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Chapter 26 - Unemployment and its Natural Rate

luisa16 — Fri, 22 Feb 2008 02:36:20 CST

1. How is unemployment measured?
The BLS takes data from 60000 households and figures out Emplyed Unemplyed and Not in labor force numbers.
2. How do you calculate unemployment, please give a sample calculation.
Unemployment rate = (Number of unemployed / Labor force) * 100
Example= In the year 2000, 300 people were employed, and 86 were unemployed. This means that the labor force was 386. So the unemployment rate was (86/386)x100=22.2%
3. Define the four types of unemployment. 1) Frictional unemployment - includes people who are temporary between jobs
2) Cyclical unemployment - rises in recession, workers are laid offf because the economy is bad
3)Structural unemployment - includes people who lack skills or have a poor education
4) Seasonal unemployment - affects people who have worked during the past year but are unemployed during other parts of the yeardue to changes in the weather
4. Give an example for each type of unemployment.
Frictional unemployment: An unemployed college senior is looking for her first job
Cyclical unemployment: A steelworker is laid off because of a long recession
Structural unemployment: An unemployed auto worker has been replaced by a robot
Seasonal unemployment: A Wisconsin construction worker cannot find work in the winter
5. What has happened to the size of the labor force in the past several decades? Why has this happened?

6. How accurate is the unemployment rate?
It is quite accurate but not perfect, because it is hard to determine when someone is in or out of the work force and so many who really left the work force will be counted as unemployed while people entering may also be confused as not in fact in the work force and not counted as unemployed.
7. Define discouraged and underemployed workers.
Discouraged: Would like to have work but have given up looking for a job
Underemployed: Have a job part time, or lower than the skills they have (i.e. a college graduate working at McDonald's)

8. Why are there always some people unemployed?
Some people will always be unemployed if they are in a transition between jobs as seen in frictional unemployment. other people can be temporarily unemplyed if they work only during certain seasons of the year as seen in seasonal unemployment.
9. Why is some frictional unemployment unavoidable?

People are "frictional unemployed" if they are moving and looking for a new job, looking for a job after graduating from college, quitting their job and looking for a new one, etc.
people are always bound to be "unemployed" at some point in their lives
The down time between jobs to search for something that fits their tastes, skills and education background

10. What is unemployment insurance and how does it work?
Unemployment insurance = a govt. program that partially protects worker's incomes when they become unemployed
11. Explain the issue of unemployment in Germany.

12. How are minimum wage laws related to unemployment?
Even though minimum wage laws can cause unemployment because of a surplus of workers, it does not contribute extensively to unemployment. the majority of the work force makes wages well above the minimum wage because of their skills and education. the usually smaller percentage of those workers making minimum wage therefore only contribute partially to unemployment. The type of structural unemployment created by higher minimum wages is simply due to the fact that the wage is above the equilibrium wage, which causes a surplus of laber and a decrease in the availability of jobs

13. Are unions good or bad for the economy?
There is no consensus among economists whether unions are good or bad for the economy. Their influence is beneficial in some circumstances (they are important for helping firms respond efficiently to worker's concerns), and adverse in others (when unions raise wages above the level that would prevail in competitive markets, they reduce the quantity of laber demanded and increase unemployment).

Chapter 23 - Measuring the Cost of Living

luisa16 — Fri, 22 Feb 2008 02:27:23 CST

1. Define the Consumer Price Index
CPI = A measure of the overall cost of the goods and services bought by a typical consumer.
2. How it is calculated?
Fix the basket: Determine which prices are most important to the typical consumer (things that consumers buy more should be given greater weight).
Find the prices: Find the prices of each of the goods and services in the basket for each point in time
Compute the Basket´s cost: Calculate the cost of the basket of goods and services at different times.
Choose a base year and compute the index: The base year is the benchmark against which other years are compared. To calculate the index, the price of the basket of goods and services in each year is divided by the price of the basket in the base year, and this ratio is then multiplied by 100.
3. How do you calculate the inflation rate?
first, a base year needs to be established in order to be able to observe the changes in prices over a given period of time. This will then determine the percentage change in the price index from the preceeding period, for example over a 2 year period.
In order to calculate the rate, the CPI of the second year is subtracted from the CPI of the base year, then divided by the base year CPI and multiplied by 100

4. What are some of the problem associated with measuring the cost of living?

5. How is the CPI basket broken down?
The basket is composed of the typical goods and services an average consumer may buy. This is a fixed basket which rarely changes its components and therefore reflects the average prices of consumer products in general
6. Is the CPI accurate?
Not completely accurate because...

Does not take into account consumers' ability to substitute toward goods that become relatively cheaper over time
Does not take into account increases in the purchasing power of the dollar due to the introduction of new goods
It is distorted by unmeasured changes in the quality of goods and services
CPI overstates the annual inflation rate by about 1%

7. Define GDP deflator
The GDP deflator is the ratio of nominal GDP to real GDP.

8. Deflator vs. CPI, which is better?

9. What is indexation?
The automatic correction of a dollar amount for the effects of inflation by law or contract.
10. Define real vs. nominal interest rates
Real = the interest rate corrected for the effects of inflation
Nominal= the interest rate as usually reported without a correction for the effects of inflation
11. How do you correct economic variables for the cost of inflation?

12. How might retirees suffer from the states CPI rates?

Chapter 22 - Measuring a Nation's Income

ezemad — Wed, 13 Feb 2008 05:23:14 CST

Remember to to the online quiz for this chapter and send me your results!

1. Define GDP.
The market value of all final goods and services produced within a country in a given period of time.
2. What are the two ways you can arrive at GDP figures?

GDP can be computed by adding up the total expenditure of households in the economy
GDP can also be computed by adding up the total income paid by firms in the economy, which will consist of wages, rent, and profit

3. What are the componets of GDP? Define each
Consumption: spending by households on goods and services, with the exception of purchases of new housing
Investment: spending on capital equipment, inventories, and structures, including household purchses of new housing
Government purchases: spending on goods and services by local, state, and federal governments
Net exports: spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

4. Give examples of each component of GDP.

Consumption is spending of househols on goods and services, such as a meal at burger king.
Investment is the of capital equipment, inventories, and structures, such as the General Motors factory.
Government purchases include spending on goods and services by local, state and federal governments such as the Airforce purchase of Jets.
Net Exports equal the purchases of domestically produced goods of foreigners (exports) minus the domestic purchases of foreign goods (imports.)

5. What is the difference between real and nominal GDP? Which do we care about more and why?
We care about knowing a country's real GDP, bec. it helps determine an economy's trends over a period of time. To do this you need to take out an extra variable-- changes in price. By picking a base year in which to value the price, you can figure out the quantity changes in G&S as opposed to the price changes.

Real GDP= Production of goods and services valued at constant prices
Nominal GDP= Production of goods and services valued at current prices

6. What is the GDP Deflator and how is it useful?
GDP Deflator = Nominal GDP/Real GDP x 100
Measures the price level, calculated by the equation
Reflects the prices of goods and services

7. What is the relationshp between GDP and economic well-being?

GDP measures both the economy's total income and the economy's total expenditure in goods and services.
This helps indicate the estimated income and spending of an average individual within this economy
thus, if the GDP is higher, a higher average income and expenditure is implied, which determines economic well-being

8. What are important activities that are left out of GDP?
Value of leisure
Value of a clean environment
omits value of goods and services produced at home (ex. volunteer work)
Doesn't indicate distribution of income
Doesn't indicate transactions occuring outside the market (underground economy, such as prostitution, etc.)

