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The Study of Macroeconomics

Updated: Apr 21

Hey everyone! In this blog, I wanted to continue my series of sharing my Economics lecture notes! I find sharing my studies expands my blogging's areas of activities, and allows full transparency on what my Business Path incorporates. This journey starts with education, and as Michelangelo once said, "I am still learning".


. CHAPTER 1 .

. CLASS .


LECTURE NOTES


  • Economics is the study of how individuals, business and governments make the best decision, given their scarce resources 

  • Scarcity: the resources needed to fulfill out wants are limited 

  • Examples of scarces in your life: food, water, housing and time

  • Solution to scarcity: unlimited time and money. Without these solutions, we have trade-offs 

  • Trade-offs: Using resources to carry out one decisions means that there are less resources to carry out other decisions 


HOW DO WE DETERMINE THE BEST ALLOCATION OF RESOURCES


Assumption #1

People are rational (using all available information to achieve your goals)

  • Weighing the costs and benefits when making the best decision possible 


Assumption #2

People respond to incentives (something that motivates someone to take an action)

  • If your homework is being graded on completion, why do it?

  1. Direction incentive = joy of learning

  2. Indirect incentive = exam questions based on homework


Assumption #3

Optimal decisions are made at the margin (it means change) 

  • Most decisions is about doing a little more or less of something. So like oh I am failing this art class, i will do more or oh i am being too attached to this friend let me hang out with them less


  • EXAMPLE: It is 5pm on first day of work. Boss wants you to stay an extra hour 

  • Marginal cost is the cost associated with the hour at work - could be doing something else

  • Marginal benefit is benefit from hour at work such as overtime pay, reputation 

  • IF MB > MC then stay at work

  • IF MB < MC then leave work 

  • Optimal decision would be MB = MC


Assumption #4

Cost means opportunity cost (what you give up, next best option, to obtain something)

  • If your homework is being graded on completion, why do it?

  • EXAMPLE: after work you wanted to go out and eat with friends or exercise

  1. If you went out, the hour extra of work costs Time with friends

  2. It doesn't cost exercises because you would have gone out with your friends 


!!! NO SUCH THING AS A FREE LUNCH !!!

  • Microeconomics is the studies of how households and firms interact in markers and make choices

  • Macroeconomics is study of economy as a whole and considers totally output, employment and price level in the economy 

  • 2 types of analysis

  1. Positive analysis is how economy works

  2. Normative analysis is how we think the economy should work


HOW TO JUDGE ECONOMIC OUTCOMES

  1. Efficiency is an efficient economy that produces what people want at least possible cost

  2. Equity is fairness

  3. Growth is increase in totally output of economy 

  4. Stability is condition in which national output is growing steadily with low inflation and full employment of resources 


LETS SAY there is a correlation between hourly wage and years of experience 

So hourly wage depends on number of years of experience 

  • Dependent variable is variable for which value depends on value of the other variables being considered (the hourly wage is DV)

  • Independent variable is variable for which the value does not depend on the other variable being considered (the years of experience is IV


EQUATIONS

  • Y = mx + b

  • M = slope

  • B = y - intercept (when x is 0)

  • Y = wage

  • X = experience 


Consumption might depend on mor than just income such as interest


Taking into account of the previous equations


C = 75 + 0.75I - 25 r

 r = interest rate


Lets say I = 500 and 

  1. r = 0 then C = 75 + 0.75 (500) - 25 (0) = 450

  2. SO forth if r = 1 and r = 2.


On the graph, the r + its answers values are aligned on graph with the scales being the same. And the y-int for r = 0, is 75. It gets lowered by 25 after every time the r increases 

  • Exogenous = out the model (r)

  • Endogenous = inside the model (I,C)


QUESTIONS

  1. Whats y-int when interest rate is considered in equations

  2. Whats exogenous and endogenous  


. CHAPTER 3.

. CLASS .


