Econ 102 1st Edition Lecture 6 Outline of Last Lecture I. Examining Unemployment (6.1)II. Categories of Unemployment (6.2)III. Price DataIV. Two measures of “The” Price LevelV. Problem with using the CPI as the Official Price Level EstimateOutline of Current LectureI. Inflation Since the Industrial RevolutionII. Cost of Living Adjustment (COLA)III. Who Cares about Inflation?IV. The Costs of InflationV. Chapter 7: The classical equilibrium model of labor and ProductionCurrent LectureI. Inflation Since the Industrial Revolutiona. World War II and 1970’s recessioni. Learned that we cannot print money to help the economy/ pay billsii. Only causes huge inflationb. 1700-1870i. No Inflationii. Prices were stableThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.c. How to put Historical Prices in Perspectivei. Not perfect, holds goods and services constantii. Pyear(1+ inflation rate)^# years since previous formulaiii.Year Formula Inflationiv. P1820(1+.00)^50v. Ex: Miners making $2 a day 1. Sounds like not enough but actually =$40 a day todaya. They could pay $1 for housing and the other dollar on wine, women, and illegal activitiesb. No stores then, different lifestyle2. To put in modern term (for years up until World War I)multiply by 15 or 20 (price level)3. 1970’s to now multiply by 5-10a. Next Time you hear a price on TV use this II. Cost of Living Adjustment (COLA)a. Automatic increases in wages or other payments that are tied to the official CPI estimate.b. CPI over-estimates inflation therefore COLA does tooi. Workers are being paid a little too much1. Good for worker but bad for firmc. Social Security (SS)i. a forced savings systemii. 13% your total compensation is taken by the government1. Burden shared by firm (~6%) and worker (~6-7%)iii.Get it back when you retire with interest and COLAiv.Yet because it is over-estimated for inflation…1. The government is dishing out too much to those receiving SS2. The Federal Government is trying to shift the official Price Level from the CPI to the PCE in order to save money on both its wage bills and its social security obligations. Organized labor and the American Association of Retired People (AARP) are fighting back!a. Have been trying to do this since the Clinton administrationb. hopefully in the next few years move to the chain estimatei. Eudey’s been saying 2 years since she started teaching- still hasn't happenedd. Application 4i. Stories about how long new products take to be entered into the CPIe. Inflation Table and Graphi. Experiments to get US out of recessionIII. Who cares about Inflation?a. Anticipated Inflationi. Inflation is expected1. EX: 2% more revenue therefore 2% pay increase, agreed upon, no problemsii. slow and steady wins the race- they can plan for it and everyone knows what to doiii.Relatively minor impact on the economyb. Unanticipated Inflationi. Income Distributional problem1. some people are worse off, some people are better off2. EX: price of apples goes up- good for apple sellers, bad for apple buyersii. The purchasing power of your wage has falleniii.Just BadIV. The Costs of Inflationa. Menu Costsi. The costs associated with changing prices and printing newprice lists when there is inflation.ii. Cost of recalculating and reposting pricesiii.EX: Restaurant’s prices change therefore they must reprint their menuiv.Places of High inflation use a chalkboardb. Shoe-leather costsi. Costs of inflation that arise from trying to reduce holdings of cash.ii. Holding your money in cash doesn't evolve with inflation soput it in the bank to earn interest1. Debit cardsa. a way for people to not have to take out cash out to buy thingsc. Hyperinflationi. An inflation rate exceeding 50 percent per month.ii. Very disruptive to economic activityV. Chapter 7: The classical equilibrium model of labor and Productiona. Production functioni. The relationship between the level of output of a good and the factors of production that are inputs to production.ii. Graph as you add labor what happens to GDP(Y) output1. For aggregate GDP need input to get output2. Change between 0-L1 is greater than L1-L2a. because of diminishing returnsi. hire the BEST workers first- highly motivated, a lot of experience, highly productiveii. 2nd group hired is not as talented, not as productiveiii.3rd group hired- alcoholics “haha,” even less productiveiv.Also less resources (holding capital stock constant - competing to use cash register3. A change on the axisa. Movement along the curve4. A change of something other than the axisa. Shifts the curveb. Stock of capitali. The total of all machines, equipment, and buildings in an entire economy.ii. Moves so slowly and steadily that we will assume in this chapter its not changingc. Labori. Human effort, including both physical and mental effort, used to produce goods and services.ii. When there are only two factors of production, capital and labor, the production function is written as follows:1. Y = F(K,L)d. The Classical Labor Model Overviewi. The household supplies labor to the marketii. The firm demands labor based on how productive they believe the labor isiii.The price of labor is the real wage “in real terms”1. Wage= price x marginal productivity of labor(MPL)2. “Marginal cost” = “Marginal Benefit”3. MPL is the number products produced that day4. Marginal benefit of Labor to the firm5. Wages: marginal cost to the firmiv.Labor Supply Curve1. Upward
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