9. What does GDP indicate regarding quality of life?
It indicates the income and expenditure of the average person in the economy, and for the most part since people would prefer to receive higher income and enjoy higher expenditure, GDP per person is a good measure for quality of life, although it is not perfect as it leaves out many other important contribution to the quality of life (see above).
10. What are some problems associated with GDP?

11. Explain the difference between GDP and GNP (you will need to look this one up!)

GDP (Gross Domestic Product) measures the size of the economy of a country, while GNP (Gross National Product)is "the total dollar value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country."

12. If GDP is rising, does that mean it is always good for the country? How might is be a negative?

No, because a rise in the GDP can mean also a rise in inflation.

Chapter 18 - The Markets for teh Factors of Prodcution

eivanowicz — Thu, 06 Dec 2007 18:42:21 CST

1. How is the demand for factors determined?

2. What shifts this demand?

Change in...

price of product
productivity
price of substitute
consumer preferences
demand for product

3. How are wages determined in a competitive labor market? How is this meaningful to the firm?

4. What influences the supply of labor?
- changes in taste
- changes in alternative opportunites
- immigration

5. What determines the equilibrium in the markets for land and capital?

Chapter 17 - Monopolistic Competition

matt--- — Sun, 18 Nov 2007 09:54:03 CST

Please complete and send me the online quiz as well.

Describe the monopolistic competition market.

A market structure in which many firms sell products that are similar but not identical

What is the LR equilibrium for MC? Why?

LR equilibrium is when price equals ATC and the firm earns 0 profits
this is because when firms are making profits, new firms enter the market, shifting the demand curve to the left, and when the firms are making losses, their demand curves eventually move to the right
the free entry and exit drive the profit to zero

3. Compare and contrast PC and MC. Under monopolistic competition firms produce on the downward sloping portion of their ATC curves. Free entry in competitive markets drives firms to produce at the minimum of ATC. In the long run perfectly competitive firms produce at the efficient scale (quantity that minimizes ATC), while monopolistically competitive firms produce below this level. Monopolistically competitive firms could increase the quantity it produces and lower the ATC of production. For a competitive firm price equals marginal cost. For a monopolistically competitive firm price exceeds marginal cost because the firm always has some market power. For a perfectly competitive firm price exactly equals marginal cost so the profit from an extra unit sold is zero. However a monopolistically competitive firm is always eager to get another customer because an extra unit sold at the posted price means more profit.

How does MC affect society’s welfare?

just as monopoly, monopolistic competition creates a dead weight loss
too much or too little firm entry
externalities of market entry

- product variety externality = consumers have consumer surplus when new product enters market, so new firm entry is a positive externality for consumers -business stealing externality= other firms lose profits when new competitors enter markets, so entry is a negative externality for firms

does not always ensure that total surplus is maximized

Describe the different scenarios MC can exist in the SR.

Monopolistic competitors, like monopolist, maximize their profit by producing the quantity at which marginal revenue equals marginal cost. the profit is made when the price and quantity made exceeds the average total cost.

Describe the elasticity of demand in MC.

The elasticity is the same as for Monopolies. Where the MR curve crosses the x-axis determines the unit elasticity (draw a vertical line from the MR & x-axis intersection, this equals the unit elastic point) - to the left of this point is elastic - to the right of this point is inelastic

Chapter 16 - Oligopoly

ezemad — Tue, 13 Nov 2007 18:18:52 CST

Do online quiz at: http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html and send me the results!

Describe an oligopoly market.

A market structure in which only a few sellers offer similar or identical products
An oligopoly is a type of imperfect competition, meaning firms in these industries have competitors but at the same time do not face so much competition that they are price takers.
ex. market for tennis balls, world market for crude oil
A key feature of oligopoly is the tension between cooperation and self-interest. The group of oligopolists is best off cooperating and acting like a monopolist, producing a small quantity of output and charging a price above marginal cost. HOWEVER because each oligopolist cares about its own profit as well its hard for a group of firms to maintain the monopoly outcome.

What is a cartel and collusion

cartel - a group of firms acting in unison. Once a cartel is formed the market is in effect served by a monopoly. That outcome maximizes the total profit that the producers can get from the market.
collusion - an agreement among firms in a market about quantities to produce or prices to change
ex. Jack and Jill get together and agree on the quantity of water to produce and the price to charge for it.

How is equilibrium achieved in an oligopoly?

because of competition among the few firms in an oligopoly, they have to watch each other in deciding how to price their goods in order to compete with the others
if one firm charges higher than the others, it will lose profits and vice versa
so all firms eventually end up with similar prices in order to collaborate, reaching a price equilibrium

What is the Nash Equilibrium?
- A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

Describe how the size of an oligopoly can affect market outcomes.

Summarize the OPEC and World Oil Market example on pg. 357

world's oil is produced by a few countries, mainly in the Middle East, that form an oligopoly
formed a cartel, OPEC (Organization of Petroleum Exporting Countries) that controls 3/4 of the world's oil
OPEC tries to set production levels - increase price through coordination to decrease quantity produced (high price is ideal)
some members choose to "cheat" by agreeing to decrease production but instead increase to get a larger portion of the total profit
this causes the oligopoly to become ineffective b/c of lack of cooperation/arguments
success depends on how well its members cooperate

Define Game Theory

Game theory is the study of how people behave in strategic situations, in which
they must consider others' responses to their own actions

How is game theory relevant to oligopoly?

Because the number of firms in an oligopoly is very small, each firm must
take into account the reactions other firms will have to their own actions.

Summarize the other examples of the prisoners dilemma pg. 361-362.

Arms Races: Each country prefers to have more arms than the other because a larger Arsenal gives it more influence in the world affairs. But, each country prefers to live in a world safe from the other country's weapons.
Advertising: Deciding wether to advertise between two companies: If neither advertises, the two split market. If both advertise, they again split markets, but profits are lower since they must now pay for advertising. However, if only one advertises, it attracts customers from the other brand.
Common Resources: This views the dillema into companies having to decide how many natural resource to obtain and negate the other company. Basically shows the self interest of both leads them to inferior outcome.

Why do people sometimes cooperate?

Cooperation can make everyone better off. The "prisoner's dilelamma" states that while cooperation between the two prisoners is difficult to maintain, it is mutually beneficial.

I.e. In the game we played in class, you could work together and make a constant profit instead of risking a huge loss for the sake of a larger profit

How does the government regulate oligopolies and why? Anti-trust laws

i.e. Sherman Antitrust Act of 1890 condemned criminal conspriacy amongst oligopolists
Clayton Act of 1914 encouraged parties to sue oligopolists, and they could win up to 3 times the cost of their sustained damages
US Justice Department and private parties can file legal suits to enforce anti-trust laws
laws meant to prevent oligopolists from working together in ways that could harm the public, and also meant to keep the markets competitive

Do question 5 on pg. 373.\

a. Dominant Strategy:

Mexico Low Tariff --- US High Tariff gain is greater
Mexico High Tariff --- US High tariff gain is greater
this means that the US has a dominant strategy for high tariff
US Low Tariff --- Mexico High Tariff gain is greater
US High Tariff --- Mexico High tariff gain is greater
this means that the Mexico has a dominant strategy for high tariff

b. Nash Equilibrium: A situation in which "economic actors" interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

because both Mexico and the US' dominant strategies are high, there is a Nash Equilibrium for high

Chapter 15 - Monopoly

cvanvolk — Fri, 02 Nov 2007 06:32:56 CDT

1. Why do monopolies exist?
Barriers to entry:
- A key resource is owned by a single firm
- The government gives a single firm the exclusive right to produce some good or service
- The costs of production make a single producer more efficient than a large number of producers

2. What are the different types of monopolies?
Government-created monopolies: government has given one person or firm the exclusive right to sell some good or service
ex. patent (exclusive right to manufacture and sell) and copyright (noone can print and sell the work without permission) laws
Benefits: increased incentive for creative activity

Natural monopolies: A single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. Arises when tehre are economies of scale over the relevant range of output.
ex. public goods and common resources (bridge, etc)

3. How and why is DeBeers a monopoly?
DeBeers is a monopoly because they have control of 80% of the worlds production of diamonds giving them substantial influence over the market price. Also the product they producer, diamonds, is often viewed as unique and have no substitutes and so they gain even more market power.