LECTURE NOTES


IN RELATION TO THE CHANGING GASOLINE MARKET

Will analyze this market using supply demand 


  • Quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at a given price 

  • Demand schedule is a table showing relationship between price of product and quantity of product demanded

  • Demand curve is a graph depicting the relationship between quantity demanded and price 


Below points are for gas; curve and schedules 

  • So as price decreases, quantity demanded increases


  • Law of demand is assuming all else equal, when price falls, quantity demanded increases. P and Q move oppositely

 

  • As price changes, in quantity demanded changes you move along demand curve

  • Meaning demand does not change and demand curve does not shift


  • Market demand curve means add up quantity demanded for all consumers of gasoline at various price levels. Like show all demands on the graph. 


WHAT CHANGES THE DEMAND CURVE?

BASICALLY 

  • What causes demand curve to shift

  • What will cause the relationship between quantity demanded and price to change


If my income fell to 0$ = I would drive less therefore buy less gass


  • Normal goods is the demand for these goods increases when income goes up and demand for these goods falls when income goes down SUCH AS gas, food, clothing 

 

  • As income goes down, demand decreases at every price you buy less of the good (or even at every price available, this is assuming all else equal therefore in these scenarios the price is not getting cheaper when income falls, its the same)

  • Demand curve shifts to the left 

  • Think of it this way. I made 100 now I make 50. I used to get 4 galloons at $4 of gas, now I can only afford 2 gallons. So quantity demanded went down, and demand for gas went down because I cannot afford.

  • Same for when income goes up! 


  • As income goes up, demand increases at every price you buy more of the good (same idea, that price of good isn't changing)

  • Demand curve shifts to the right


-----------------------------


  • Inferior goods is the demand for these goods decrease when income goes up and demand for these goods increases when incomes goes down 


  • As income goes down, demand increases, so at every price you buy more of the good. 

  • Demand curve shifts to right

  • Think like this, basically you stopped working. You have no income and about $700 to last you weeks until next job. You cant afford trader joes so you go to dollar tree. Your groceries from there were less to basically nada, but now as income as gone down, you want more from dollar tree more than you ever needed more. No matter the cost you will buy more it, so quantity demanded increases and so the demand shift moves higher.


  • As income goes up however, you got richer therefore you don't need to scrap around at dollar tree because you can no afford trader joes.  

  • Demand decreases, at every price you buy less of good.

  • Demand curve shifts to the left


  • Complement goods are goods and services that are used together. Its a complement good when price of good A falls and more of good B is bought. 

  • Such as keyboard and computers

  • If the prices of SUVs drops, then people will buy more than gas demand increases, demand curve shift to right!

 same thing for substitute but yk arrows

  • Substitute Goods are goods and services that are used for same purpose. Its substitute if the price of good A falls causes demand to decrease for good B

  • Lets say all electric ars are 50% off so demand increases for elec so gas demand DECREASES


OTHER POTENTIAL REASONS THAT SHIFTS DEMAND

  1. Number of consumers

  2. Expected future prices

  3. Tastes and preferences 


Change in price of good = movement along demand curve

Change in anything else that affects demand = causes shift of demand curve


---------------------------


SUPPLY


  • Quantity supplied is amount of good or service that producer is willing and able to sell at given price

  • Supply schedule is table that shows relationship between price of product and quantity of product supplied 

  • Supply curve is graph depicting relationship between quantity supplied and the price


  • Supply is not about oh making more money, or yes like who cares if they dont buy, their assumption is they will buy iT... NO that is not case. Its about how much they can make. They can’t make a dozen donuts everyday if they sell at 2 cents. But they have the finance and ability to cook if they sell for say 2 DOLLARS. That is supply, its about possible, its positive a fact, not normative an opinion

  • Law of supply states that at all else equal, when price increases, quantity supplied increases. So price and quantity supplied move in same direction


WHAT HAPPENS WHEN THE PRICE CHANGES?

Well the quantity supplied changes means to move along supply curve WHILE WHEN supply does not change, supply curve does not shift 


  • Market supply curve means to add up the quantity supplied for all producers of gasoline at various price level s

  • What causes relationship between quantity supplied and price to change?

