expenditure decisions and activities particularly as they affect
the economy
 Fiscal Policy for Inflation
 When demand is bidding up prices a tax increase coupled with no increase in
government spending will dampen the upward pressure on prices. The tax
increase lowers demand by lowering disposable income.
 Reduction or Increase in government spending can produce the same effect.
 Fiscal Policy for a Sluggish economy
 Tax cuts produce increase disposable income=higher demand
(spending)=increased production (GDP)
 Reduction or increase in government spending can produce the same effect
 What should Hoover’s response be to the Great Depression?
Automatic Stability Effect
 Fiscal Policy exerts this even when the government makes
no explicit changes in its tax or spending plans
 When the economy contracts taxes automatically
decrease because incomes decrease (tax brackets)
 Government spending is usually maintained and its
general level of spending during recessions which
ensures a solid base line of demand from the g in C+I+G
equation
 Programs of unemployment insurance and public
assistance help to ease the burdens of tough times on
households
Boom and Bust
 Boom
 Occurs when demand increases sharply over a sustained period
 Can generate over expansion by businesses and inflation
 Recession
 The government tries to produces a mild recession in response to
inflation.
 They do this through monetary policy
 The Federal Reserve increases interest rates which makes borrowing
more difficult and curtails growth of money supply which takes
excess money out of the money supply
 Can also be caused when consumers “sit on their wallets”
production may decrease. If it decreases enough to raise
unemployment and lower incomes this causes a recession
Application Questions
 The Economy is in a recession with high unemployment and low
production
 Identify an open market operation that would restore the economy to
its natural rate
 Assume the Economy is in a recession. Explain how each of the
following policies would affect consumption and investment.
 An increase in government spending
 A reduction in taxes
 An expansion of the money supply
 For various reasons, fiscal policy changes automatically when output
and employment fluctuate
 Explain why government spending changes when the economy foes into
a recession
 If the government were to operate under a strict balanced-budget rule,
what would it have to do in a recession? Would that make the recession
more or less severe?
Agenda Period 5
 Finish Economics 101
 Answer Questions for chapter 3
 Read chapter 4, and complete the reading guide for
Monday
 Hw: Prepare for Book Club. Remember it will be book
club 1 and 2 so you will have to leaders with two sets of
Socratic Questions and two Reader’s Response
journals.