The diamonds are viewed as unique because DeBeers advertises diamonds with slogans like diamonds are forever, this causes consumers to think diamonds must be diffrent than other precious gems.

4. How is MR different in monopoly than in PC? Why?
In a monopoly, the MR does not equal the D like in PC.
The MR has a different slope than the D curve and is under the D.
The MR also intersects the x-axis and determines the elasticity.

5. How is the demand curve in monopoly different than in PC? Why?
In PC, the D curve is a horizontal line. In a monopoly, the D curve is downward sloping

6. How and where to monopolies maximize profits?
Monopolies should increase output up to the level where the marginal cost curve intersects the marginal revenue curve, in order to maximize its profits

7. Why do we say that monopolies are inefficient?
They work in their profit maximization point or MR = MC, and this point is on the downward slopping section of their ATC curve in monopolies making them less efficient.

8. Why don't monopolies have supply curves?
Monopolies will always try to produce at an output level that maximizes profits. therefore, their supply is determined by where MR intersects MC
This means that the MC curve acts as the firm's supply curve

9. Discuss deadweight loss and monopoly.

10. What are the social cost of monopolies?
Because a monopoly's price is higher than the market sets it as, consumer welfare is hurt, while the producers welfare increases. However, there is no loss in total welfare, just a shift towards producer welfare

In a government created monopoly, the firm must often pay additional costs, such as lobbying fees, to maintain their monopoly. These costs are another type of deadweight loss, neither the consumer or the producer benefits

11. How are monopolies controlled by the government?
Governments regulate monopolies by taxing and subsidizing them to influence their prices. Sometimes the govt. will act in the consumers best interests, and other times it will act in the industry's best interests. An effective regulation finds an equilibrium point between the two.

12. What is price discrimination?
When prices are different for different people in society, usually due to their social background and their income. This means that for example water might be cheaper for the poor and more expensive for the rich. It's prices do not have to anything with the costs.

13. How does price discrimination relate to producer and consumer surplus?
Price discrimination may occur more when consumer surplus is lower, since less consumers will have the ability to pay a certain price. Also, price discrimination may not occur as often if producer surplus is lower, since they cannot cover their costs by altering prices

Chapter 13 - The Cost of Production

MikeCronq — Thu, 01 Nov 2007 18:39:37 CDT

Define the following:

Total Revenue

The amount a firm receives for the sale of its output.
Quantity of output the firm produces X Price at which it sells its output

Total Cost

the market value of the inputs a firm uses in production (includes all opportunity costs)
In economics total cost = explicit costs + implicit costs

profit

total revenue minus the total cost
Most producers' objective is to create as much profit as possible in their firm

explicit vs. implicit costs

Explicit costs are defined as input costs that require an outlay of money by the firm. For example, a worker's wages are part of a firm's explicit costs
Implicit costs are those that do not require an outlay of money by the firm. These are usually defined as opportunity costs. For example, if the owner of a firm makes a 200$ income per year while having made a 300$ income as a worker somewhere else, the 100$ opportunity cost would be part of the firm's implicit costs.

economic profit vs. accounting profit

Economic profit is the total revenue of the firm minus the total costs, which would take into account both the explicit and implicit costs. This is because economists are interested in studying how firms make production and pricing decisions.
Accounting profit is the total revenue minus the total explicit costs, without taking into account opportunity costs. This kind of profit is usually recorded by accountants for the firm. Accountants just keep track of the money that flows into and out of firms.

marginal product

The increase in output that arises from an additional unit of input
ex. in a cookie factory: when the number of workers increases from 1 to 2, cookie production increases from 50 to 90. The marginal product of the second worker is 40 cookies.

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases
ex. Following the example of the cookie factory above: when the number of workers increases from 2 to 3, cookie production increases from 90 to 120. The marginal product of the third worker is 30 cookies instead of the 40 cookies which was the marginal product of the second worker. As can be seen, the marginal product declines.

fixed vs. variable costs

Fixed costs are costs that do not vary with the quantity of output. Examples of fixed costs would be rent for property and worker's salaries. These costs occur even if the firm is not producing anything.
Variable costs are costs that vary with the quantity of output produced. This would include the cost of inputs (the more you produce the more you need) as well as the need for more workers to be hired as production increases.
Total cost: fixed costs + variable costs

average total cost

The total cost divided by the quantity of output
Sum of average fixed cost and average variable cost

average fixed cost

The fixed costs divided by the quantity of output

average variable cost

The variable costs divided by the quantity of output

marginal cost

The change in total cost from producing an additional unit of a good

The MC first decreases, reaches a minimum then increases

Why do marginal costs first decrease and then rise?

First decreases because it's not too hard to get an additional unit out of a business or worker Then rises because it becomes increasingly difficult to increase output as you near capacity (Law of Diminishing Returns)

What is the relationship between marginal costs, the ATC and the AVC? When the marginal cost is less than the average total cost the average total cost is falling but when the marginal cost is greater than the average total cost the average total cost is rising. the marginal cost curve will intersect both the ATC and the AVC curves at their lowest points.

What is the relationship between marginal costs and fixed costs? Explain.

Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising.

Explain the reason for the ATC and the AVC curves?

Because the variable cost and so also the total cost, according to the law of dimminishing returns, will increase as a you produce 1 more quantity of a good. This causes the ATC and AVC to curve up as a greater ammount of a good is produced.

If AFC is not represented on most graphs, how can you figure this out?

In a graph the difference between the ATC and AVC would be the AFC, because the ATC is the AVC + AFC.

How do long run ATC curves and short run ATC curves differ and why?

Define economies of scale and why they arise.

The property whereby long-run average total cost falls as the quantity of output increases.

Diseconomies of scale and why they arise.

The property whereby long-run average total cost rises as the quantity of output increases.

constant return to scale

The property whereby long-run average total cost stays the same as the quantity of output changes.

Chapter 14 - Firms in Competitive Markets

MikeCronq — Thu, 01 Nov 2007 18:26:10 CDT

1. Define competitive market
A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.
- There are many buyers and sellers in the market.
- The goods offered by the various sellers are largely the same
Therefore the actions of any single buyer or seller in the market have a negligible impact on the market price.

