Introduction to Macro 09 04 2013 Stuff that goes beyond the textbook is not on tests Business Cycles Look at three things to study in economy GDP Employment rate Inflation rate Then we look at possible causes And two policies that can solve this Fiscal policies implemented by Gov Monetary policy implemented by federal reserve bank First midterm very beg of October All other important material is on the syllabus First Class Tuesday September 3 09 04 2013 Scarcity Problem chapter one Most fundamental problem in all of econ We look at individuals as part of social groups Are goal is to try and improve our material well being Econ is unique in that way We do this by satisfying humans wants and desires every economy So how do u do this By engaging in one of two activities that happen in Engage in the consumption of goods and services 2 categories of goods and services necessities and luxuries Only a fraction of our desires come from necessities Most is luxuries Engage in production of goods economic resources what does this mean 4 large categories of resources o Labor manual and intellectual o Land includes soil etc also includes mining anything under soil and property used in production process o Capitol goods machinery and raw materials o Entrepreneurial ability its different than labor because of one main criterion to classify an entrepreneur Schumpeter you have to engage in product innovation or process innovation Product innovation bring in a unique product in 1980 you had a P C introduced That is product innovation because it is a new thing that has never been Process innovation A new technology used to produce a consumer good OR a new organizational change introduced assembly line If asked which sector of the US economy used the assembly line first it was not in cars It was actually in Guns Thursday Sept 5 made up notes RH 09 04 2013 Macroeconomics Sept 5 Scarcity Problem Regardless of any economy at any time we have the use of economics resources to engage in the production of goods and services Human wants desires are unlimited our ability is limited Advertising and technological change increases our desires Satisfy the need temporary our needs and desires are limitless Economic Resources limited or unlimited LIMITED Quantitative point of view unlimited wants but limited resources SCARCITY PROBLEM There are a finite number of goods and services Scarcity problem has huge implications on economics Scarcity gives goods and services value If they were unlimited they would have no value Ex Adam Smith s Water Diamond Paradox Water is crucial to everyday life but diamonds are useless however diamonds are much more expensive than water Answer water is super abundant diamonds are super scarce If commodity is scarce it has a price Cost onto consumer If something becomes more scarce price goes up if something becomes more abundant price goes down Opportunity Cost Two components explicit cost and implicit cost Explicit cost the direct amount of money something costs Ex tutition a good etc 4 years of education Example Tuition 180 000 Room and Board 40 000 the difference between the cost of living in your home town to living in Manhattan Miscellaneous 20 000 Implicit cost things you sacrifice in order to obtain something can have monetary value or not Ex potential income time etc 4 years of education Example Lost income 72 000 difference between a 4 year full time job and part time job summer jobs you can hold during school Lost leisure no monetary value Lost investments money that could have been saved in a bank and accumulated interest money that could have been invested etc Total cost of education 312 000 and lost leisure time Worth it Average income of a high school graduate over a lifetime 1 1 5 million College graduate over a lifetime 2 2 5 million Takes about 15 years to make up the money lost to education afterwards it is all gain Implicit cost Instead of going to the movie staying home to study for physics exam if you stay home and study you get x points higher Implicit cost study time leisure time Product Possibilities Frontier PPF Technology utilized in economy is given static finite Capital goods finite assumptions before curve What is the implication if you move down the curve due to a war Defense goods increase civilian goods decrease Goods are finite cannot mutually increase in this example How would you calculate the opportunity cost of the extra defense goods Implicit Take the value of the civilian goods that you give up Explicit the amount of money needed to produce extra defense goods Tuesday September 10th 09 04 2013 Production possibilities frontier ppf Ppf graph is used when looking at national economy from a static point of view freeze time and look at it at a specific time Static point of view means The number of economic resources is given at that point in time And the level of sophistication of technology is also given Scarcity problem only way to increase number of defense goods to shift away from another resource So u can only increase one When calculating opportunity costs u need to account for implicit and explicit costs The reason the gain is less than the loss is because the law of increasing opportunity cost Which states that the efficiency of producing something goes down as u go to the extreme Because you should be using certain resources for one thing but u actually use it for something else Reducing efficiency For example u use a refrigerator engineer to produce guns he wont be as efficient as if he were producing refrigerators When u look at the national economy at which point does it operate Inside the ppf Very unlikely that anyone has ever operated on the ppf If it operate on the ppf two things r implied All resources in the economy are FULLY employed These resources achieve their highest level of productivity and efficiency Its possible to achieve this but it is highly unlikely The only time this has ever happened was the second half of the 90 s during the Clinton administration when were operating on the ppf Now we do not operate on the ppf but rather inside the ppf What kind of phenomenon causes this A recession A natural disaster but little impact on national economy Resources aren t used in the highest level of productivity and efficiency o Greek economy failed because of a lot of things Early retirement People were hired in the government sector every new election and people were given tenor So at one point 25 of people worked in the