Macroeconomics midterm OCT 1st Methodology of economics The first thing to do is to gather empirical evidences to build up a robust economic principle generalizations and theory more and representative samples are needed Income and consumption are directly proportionate Income could be affected by inflation rate assets debts children health status consumption desires established economic principles tend to be over simplified because many times we don t take in account the additional variables ceteris paritus assumption other things being equal only when other variables aren t taken into account does the economic principle become valid Economists simplify the situations to not complicate things in order to explain the concepts Econometric models mathematical equations that explain the relation between economic concepts ie Income and consumption Assets real assets estates and property and financial assets stocks and bonds Observations word of mouth cost of operation before and after the technological innovation comparison of before and after the innovation After gathering empirical evidences and establishing economic principles economists need to apply it to practical situations Even the best economy is bound to have problems This is when the economists need to apply the concepts into economic policies to solve real world problems ultimate goal of economists Goals of economic policies economic growth the amount of commodity produced as a country to increase as much as possible percentage wise annually GDP is used to identify the economic growth The historical high of growth 3 china has an economic growth of 10 because china is still a developing country By contrast the US has less space to grow since it s already a flourishing country achieve low unemployment not zero unemployment because it s impossible There are always people between jobs or looking for other jobs when this concept is presented on the PPF economists assume that they have achieved the lowest possible unemployment rate because zero UER is impossible basically if zero UER is considered the economy will never be on the PPF Inflation when the majority of prices go up For the majority population inflation is harmful The wage earning majority taking nominal incomes are deprived of their consumption abilities Oscillation between 2 4 is normal efficiency to operate on the PPF full employment of the resources and maximum efficiency When least amount of resources is used to achieve the most amount of output maximize the value of output at the lowest possible cost equitable distribution of growth the average standard of living may increase but that doesn t mean an equal increase in SOL among all classes of people Business cycles components expansion phase when the GDP increases peak recession phase when the GDP decreases trough two consecutive quarters of negative growth absolute decline and when research group in the national bureau of economic research BER take into account many factors and declare that the economy is in recession During an expansion the economic growth GDP increases and UEP decreases Inflation doesn t necessarily increase but the pressure for price to increase intensifies When the economy is very close to the PPF there is a heightened possibility to inflate Prices tend to be upwardly flexible During a recession opposite The inflation will remain stable at the beginning of a recession and eventually increase after the tendency to decrease deflation Prices tend to be downward inflexible When deflation happens business makes less profit and industries may close causing unemployment to increase then causing a pessimistic consumption habit among consumers downward spiral Macroeconomics recitation TA Ercan Koradas What is economics study of choices made under scarcity ie An economic choice At the individual level time money At the national level 1 labor 2 capital physical capital mechanical equipment human capital skills knowledge 3 land 4 entrepreneurship Production Possibilities Frontier PPF suppose we have two alternatives tank production defense wheat production civilian Macroeconomics Graphs September 17th The Gini coefficient how the wealth of a nation is distributed among the population Complementary economic goals improve both goals at the same time efficiency and economic growth Economic growth and low unemployment Low unemployment and equal distribution Contradictory economic goals improve one goal but harm another technological development and low unemployment Economic growth and inflation occasionally The more equality in an economy the more economic growth benefits all sectors of the economy It s still important to have a certain degree of inequality in order for an economy to take off Afterwards the economy takes off it becomes self sufficient Economic statements Normative recommendations opinions to economic policies Positive factual statements regarding the economy Microeconomic looking at a focused segment of the economy people with MBAs from Harvard have a higher rate of individual saving decision Macroeconomic looking at the economy at large as a whole employment rate in the US today Ways to describe the economy Narrative tabular graphic mathematics Graphic explanation determine the in dependent variables A and B ie Income independent x axis and consumption dependent y axis a compilation of the coordinates forms the consumption line which helps economists determine the behavior of consumers linear relationship constant increase in the two factors Y a bx y is the dependent variable a is the intercept b is the slope x is the I V Doesn t matter if the market is illegal or legal or if the market is as large and complicated as Wall Street transactions as long as there are producers interacting with consumers there is a market Consumer product market companies resource markets Mathematical SEPTEMBER 19TH SUPPLY AND DEMAND Purely competitive Monopolistic Oligopolistic Criterion Number of producers ie cell phone carriers farmers product differentiation entry buyers capital cost of investment SUPPLY AND DEMAND DEMAND Quantity demanded and price are inversely proportional downward slope on the SD graph Important terminology It s important to distinguish between demand and quantity demanded Positive change in demand shift rightward Negative change in demand shift leftward change in DEMAND differ from quantity demanded Factors of additional variables income direct depends normal goods QD increases when