2. Explain the relationship between MR, AR and Price
Marginal Revenue: change in total revenue from the sale of each additional unit of output
Average Revenue: total revenue divided by the amount of output. Tells us how much revenue a firm receives for the typical unit sold.
For competitive firms, marginal revenue equals the price of the good.

therefore, AR equals the price in all firms, and MR equals the price in all competitive firms

3. What is the relationship between Marginal Cost and the firms Supply? Why and explain.

With the MC, the quantity of output that maximizes profit can be found
MC crosses average total cost curve at minimum
this allows MC to intersect marginal revenue
therefore the point of highest profit maximizing output is where MC = MR
this way, the marginal costs are sufficiently covered

4. What is the shut-down decision in the short-run?
When therevenue does not exceed the average variable costs, the firm should shut down. However, if the revenue pays part of the variable costs, the firm should continue operating at a loss.
5. Describe how you measure profits on the graph.

profit= TR - TC
since MR = price, the ATC curve must be below MR to produce profits
the area between the MC MR intersection point and the ATC point at that specific quantity indicate the profit

6. Describe how you measure losses on the graph

if ATC is over MR, firm experiences losses
losses are also calculated by area where MC intersects MR and ATC point where quantity is produced

7. What is the different between short-run and long-run?

8. Why are you at the break-even in the long-run?

- The prices increase and decrease, so they eventually even out, thus operate at break-even

9. When do firms exit the industry and what effect does that have on the firm and the market?

- Firms exit when there is a SR loss
- Supply decreases, market price increases & loses will eventually disappear

10. When do firms enter the industry and what effect does that have on the firm and the market?
-Firms enter if P>ATC
-Its the exact opposite as conditions for firms to exit
-supply increases, price falls and profits of other firms gradually disappear

Chapter Seven - Consumer, Producers, and teh Efficiency of Markets

eivanowicz — Sun, 07 Oct 2007 13:40:59 CDT

Be Sure to do the online quizzes at http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html

1. Explain the concept willingness to pay.
- the maximum amount that a buyer will pay for a good
- measures how much the buyers value the good
- a buyer would be willing to buy a product at a price less than his willingness to pay, would refuse to buy the product at a price more than his willingness to pay, and would be indifferent to buying the product at a price exactly equal to his willingness to pay.

2. How do we use the demand curve to measure consumer surplus?

consumer surplus is measured by the willingness of a buyer to pay for a certain product along the demand curve.
i.e. if the price of a product were too high, how many people would leave the market etc.

3. How do lower prices raise consumer surplus?
Consumer surplus is a buyer's willingness to pay minus the amount the buyer actually pays. Therefore if prices are lower consumer surplus increases.

ex. If a consumer is willing to pay 5 pesos for an icecream cone and the price is actually 3..consumer surplus will be 2 pesos. If the price of the iceceram cone lowers..let's say 2 pesos...consumer surplus will be 3 pesos.

4. What does consumer surplus measure?

The buyer's benefit, as they see it
Official definition: the benefit that buyers recieve for a good as the buyers perceive it.
I.e. If I am willing to buy an iphone for $400, and can buy it for $250, my consumer surplus is $150. The market price may indeed be $250, but as a consumer, I feel happy!

5. What does producer surplus measure?

Producer surplus indicates the producers profit, which would be measured by the amount a seller is paid for a good, minus the seller's cost
Ex. Shop sells tea cups for 20$, and they cost 15$ to make. The shop's poducer surplus is 5$

6. How can we use the supply curve to measure producer surplus?

On the supply curve, the seller's costs are demonstrated
The area below the price and above the supply curve shows the producer surplus
Height of curve measures seller's costs, and producer surplus id shown by the area of the price and quantity created

7. How do higher prices impact producer surplus and why?

higher prices raise producer surplus
sellers recieve a higher price so they are willing to produce more
now producers will recieve a higher price to lower production costs, which will increase the producer surplus

8. How do we maximize both producer and consumer surplus?

By allowing the price to reach market equilibrium, at quantities less than the equilibrium the value to buyers exceeds the cost to sellers. At quantities greater than the equilibrium quantity the cost to sellers exceeds the value to buyers.
total surplus must also be maximized through effective allocation of resources = efficiency

9. How is efficiency promoted?
By maximizing total surplus (total surplus = consumer surplus and producer surplus or total surplus= value to buyers - cost to sellers) To do this goods must be produced by sellers at lowest cost, and good must be consumed by consumers who value it most highly. Free trade (no taxes) is a good way to promote efficiency. More competitive markets are also more efficient.

10. How is equity promoted?
Leaving the market to be free, automatically promotes equity.
Distribution of well-being fairly helps promote - care both about the economy and how the economy is distributed amongst people in a society
normative judgements

11. Explain how ticket scalping is an example of how the market reaches efficient outcomes (pg. 156-7)
Scalpers buy tickets to plays, concerts ,etc, and then resell the ticket at a price above original cos. By charging the highest price the market will bear, scalpers help ensure the consumers with the most willingness to pay for the tickets get tickets.

12. What is market failure and how is it related to welfare economics.

Market failure is the inability of some unregulated markets to allocate resources efficiently. This is due to factors such as market power or externalities.
economists study market failure & what policies can correct the failures
welfare economics can be adapted to problems such as 'market failure'

Chapter Eight - Application: The Costs of Taxation

debbielim — Sat, 29 Sep 2007 11:04:10 CDT

Define deadweight loss.

a fall in total surplus that results from a market distortion
- Total Surplus = Tax Revenue + Consumer Surplus + Producer Surplus
- Welfare with a tax:
  - Tax revenue = positive. Consumer surplus & producer surplus = negative. Therefore, losses to buyers and sellers exceed govt's gains--- this is the deadweight loss
- impacted by the elasticity of supply and demand
examples: as tax increases, size of deadweight loss increases

Where does it exist on the supply and demand curve?

The deadweight loss exists in boxes c & e (look on page 164).

Boxes a, b, d, and f make up the total surplus. However, as the tax pushes up the price, the consumer surplus decreases from P1 to Pb (getting rid of box c). The tax pushes the producer surplus down from P1 to Ps (reducing box e). So, thetriangle on the right, made from boxes c and e,is thedeadweight.

How does a tax affect welfare of market participants?

A tax creates a deadweight loss, which has a negative effect on both the

consumer and producer surpluses. This in turn means that both consumers and producers are not receiving the full benefits available at the equilibrium price.

Explain how elasticity of supply affects deadweight loss.

when supply is inelastic, the deadweight loss of a tax is much smaller because of the shape of the steeper supply curve, which allows less space for the deadweight loss
More elastic supply will create a greater deadweight loss sicne the supply curve is flatter and will allow more space for the deadweight loss

Explain how elasticity of demand affects deadweight loss

when demand is inelastic, the deadweight loss will be smaller sicne the demand curve is steeper
when demand is more elastic, the deadweight loss will be greater since the demand curve is flatter

The demand for beer is more elastic than the demand for milk. Would a tax on beer or a tax on milk have a larger deadweight loss? Why?

Since the demand for beer is more elastic than milk, the deadweight loss will be larger foir a tax on beer because the demand curve will be much flatter than that of milk, allowing more space for the deadweight loss

How is tax revenue impact by a small tax and why Tax revenue is usually not very large since the tax will not bring as much profit. But the deadweight loss from a small tax is kept at a minimum, so it may be more efficient than a large tax.

How is tax revenue impacted by a medium tax and why. A medium tax will yield a fair amount of tax revenue since the tax will be medium sized, but the deadweight loss will also be considerably larger. However, a medium tax may be preferred by governments in soem cases because of the greater profits they bring than a small tax
How is tax revenue impacted by a large tax and why.

If a large tax is imposed on a good the total revenue gained from the tax may be less than the deadweight loss caused towards the good that was taxed. A larger tax is more likely to be inneficient than a smaller tax.

The higher tax drastically reduces the size of the market. For a very large tax no revenue would be raised, because people would stop buying and selling the good altogether.

What do tax planners have to play particular attention to when taxing a product?

Elasticiy: When supply is relatively inelastic the deadweight loss of a tax is small. When supply is relatively elastic, the deadweight loss of a tax is large. Also when demand is relatively inelastic, the deadweight loss of a tax is small while when demand is relatively elastic, the deadweight loss of a tax is large.

Explain the significance of the Laffer Curve.