  • Change in price and demand does not affect this relationship but rather other factors


  • Inputs (factors of production) are resources used to produce goods and services when exchanged

  1. Labor are workers

  • If wages, such as cost of labor, increases then production becomes expensive 

  • This causes decrease in quantity supplied at each price 

  • Supply curve shifts to left because less production  because worker efficiency has gone down CAUSE there is less workers not their work ethics 

  1. Capital are machines used in production

  • If rental rate, such as cost of capital R, goes up this causes production to become expensive 

  • This means there is a decrease in quantity supplied at each price

  • Supple curve also shifts to left


A change in price of good causes movement along supply curve

Change in anything else that affects supply causes a shift of supply curve 


----------------------


  • Equilibrium price is price where quantity demand equals quantity supplied

  • Equilibrium quantity is amount of good that is bought and sold at equilibrium price

  • Market is gathering of buyers and sellers

  • Excess supply - surplus is when quantity supplied is greater than quantity demanded 


Ex: price of gas is $4

Firm wants to sell 20 gallons but ppl only wanna buy 8 galloon 

So = excess supply - SURPLUS OF 8 GALLONS

This excess supply means firms are making gas that they cant even sell. Waste of money resources and time. THEREFORE

  • They will lower prices

  • This will increase quantity demanded and reduce quantity supplied

  • Prices will fall until all 20 gallons sold meaning until there is no longer any excess supply

  • The market will be in equilibrium when price is $3 / gallon and 12 gallons are sold 

  • Equilibrium solves a lot

  • Excess demand aka shortage is when quantity demanded is greater than quantity supplied 


EXAMPLE

Gas price is $2.

Firms will wanna sell 4 galloons of gas but consumers want 16 gallons.

So that means there is excess demand meaning shortage of 12 galloons of gas


NOW THIS MEANS THAT

So now cause of that excess demand, consumers want to buy more of good than there is available to purchase.

This means that the firm just isn't making more when selling at that market price, so what they do they raise prices = decreasing quantity demanded = increased quantity supplied

By increasing quantity supplied because of the high prices this will mean they will generate enough $ to supply the quantity demanded


PRICES RISE UNTIL THERE IS NO EXCESS DEMAND

On the graph excess demand has same value from same x-axis such as a literal range 


________________________________


  • If we go on lockdown, we will have less gas demand because no one is going anywhere. Therefore, all else equal, curve shifts to left which created excess supply

  • To combat this they will lower prices to increase quantity demanded

  • Price will fall until no longer an excess supply

  • Or even if a gas company, all else equal makes more gas. This will create excess supply so supply shift going right which = lowers cost 



WHAT HAPPENS WHEN LOCKDOWN AND OPEC happen together?

  1. Lockdown = excess supply = lower prices = quantity supplied to decrease until excess supply solved

  2. OPEC increases gas supply = decreased prices = but quantity increases 

BOTH say lower prices so price will fall however quantity goes both ways

RELATIVE MAGNITUDE OF QUANTITY


-------------------------------------

Comparing owning a house to renting shows owning is cheaper, excluding taxes

With home owner taxes, shows why everyone does not just buy


Decision to buy or sell is heavily influenced by interest rate and how much you think you can sell house for 


. CHAPTER 5 .

. CLASS .


LECTURE NOTES


  • Aggregate behavior is behavior of all households and firms together

  • Sticky prices is when prices do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded (such as once demand phone for $800 but remains same even after demand rapidly drops)

Noticing how its suppose to be priced at new market equilibrium but price remains same!


MACROECONOMICS CONCERNS?!

  • Output growth is essentially aggregate output: Is the total quantity of goods and services produced in an economy in a given period

  • Business cycle is the cycle of short term ups and downs in an economy

  1. expansion/boom: period in cycle from trough up to a peak during which output and employment grow

  2. contraction/recession/slump: period where from peak it goes down to trough where output and employment fails

  • Depression is a prolonged and deep recession

  1. Unemployment rate is the percentage of labor force that is not working

  • Existence of unemployment seems to imply that aggregate labor market is not in equilibrium such as low wages etc. 

  • This asks why is there unemployment at all?

