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?
Direction incentive = joy of learning
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
If you went out, the hour extra of work costs Time with friends
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
Positive analysis is how economy works
Normative analysis is how we think the economy should work
HOW TO JUDGE ECONOMIC OUTCOMES
Efficiency is an efficient economy that produces what people want at least possible cost
Equity is fairness
Growth is increase in totally output of economy
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
r = 0 then C = 75 + 0.75 (500) - 25 (0) = 450
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
Whats y-int when interest rate is considered in equations
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
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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
Number of consumers
Expected future prices
Tastes and preferences
Change in price of good = movement along demand curve
Change in anything else that affects demand = causes shift of demand curve
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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
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
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
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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
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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?
Lockdown = excess supply = lower prices = quantity supplied to decrease until excess supply solved
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
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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
expansion/boom: period in cycle from trough up to a peak during which output and employment grow
contraction/recession/slump: period where from peak it goes down to trough where output and employment fails
Depression is a prolonged and deep recession
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
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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
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
Labor market
Here, households supply labor, firms and government with demand
Labor is also supplied to and demanded by the rest of the world
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
Final goods and services are those that are produced for final use; basically direct use by customer end
TV, milk, medicines
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
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
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