The Laffer curve shows that tax revenue first rises, then falls.
It shows how tax rates affect tax revenues
high tax rates create disincentive to work
applies best to the richest, who pay very high tax rates. When their tax rates are cut, revenues tend to rise

Using the text, what is supply-side economics?

- the cut in tax rates that was intended to encourage people to increase the quantity of labor they supplied

Chapter Six - Suppy, Demand and Government Policies

tbrandon — Tue, 25 Sep 2007 17:57:19 CDT

Chapter Six Quiz: http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html

1. Define price ceiling
Legal maximum on the price of a good or service, cannot rise above level

i.e. rent control - price is below the equilibrium therefore
Quantity demand > Quantity supply = shortage
- sellers must ration good/service to buyers ex. In a command economy (communist government) prices are usually controlled using price ceilings. However, this creates shortages and a high rise in prices due to pent up demand after the price ceilings are removed

2. Define price floor

a legal minimum at which the price of a good can be sold.
Quantity demand < Quantity supply = surplus
i.e. minimum wage law - price is set above the equilibrium to give workers with no skills an opportunity to have affordable living.
Minimum wage can create unemployment because there will be a surplus of workers, since the price of labor remains above the equilibrium price

3. How do price ceiling affect market outcomes?
If the price ceiling is set bellow the market equilibrium it will cause shortages because the demand would increase while while the supply would stay constant or decrease.
Ex. The equilibrium price of apples is at 5 $, and the government imposes a price ceiling of 3 $. Supply and demand would naturally move the price up to 5$, but because they are restricted by the price ceiling, the quantity demand exceeds the quantity supply. this will create a shortage of apples

4. What are the long-run and short run issues related to rent control?
In the short run rent control helps provided affordable homes to more people, but in the long run because it is a price ceiling it will create a shortage in supply, because investors in homes will be less willing to invest when their profits are being cut by a price ceiling.
5. What are the issues surrounding rent control in New York City?
Rent control is very common for many appartments in NYC, and many tenants depend on such price ceilings to be able to afford the neighborhoods they live in. However, the wealthy benefit greatly from these low rent prices, since they have to pay a much smaller sum for their appartments in pricy neighborhoods. many are unwilling to give up rent control because the high rent prices that will follow will affect low income families the hardest, and many will ahve to give up their appartments for more affordable residencies. But many state that rent control, instead of eliminating inequality, helps promote it by allowing landlords to discriminate. Since rent control appartments are a scarcity because of the price controls, they are able to decide who recieves the appartment. this only further promotes inequality, and low income families dont always recieve the appartment price they need.

6. How do price floors affect market outcomes?
If the price floor is set above the market equilibrium it will causes a surplus because the demand would stay constant or decrease while the supply would increase.

Two outcomes:

1) The price floor is set below the equilibrium, in which case it has no affect because prices will adjust to supply and demand
2) The price floor is set above the market eq., this is called abinding price floor, which creates a surplus .

7. Examine the issues surrounding minimum wage.

Minimum wage is beneficial to low skilled workers and is set to help increase the average living standard.
But minimum wage is also a price floor and like all price floors creates a surplus (in this case unemployment). For example if a car maker has to pay their workers a minimum price it can be more profitable for them to use robots and have less employees resulting in unemployment.

Minimum wage may also increases legal/illegal immigration of low skilled workers into a country when it has a high minimum wage.
-this does not affect those workers whose skills and experience allow them to work well above the minimum wage

8. Discuss an economist’s perspective on price controls and price ceilings, if the Ten Principals of Economics state that sometimes governments can improve market outcomes, why do they view these types of controls the way they do?
Economists usually oppose price controls because of the fact that they disturb the natural function of the laws of supply and demand within a market. by altering natural decisions made by producers and consumers, the allocation of society's resources is distorted. When governments try to improve market outcomes, they dont often realize that price controls often end up hurting those who they intend to help. While it is believed that minimum wage helps protect workers rights and ensure better standards of living, it alkso creates more unemployment. Price ceilings should normally help consumers buy goods at lower prices, but they will usually find a shortage of those goods

9. Define tax incidence.
- the study of who bears the burden of taxation (buyers or sellers?)
Tax incidence depends on price elasticity of demand and price elasticity of supply.-

10. How do taxes on buyers affect market outcomes? Explain with examples.
- Initial impact: tax creates less incentive to buy, demand curve shifts to the left. Supply curve is not affected because sellers have the same incentive to provide
- Tax shifts the demand curve by exactly the size of the tax (because to induce buyers to demand any given quantity, the market price must now be as much as the tax lower to make up for the effect of the tax)
- Equilibrium price falls, equilibrium quantity falls : sellers sell less, buyers buy less
- Size of market reduced!
- tax incidence: Although buyers send the entire tax to the government, buyers and sellers share the burden
- Because equilibrium price falls sellers receive less than they did without the tax. Buyers pay sellers a lower price but the effective price (including the tax) rises, making them worse off than before the tax was imposed.

11. How do taxes on sellers affect market outcomes? Explain with examples.
- Initial impact: Tax raises the cost of selling and leads sellers to supply a smaller quantity at every price so the supply curve shifts to the left. The quantity demanded is the same so the demand curve does not change.
- The effective price to sellers (the amount sellers get to keep after paying the tax) is lower as much as the quantity of the tax. To induce sellers to supply any given quantity, the market price must be as much as the tax higher to compensate, so the supply curve shifts by exactly the size of the tax.
- The equilibrium price rises and equilibrium quantity falls.
- Size of market reduced!
- tax incidence: Although sellers send the entire tax to the government, buyers and sellers share the burden
- Because equilibrium price rises buyers pay more than they did without the tax. Sellers receive more but the effective price (after paying the tax) falls.

12. What are some of the issues surrounding the payroll tax?

The burden of the tax cannot be easy distributed
The burden will not be 50/50 between the employees and employer
Instead the burden will follow the laws of supply and demand

Chapter Five - Elasticity and its Applications

matt--- — Sun, 23 Sep 2007 19:54:20 CDT

Define Price Elasticity of Demand

- how much the quantity demanded responds to a change in price - demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price - is said to be inelastic if the quantity demanded responds only slightly to changes in the price

What are the factors that affect price elasticity of demand?

- Necessity vs. Luxury
ex. vacation flight (luxury) vs. business flight (necessity)
- Availability and # of close substitutes
ex. cereal (lots of competition)
- Level of addiction
ex. cigarettes and alcohol
- Branding and advertising
ex. luis vuitton, coke...
- Proportion of income spent on the good
ex. paper clips (small portion) and cars (large portion)

Describe the midpoint method of determining elasticity of demand.

The midpoint method for calculating elasticity measures the percentage change by dividing the change by the midpoint of the initial and final levels of two points on the demand curve ex. Point A=$4, Point B=$6, midpoint is 5, in order to calculate % change = (6-4)/5 x 100 = 40 so we can say that when going from Point A to point B, there is a 40% rise, and quantity falls by 40%, and vice versa The formula= ((Q2-Q1)/[(Q2+Q1)/2])/(P2-P1)/[(P2+P1)/2]

What is the variety of shapes the demand curve come in? What does each shape indicate related to elasticity?

Explain the Total Revenue test for determining elasticity.

Total revenue is defined by price times quantity, and is affected by price elasticity of demand. If demand is inelastic, then an increase in price will cause an increase in total revenue, indicating that quantity demanded has no changed that much. When there is an increase in price and a decrease in total revenue, then demand is elastic

Why are there ranges of elasticity along the demand curve?

What is income elasticity of demand and how is it used to determine normal and inferior goods?