  • Inflation is increase in price level 

  • Deflation is when prices decreases 

  • Hyperinflation is period of rapid increases in overall price level

--------------------------


DIVING ECONOMY IN MACRO DIVISIONS

  • Households, firms, government and rest of world

  • Private sectors has households and firms

  • Government has public section

  • Foreign sector has the rest of the world


CIRCULAR FLOW DIAGRAM

  • Transfer payments are cash payments by gov to people who dont’t supply goods, services or labor in exchange. This could be social security benefits, veterans benefits and welfare payments


THREE MARKETS AND THEIR INTERACTIONS 

  1. Goods and services market 

  • Households and government buy goods and services from firms in this market

  • The firms then buy goods and services from each other ---> then supply to goods and services market 

  • Households, government and firms demand from this market

  • Rest of the world buys from and sells to goods and services market 

  1. Labor market 

  • Here, households supply labor, firms and government with demand

  • Labor is also supplied to and demanded by the rest of the world 

  1. Money (financial) market 

  • Households supply funds to money market in expectation of earning income in form of dividends and stocks + interest on bonds

  • Shares of stocks are financial instruments that give to the holder a share in the firm’s ownership and therefore the right to share in the firms profits

  • Dividends are portions of a firm’s profits that firm pays out each period to its shareholders

  • Households demand + borrow funds from this market to finance various purchases such as loans

  • Firms borrow to build new facilities in hope of earning more in future

  • Corporate bonds are promissory notes issued by corporations when they borrow money

  • The government borrows by issuing bonds 

  • Treasury bonds, notes or bills are promissory notes issued by federal government when it borrows money

  • Rest of world borrows from and also lends to money market 

  • This borrowing and lending is coordinated by financial institutions takes deposits from 1 group and lends to others



GOVERNMENT ROLE

  • Fiscal policy are government policies concerning taxes and spending

  • Monetary policy are tools used by federal reserve to control short term interest rates (meaning central bank decreases/increases money supply etc. )  


US ECONOMY’S GROWTH SINCE 1920s

  • 1920s: extremely prosperous in the United States

  • Everyone who wanted a job had a job

  • Incomes increased substantially and prices were stable

  • Thriving truly 

  • The great depression 1929 - 1939

  • In 1929 1.5 million people were unemployed

  • 1933 unemployment was 13 million 

  • In 1933 US produced 27% less goods and services than 1929

  • Unemployment rate was 14% until 1940

UNDERSTAND HOW ECONOMY WORKED 

  • Reevaluating macroeconomic theory 

  • Classical or market clearing models say that unemployment would not persist for long

  • But in great depression unemployment remained high for nearly 10 years

  • In the book “the general theory of employment, interest and money” is about this theory that explain the confusing economic events of his time 

  • He saw that this views were heavily influential over both professional economists and government policy makers

  • Governments started believing that they could intervene in their economies to attain specific employment and output goals 

  • This view that government should and could act to stabilize macroeconomy reached height of its popularity in 1960s

  • Fine tuning is phrase used by walter heller to refer to government’s role in regulating inflation and unemployment  

  • 1970s - 1980s

  • The optimism about gov ability to finely manage economy was short lived 

  • In 1970s and early 1980s, US economy has wide fluctuations in employment, output and inflation

  • In 1974 - 1975 and then 1980-1982 the US experienced a severe recession

  • Stagflation is situation of both high inflation and high unemployment


By 1975 it was clear that the macroeconomy was more difficult to control than heller or textbook theory had led economists to believe


. CHAPTER 6 .

. CLASS .


LECTURE NOTES


  • National income and product accounts is data collected and published by the government describing the various components of national income and output in the economy 

  • Bureau of economic analysis BEA (of US department of Commerce) is who complies the data 

  • Gross domestic product GDP is the total market value of all final goods and services produced within a given period by factors of production located within a country

  1. Final goods and services are those that are produced for final use; basically direct use by customer end 

  • TV, milk, medicines

  1. Intermediate goods are produced by 1 firm for use in further processing or for resale by another firm 

  • Ingredients in making finished products 

  • Wood used in manufacturing tools etc. 

  • Wheat, sugar, steel, soil

  • Could be old tires bought by an automaker 

  1. Intermediate goods PT.2

  • Some goods can be intermediate goods for some people and sometimes final goods for others

  • A good isn't necessarily inherently intermediate or final

  1. Value added: There is a difference between value of goods as they leave production stage and cost of goods as they enter selling stage 

  • When calculating GDP, we add value added at each stage of production OR we can take value of final sales 

  • You don't use value of total sales in an economy to measure how much output has been produced   

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