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- HW: read chapters 6, 7, 8- HW #2 will be sent out soon and is due 2/26/14- Midterm 1 is in class Monday 3/3/14- Professor Kelly will not have office hours this Wednesday- Supply and Demand Review continued: o Domestic Consumers prefer an open economy most, then an open economy with a tariff, then a closed economyo Domestic Producers prefer a closed economy most, then an open economy with a tariff, then an open economy- Quota: (see example from previous lecture) replace the tariff with a quota- the government gives the license holder the right to import 2 unitso World price = \$2o Demand: P = 10 – Q or Q = 10 – Po Supply: P = (2/3)Q or Q = (3/2)Po Method 1 of finding the new equilibrium: Qs domestic + Quota = Qd domestic (3/2)P + 2 = 10 – P P quota = \$3.20 Q quota = \$6.80o Method 2: Find new equation of supply curve P = (2/3)Q + b Plug in either (5,2) or (8,4) 2 = (3/2)5 + b10D domS dom43.2 Pw2856.834.810 b = (-4/3) P = (2/3)Q – (4/3)o CS quota = \$23.12 (yellow)o PS quota = \$7.68 (red)o Lincense holder revenue = (1.2)(2) = \$2.4 (green)o DWL = \$1.80 (blue)- Macro aggregationo How to measure the economy: GDP: Gross Domestic Product; = the size of the economy in one number Employment or unemployment: how well we are utilizing our labor resources in one # Price level: how stable prices are in our economy in one #o GDP- focus on production How do we quantify the level of production in our economy?- E.g. new homes built, sweaters, cars, food produced, etc.- Use GDP: the market value of all final goods/services produced within a given period of time by factors of production located within a countryo Market value: add up the money value of all things Nominal value (current dollars) Vs. **Real value (constant dollars)o The market EXCLUDES: Items produced in previous years- E.g. selling a house built in 1941 has no effect on GDP- BUT hiring a realtor to sell the house produces aservice and raises the GDP- E.g. selling shares of a stock has no effect of GDP- BUT hiring a broker produces a service and raises GDP- E.g. selling land has no effect on GDP- E.g. selling an old car has no effect on GDP Illegal activities and non-market activities- E.g. opening a brothel in Madison has no effect on GDP- BUT opening a brothel in Reno raises GDP (because prostitution is legal there)- E.g. taking care of your own children has no effect on GDP- BUT hiring someone to take care of your children raises GDP Final good & services- E.g. producing tires: they could go on an old truck, or on a new truck, or be sold to an auto parts store- You can’t count the new truck AND count the tires that went on the new truck (because you are counting the tires twice)- *Beware of double counting Located within a country- GDP looks at “where your feet are”- It doesn’t matter if you are a U.S. citizen or not, your production still adds to GDP- GNP: Gross National Product- the same as GDP except that it only counts production from the citizens of a certain country (like the

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