- A measure of how much the quantity demanded of a good responds to a change in customers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
- normal goods = positive income elasticities
- inferior goods = negative income elasticities

What is cross-price elasticity of demand and how is it used in economics?

measures the responsiveness of one good to the changes in price of a related good
- negative # - goods are complements
- positive # - goods are substitutes
example: if the price of beef goes up, what will happen to the demand for ketchup?
- Answer: Demand for ketchup will decrease
- Why? The goods are complements

Define price elasticity of supply and the factors that affect PES.

measures how much the quantity supplied reacts to changes in price
supply is elastic if quantity suppliedresponds significantly to change in price
supply is inelastic if QS responds slightly to change in price
depends on flexibility of sellers to change the amount of a good they produce, ex. Manufactured goods such as watches and cras are more elastic because more of them can be produced quickly, while real estate is more inelastic
Time period is key determinant
Supply is usually more elastic in long run than short run bc eventually more of the product can be produced

From Part II: Elasticity and its Applications

Describe the farming scenario on pg. 109 and how it relates to elasticity.

Explain the OPEC example and how it relates to elasticity.

Describe the Drug interdiction example on pg. 112 and its relationship to the concept of elasticity.

Drug interdiction on behalf of the government could increase drug-related crimes. If government agents are out to get drug dealers it becomes harder to sell drugs. As a result the price of drugs goes up and drugs then become an inelastic product. People are willing to pay higher for the drugs and in many cases will pay high prices because of addictions.

Chapter Four - The Market Forces of Supply and Demand

DanteC — Thu, 06 Sep 2007 17:37:54 CDT

shiAnswer the following in relation to demand and your reading from Chapter Four in your text.

Define a market

A market is a "group of buyers and sellers of a particular good or service." The buyers determine the demand, the sellers determine the supply. There can be many different types of markets, organized or less organized. In a market buyers and sellers interact, and because of this the forces of supply and demand determine the quantity of the good sold and the price.

What is a competitive market?

A competitive market is a market that has many buyers and sellers so that each has a negligible impact or influence on the market price (the opposite of a monopoly)
each seller has limited control over the price because of competition
ex. if an ice cream seller charges more than the going price then the buyers will go buy ice cream somewhere else
No single buyer can influence the price because each buyer only purchases a small amount
Competetive markets prices are predicted to equalize the amount of goods or services sought by buyers and the amount of goods or services produced by sellers, resulting in an economic equilibrium.

What is the relationships between price and quantity demand?

Quantity demanded: the amount of a good that buyers are willing and able to purchase
On a Price vs. Quantity graph, the quantity demand is a move along the Demand curve
A move to the left means an increase price, decrease quantity
A move to the right means a decrease price, increase quantity
Therefore it can be said that quantity demanded is negatively related to the price
If price rises people will demand less. If price falls people will demand more

Illustrate the law of demand with an example.

Law of Demand: As the price of a good rises, the quantity demand falls. Or, as the price falls, the quantity demand increases. (assuming all things are equal, or ceteris peribus)

Example: the price of running sneakers is increasing, so the quantity demand for those sneakers will drop. But if the price of those sneakers starts to fall and they become cheaper, then the quantity demand will rise

What is a demand schedule?
A demand schedule is graph that shows the amount of a good that buyers are willing to buy at different prices. Although this ignores all non-price factors that could also affect demand.
it shows the relationship between the price of a good and the quantity demanded
ex. A demand schedule showing the "price of ice-cream cone" and "quantity of cones demanded". This schedule can be used to graph the demand curve
Explain the difference between market demand and individual demand.
Individual demand focuses only on the demand of a product for a certain individual, while market demand sums up all the individual demands for a good/service
The sum of the quantity demanded by all buyers would give you the market demand
To analyze how markets work we need to determine the market demand
Market demand depends on all factors that determine the demand of individual buyers (ex. incomes, tastes, expectations, prices of related goods) and on the number of buyers

What are the factors that shift the demand curve and give an example for each factor, indicating which direction it would shift the demand curve.

Factors - Change in...

Price of complements

i.e. If the price of hamburgers decrease, what will happen to the demand curve for ketchup?

Answer: If the price of burgers decreases, demand will increase thus the demand for ketchup will also increase shifting the graph to the right

Price of substitutes

i.e. The price of coffee rises, what happens to the demand curve for tea?

Answer: The demand curve would shift to the right, meaning an increase in demand because a decrease in demand of a substitute, coffee

Income ex. People's average incomes are said to be reduced by 5%. This will shift the demand curve to the left

Preferences ex. government sponsors campaigns which show how smoking can give you cancer. What will happen to the demand for cigarettes? The demand curve for cigs will shift to the left

Future Expectations

Victoria's Secret is having its "Semi-Annual" sale on Friday. What will happen to the demand curve for Thursday?

Answer: the demand curve will shift to the left because demand will decrease if consumers know goods will be cheaper on Friday.

Number of buyers ex. a deadly disease in Frankfurt has caused many refugees to flee to Berlin. what will happen to the demand curve for goods in Berlin? It will shift to the right

What is the difference between a change in quantity demand and a change in demand?

Change in demand = shift of Demand curve to the right or left

- caused by factors like changes in:
i)prices of compliment
ii)prices of substitute
iii)future expectations of prices
iv)number of buyers
v)preference
vi)income

Change in quantity demand = move along the demand curve to the right or left

- caused by the changes of prices of the item. A simple way to determine whether a change in quantity demand or a change in demand occurred is to determine whether demand changed DUE TO price changes (change in quantity demand) or if price changed DUE TO a change in the consumers

9. What is the difference between quantity supplied and supply?
Supply is the ammount of a good produced at every given price, while quantity supplied is the ammount of good produced at a particular price.

Supply = shift of the supply curve to the right or left -
When one of the causes that shift supply occurs first, then it is a shift
Quantity supply = move along the supply curve
When the price changes, there is a move in quantity supplied

10. Market supply vs. individual supply

Market supply is the sum of the supplies of all sellers.
Individual supplie is what individual people or businesses own. You find the Market supply curve by adding up all the individual supply.

11. What causes shifts in the supply curve, give an example for each.

Advance in technology- A new machine is created and it can produce at twice the speed as the previous machine.

Cost of inputs- If the price of wood goes up, the supply of wooden chairs will decrease as they will have to spend more money on less amount of wood.

Natural disaster or unexpected event- A hurricane in Florida destroys orange fields, causing a decrease in supply.

Gov't Regulations- Taxation may be placed on a good causing the supply to decrease

ex. government puts a tax on imported foreign cars. Supply of foreign cars goes down

Number of producers- More people move into Belgrano causing builders to make more housing, thus the supply of homes will increase

12. How are prices established?

prices are established at the equilibrium, or the intersection between the supply curve and the demand curve

If supply and demand shitfs, then the price will shift accordingly too
13. What are the three steps to analyzing changed in the equilibrium? Use examples.

Decide whether the event shifts the supply curve, the demand curve or both.

Decide whether the curve shifts to the right or left.

Use supply-and-demand diagram to examine how the shift affects the equilibrium price and quantity.
Eg; How does the market for ice cream change during a hot summer?
1)Hot weather affects demand curve - change in preferance. Supply curve remain unchanged.
2)More ppl want ice cream - demand curve shifts to the right.
3)Increase in demand raises the equilibrium price and equilibrium quantity.

Conclusion : Hot weather increases the price of ice cream and the quantity of ice cream sold.

Chapter Three - Interdependence and the Gains from Trade

Jamieng — Sat, 25 Aug 2007 20:32:58 CDT

Please also remember to do the online quiz for chapter three and send it to me by next Monday!

