ECON 1 1st EditionLecture 3Outline of Last LectureI. Chapter One: The Ten Big Ideas, ideas 4 7‐II. Externalities and Market PowerOutline of Current LectureI. The Ten Big Ideas, ideas 8 10‐II. Chapter Two: The Power of Trade and Comparative Advantage Current LectureChapter One: The Ten Big Ideas cont.Big Idea #8: Economic booms and bursts cannot be avoided but they can be regulated (moderated).· Policy makers use fiscal policy and monetary policy at some point to attempt to smooth out economic volatility.· Difference between monetary and fiscal policy:o Monetary‐how much money is printedo Fiscal tax laws‐ and regulations· How would you decide to print money or not? What would you look at?o Inflationo How much money is flowingo Natural disasterso Gross Domestic Producto ManufacturingBig Idea #9: Prices rise when the government prints too much money. Def.: Inflation: an increase in the overall level of prices in an economy.· Long run: If you have too much money flowing around, prices have to rise to keep a balance. If prices didn’t rise, the value of the dollar would decrease.· Printing too much money in the short run:o Makes the purchase power increaseo Stimulates the overall level of spending and thus the demand for goods and services will godowno The result of higher demandàmay cause firms to raise their prices (over time), but in the meantime it encourages them (the firms) to hire more workers and produce a larger quantity of goods and serviceso Overall, more hiring means lower unemploymentBig Idea #10: Central banking is a hard job.· Too much money leads to inflation.· Not enough money leads to recession.· Need to find just enough money to avoid both inflation and recession.Ø Ex: Investors move money from Greek banks and look at rest of Europe banks to invest their money.See Spain is not doing so well. As an investor, take money out of Spanish banks…they become affected. Spain owes money to France, now France goes down. Now all European is in trouble. We’re linked to Europe, so now we’re affected, not as much as European counties but somewhat. So the international market comes into play.Chapter Two: The Pow e r o f Trade and Comparative Advantageü Central Ideas:1. Trade makes people better off when preferences differ.2. Trade increases productivity through specialization and the division of knowledge.3. Trade increases productivity through comparat v e advantag e.The Production Possibilities Frontier (PPF): Graph that shows combinations of output that the economy can possibly produce given the available factors and production technology.Ø Ex: Trade between two individuals and two goods.o A cattle rancher and a potato farmer.Q: What if the cattle rancher is better at his specialty and at producing potatoes? Should he trade?A: Production Opportunities: Minimum neededto make1 oz ofAmount produced in8 hoursFarmerMeat: 60 min/oz Potatoes: 15 min/ozMeat: 8ozPotatoes: 32 ozRancherMeat: 20 min/oz Potatoes: 10 min/ozMeat: 24 ozPotatoes: 48 ozConclusion: Rancher is better at both!GradeBuddy:Farmer's P PF : [>.ofP,,J.. -h'" p....; >;litic.>