1. How is a PPC curve used in comparative advantage?

The PPC curve shows how much each producer can consume according to their possible productivity
can show trade-offs between two goods, meaning that the good which will produce less opportunity costs can be determined
In this way when comparing between two countries (or companies, individuals, etc) it is possible to determine who has comparative advantage over producing each good

2. Explain how on a PPC curve you can determine how much each gains through trade? How their consumption increase through trade.

The PPC curve shows opportunity costs and how much they give up on one good while producing another good.
It would show if an country focuses more on what it does best and less on what it does not do so well it can produce much more of the product it produces best
When both countries focus more on what they do best and trade with each other based on these (specialization), both benefit because both will consume more of both products than they otherwise would without specialization and trade.(the graph would bend outward, which means the comsumption increases)

3. Define absolute advantage

When comparing the productivity of one firm or nation with that of another. The producer who has a larger amount of output or smaller number of inputs to produce a certain good is said to have the Absolute Advantage.
- comparison according to productivity

4. Define comparative advantage

The comparative advantage is determined by comparing the advantage one might have if they specialize in a product they are good at producing and trade it for another product they may or may not be so good at producing.
- The less the opportunity cost is, the more comparative advantage he/she/it has

5. How is opportunity cost related to comparative advantage?

Opportunity cost: whatever must be given up to get something else
Comparative Advantage: Goods compared among producers based on the opportunity cost
i.e. If China spends one hour producing either 50 Barbies or 2 lbs of beef

and Argentina spends one hour producing 5 Barbies or 100 lbs of beef

Argentina has a lower opportunity cost producing beef because they lose less production of Barbies than China, thus they have the comparative advantage for beef

6. Why should the United States trade with other countries?

The US can't produce all goods at as low of a cost as other countries
(i.e. bananas trade w/ Ecuador in exchange for Florida oranges)
trade allows countries to prosper, gain money from exports, gain goods from imports
Just like individuals benefit from specialization and trade, countries do so as well. Trade can help the US focus on what it does best.

7. Explain the output method for determining comparative advantage.

If it is an output (i.e. # of goods produced per amount of time), the # of goods for product A becomes the numerator for good B
= Good A / Good B in column B and Good B / Good A in column A
compare these values for Producer #1 and Producer #2
The Producers with the smaller value for a product has the lower opportunity cost, thus the comparative advantage for the other good

8. Explain the input method for determining comparative advantage.

If it is an input (i.e. # of time required to produce a certain amount of a good) the # of time (A) becomes the denominator for good B
You place the numbers oppositely as you would do with an output method
The one with the lower opportunity cost has the comparative advantage for the good

9. Suppose the world’s fastest typist happens to be trained in brain surgery. Should he do his own typing or hire a secretary? Explain.

He should hire a secretary. He could do his own typing, but should he? Even though he has an absolute advantage in typing, his time which is used to type is better spent conducting brain surgery which would bring him more benefit. The secretary has a comparative advantage in typing because he/she has a lower opportunity cost(giving up lesser wage compared to the surgeon)---working, in contrast to performing surgery. (this exemplifies question #10)

10. Given an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.

John needs 9 acres to produce 100 bushels of corn, and 3 acres for 100 bushels of rice
Jane needs 8 acres for the same amount of corn, and 2 for the rice
Jane has the absolute advantage = needs less acres for both corn and rice
But John has the comparative advantage in producing corn, so Jane has the comparative advantage in producing rice

11. Will a nation tend to import or export goods in which it has a comparative advantage?

Export goods it has the comparative advantage in because it means they have a lower opportunity cost for producing the good (meaning they produce it well, and most likely a lot of it)
export the good to import goods that they don't have the comparative advantage in producing

12. Why do economists oppose policies that restrict trade among nations?

economists oppose this because free trade allows countries to specialize without restraints and does not require them to become self sufficient to an extent that would harm the economy
by specializing, each country has the chance to increase its potential and expand its economy, something that would be harder to achieve without specialization

Chapter Two - Thinking Like an Economist

luisa16 — Thu, 16 Aug 2007 20:41:11 CDT

Remember to check the calendar for assignments etc. posted at www.lincoln.edu.ar/stephens/ then go to the AP Econ site for the calendar.

Please address the following from the reading of Chapter Two in your Mankiw text:

1. Role of the Scientific Method in Economics:

Observations lead to the development of theories
Economists cannot experiment like scientists thus analyze and study changes in countries' economies
Study of historical episodes allows economists to gain insight and knowledge about economic situations and develop theories from observation.

2. Role of Assumptions in Economics

Assumptions made to help understand surroundings and focus thinking
they simplify situations for clarity's sake and allow an easier analysis of the problem
Assumptions lead to questions (i.e. If we assume this happens, how will that affect...)

3. Purpose of Economic Models

To learn about the world...the models include important diagrams and equations but leave out more minor details concerning the economy.
In other words, models simplify to help us understand-- so we can then work through real-life problems more easily.
Common economic model: The circular flow diagram, which shows the shifting of money through markets among households and firms

4. The PPC:

What does it show?A PPC is used to show the amounts of 2 goods that an economy could produce using limited resources. The PPC graph shows the posible outputs (products) an economy can produce given its available production factors and production technology. (a firm produces the products.)
It is a vast simplification of economic proceedings within a market, designed to clarify the issues of scarcity, trade-offs, opportunity costs, and economic growth
How is it used? The graph is used by plotting the amount of one output vs. another output. (vertically and horizantally). After plotting multiple points on the graph you can discuss what is the best option for your economy in how much of a certain output is produced at the possible cost of less production of another output. Any point that is on or inside the frontier of the PPC graph can be compared as a production possibility for the economy.
What can shift the PPC? The PPC can be shifted outwards through technological advancements, or through an increase in the Factors of Production.
How do you measure opportunity costs? Opportunity costs can be measured using the loss of Good B produced per extra unit of Good A produced or with the PPC graph you measure the opportunity cost by comparing what is being given up from one output to produce more of another output and vice versa. (ie. If you choose to produce 100 cars and 200 computers, your giving up the opportunnity to produce 200 cars and 100 computers. Depending on the demand of your markey will determine what is in your best interest to produce more of.)
What are the trade-offs?

The trade-offs are that for every unit of good A produced, less of good B is produced. (you decide what to give up at a given time depending on what is in your economys best interest.)

5. Give examples (meaning more than one) of what you would study for...

Macroeconomics
- Study of the entire economy. I.e. impact of foreign competition on US industries, new govt. agricultural policies, NAFTA, protectionism
- Studying the effect of extensive borrowing on the economy (foreign debt, etc)
- federal government dealing with inflation in a country
Microeconomics
- Study of the economy at a small scale, for example the study of the economy of a coffee shop in Martinez by analyzing it's costs, profits, prices, etc.
- Can also be "personal" economics - i.e. studying your household's interaction in the market, exchange of labor/services for goods, etc.
- Studying personal economic activity such as rent control in a city, different types of marketstructures on a smaller scale (ex. the kiosko monopoly at school)

6. Give examples of positive and normative economic statements

positive
- An example of what a positive economist would say: "Argentina has an inflation rate of 20%" (stating the facts)
- "The unemployment rate is about 30%"
normative
- Economists state what should happen. I.e. To fix inflation, the central bank should use contractionary policy to reduce the money supply
Economists can argue over positive statements using statistics and facts. It is harder to argue over normative statements because they include opinions about how the economy should be-- they are acting as policy advisor's giving advice, rather than scientists revealing a study.

7. Which would a president rather have? A positive economist or a normative economist and why?
A president would rather have a normative economist because they are the ones who would be able to advice him about policy making, whereas a positive economist would only state facts which unless the president is an economist himself would not do him much good.
While a positive economist would still be useful to a president by giving him a clear idea of the economic situation in the country, a normative economist would then be able to use these facts and develop a strategy to solve them. Therefore, both types are
extremely necessary to the president, the normative one eventually helping him act accordingly.

8. Why do economists disagree?

Differences in scientific judgement - (hold different normative and positive views)

Differences in values

Disagree about the validity of alternative positive theories about how the world works
Economics is still a relatively new science, and therefore new theories and ideas are constantly being developed, which will cause disagreement among different minded economists

9. Circular Flow of the Economy:

What does it show?
- The circular flow of the economy model, shows how income flows from one place to another. On one side it shows the production of the product, and how the businesses must obtain the factors of production to build the product. On the other side we see the commercial side, the selling of the product to the consumer.
- The circular flow of the economy also has two loops in its model. The inner one shows us the flow of the goods or the services between the firms and the household. The household gives their land, labor and capital to the firms, which the firms use in order to return to the households goods and services.
- The outer loop shows the flow of dollars in the economy. The households buy these goods and services from the firms and then the firm in exchange uses the money they receive to pay the factors of production received from the households (wages). The profit is also part of the household since it is given to the owners who are part of the household.
Define product and factor markets
The product market is the market for goods and services, in which firms sell their good sand services to the household, which puts money into the product market. So revenue goes to the firms, which in turn supplies the market with more goods and services, and goods and services are sold to the household in return for savings.
The market for factors of production consists of the household selling these F of P, and the firms buying them. So land, labor and capital is supplied to the market by the households, while they recieve income from the market, firms recieve inputs for production while moeny in the form of wages and rent goes back to the market.
Where should government be and why?
The government should probably be in the middle, since it's main job is to collect taxes from all sides and provide services back to the community.

Chapter One - Ten Principals of Economics

tbrandon — Wed, 15 Aug 2007 14:36:21 CDT

Collectively answer the following questions based on the reading from Chapter One in your text. Due by Wednesday.

Take the online quiz after at http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html and send me the results.

Principal One: What is a trade-off?
Trade-off is about making choices, giving up one thing for another as nothing comes free. An example is the trade-off between a clean environment and a high level of income. In order to reduce pollution, the cost of production has to increase and because of a higher cost, the profit earning is lower, same goes to the wages, while the the price of the product shoots up.

Principal Two: What is an opportunity cost?
An opportunity cost is what you give up in order to get something. All decisions that you make have opportunity costs, whether they be related to economics or not: if you choose to take one road, the other road would be your opportunity cost. For example, the people who choose to go to college and study there for years face a major opportunity cost: this does not necessarily refer to the money spent on tuition and boarding, but the time spent. A college student could be working at a job and earning wages instead of writing papers and reading text books. Before making decisions one must decide wisely whether the benefit is worth the cost.

Principal Three: Marginal benefits vs. Marginal Costs
Marginal changes are defined as adjustments made to an already decided on action-- making it different fromtrade-offs. Theonly thing that can still be adjusted within this decision are the marginal changes. In order to be able to make these decisions, marginal benefits and marginal costs must be evaluated. The possible outcomes of a decision are analyzed by seeing if the marginal benefits outweigh the marginal costs. The term marginal is used, seeing as the benefits and costs are seen from an outside perspective. If the outcome of a decision has more disadvantages, then the marginal cost is higher, and if the outcome will have more benefits, then the marginal benefits are higher.

Example: A company procuces 10 shirts, and the total cost is $50. If they decide to increase production to 11 shirts, the total cost is $60. Themarginal cost is then $10, because it is measuring the change in cost over the change in quantity.

Principal Four: How are incentives important?
Incentives are important because they alter people's behavior. Policymakers have the power to create incentive in people and therefore cause people to do things.

Example:taxing gasoline will make people drive smaller fuel-efficient cars because people choose things that are more beneficial for them.
Example: the seat belt law. Driving slowly and carefully costs the driver time and energy, so people tend to drive more carefully when the benefits of careful driving are higher (ex. icy roads). Seat belts are well known to reduce the costs of the accident, which therefore causes a decrease in the benefits of careful driving. With seat belts, because of the feeling of security, drivers feel less incentive to drive slow and carefully. Thus the seat belt law causes fewer death per accident, but causes more accidents. This all depends on people's incentives in their actions and what they choose to do depending on these incentives.

Principal Five: Why is trade good?
Trade can make everyone better off; it allows everyone to specialize in what they do best. By trading, people can buy more G&S at lower cost. This also happens with countries. Trade can make everyone better off because it isn't like if one looses the other one wins, by trading both obtain profit.
Free trade allows countries to specialize in their strongest market, and by trading with other countries they are able to compliment each other with the different goods and services that they are each dominant in. This way, they can recieve a greater variety of goods and services while focusing on the efficient production of their specialized goods, and gaining a profit from it.

Example: Argentina trades with China, where Argentina exports meat and imports electronics. Argentina will make a higher profit by specializing in meat rather than developing an electronics industry.

Principal Six: What is a market economy?
A market economy is basically a economic system in which the government makes no intervention what so ever. This allows flowing of prices and choices for both the producer and the consumer. In a market economy, Prices are set based upon the principles of supply and demand.
* Note: There is no country with an absolute market economy. All governments intervene to some extent.
Market Power: A person can influence the market prices

example: Adam Smith's "invisible hand", free market society without government intervention

Principal Seven: What and how can markets make things better?

Markets increase the range of goods and services offered in an economy. The more choices between products, the high the competition between companies. As producers compete for consumers, they look for ways in which they can overcome the competition, which can be achieved by improving their items.

Principal Eight: Are are living standards and productivity related?
It can be seen that the living standards in a specific country are very closely related to their productivity, or how many goods and services they produce in a given time. A nation that can produce a large quantity of goods and services at an efficient rate will allow its consumers to enjoy a higher standard of living. This usually results from the possibility of offering more employment, and also enjoying a higher possibility of trade, which brings money into the economy and therefor gives consumers more benefits. Also, with higher productivity, consumers have a wider variety of goods and services and more income to be able to gove back to the economy.

Another aspect of the relationship between living standards and productivity is simply that workers with better living conditions will be more productive than those with lesser living conditions; for example, a person who is able to access adequate medical care will be able to recover faster from a debilitating accident than a person without such access, allowing them to get back to work faster.

Principal Nine: Why can't you just print more money?
The more money you print the less each bill is worth. This then causes inflation because businesses have to charge more for the same product to equal their old profits.
Inflation: Increase in the level of prices in the economy

that's what happened in Germany - kept printing money and it became worthless

Principal Ten: Why is there a trade-off between Inflation and Unemployment?
When their is too much money printed inflation occurs. Through inflation the money begins to loose its value. With high prices that companies refuse to lower (sticky prices) and a weak economy, customers begin to make sacrifices and dont buy as much of products they would have bought in the past or directly just dont buy those products at all. When people dont buy the products companies have to offer, the companies loose profit. If they loose profit they lay-off or fire employees. Thus unemployment occurs.

Phillips curve shows the trade-off between inflation and unemployment - as one goes up, the other down and vice-versa

Example: Argentina has an approx. 20% inflation rate. However, the govt. doesn't want to tackle inflation in the fear of hurting employment (which has been a big problem in the past). People would rather have a job and pay more for goods than have no job.

Economics - For Those Who Dare

staces — Tue, 22 May 2007 10:53:51 CDT

A place to discuss, investigate, and share economics as a community. Using these resources throughout the year we will delve more deeply outside of class into economics and its issues. Each of you has the power to contribute to and learn from this endeavor.

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