Economics: COVID-19, Policies, and Global Impact

• These notes cover key economic concepts and policies, including the impact of COVID-19, climate change, monetarist and Keynesian economics, supply-side and demand-side policies, exchange rate policies, and global economic harmonization.

Economics and Global Issues

• The COVID-19 pandemic presented unprecedented challenges globally, causing illness, death, and economic disruption.
• Developing countries were hit particularly hard. The World Bank estimated that around 100 million people were pushed into extreme poverty in 2020 alone.
• Governments globally adopted a "spend now, pay later" approach, which involved increasing borrowing to address immediate needs. This was a difficult choice, especially with upcoming elections.
• Central banks like the Federal Reserve, European Central Bank, and Bank of England implemented quantitative easing to stimulate economies.
• Quantitative easing involves creating more electronic money to encourage borrowing and spending.
• Central banks face the challenge of balancing the money supply to avoid recession or inflation, aiming to keep inflation around 2% per annum.
• Economists played a crucial role in advising on economic choices during the pandemic.
• Economists can play a central role in addressing the climate emergency by advising on choices to cut emissions and achieve carbon neutrality.
• Achieving the IPCC's goal of limiting global warming to 1.5°C above pre-industrial levels requires careful economic choices.
• People's actions significantly impact the environment, making environmental considerations crucial.

Key Economic Concepts

• Macroeconomics: Focuses on the economy as a whole, studying aggregates like national income, unemployment, and the general price level.
• Aggregate demand: The total level of spending in the economy by consumers, firms, and the government.
• Aggregate supply: The total amount of goods and services produced in the economy.
• Microeconomics: Examines individual parts of the economy, such as households, firms, and industries, and their interactions.
• Inflation: A general rise in the level of prices throughout the economy. The rate of inflation is the percentage increase in prices over a 12-month period.
• Recession: A period of declining national output, with negative economic growth. Officially, it's defined as output declining for two or more consecutive quarters.
• Balance of Trade: A component of the Balance of Payments, reflecting a country’s exports minus its imports. A trade surplus occurs when exports exceed imports. A trade deficit occurs when imports exceed exports.
• Unemployment: The number of working-age people actively seeking employment but currently without a job.
• Demand-side policy: Aims to influence spending and aggregate demand through measures like cutting taxes, increasing government spending, or reducing interest rates.
• Supply-side policy: Seeks to directly influence the level of production and aggregate supply through measures like tax incentives for investment, training schemes, or infrastructure development.
• Opportunity Cost: The value of the next best alternative forgone when making a choice.
• Rational choice: Weighing the benefit of an activity against its opportunity cost.
• Movements along and shifts in the demand curve: A change in price leads to a movement along the demand curve. A change in other factors (determinants) causes the demand curve to shift.
• A change in demand means the entire curve shifts. A change in quantity demanded means a movement along the curve.

Supply

• Supply Curve: Illustrates the relationship between a good's price and the quantity supplied over a specific period.
• Substitutes in Supply: Goods where increased production of one necessitates reducing production of the other.
• Goods in Joint Supply: Goods where the production of one results in the production of the other.
• Price and Quantity Supplied: Generally, as the price of a good increases, the quantity supplied also increases.
• Higher production costs lead producers to require higher prices for additional output.
• A higher price for a good makes its production more profitable, encouraging firms to produce more.
• Over time, sustained high prices attract new producers, increasing total market supply.
• Short run: Supply can change somewhat as some inputs remain fixed.
• Long run: All inputs can be changed, new firms can enter, and existing firms can exit, making supply more elastic.

Price Elasticity of Supply (PES)

• Measured using the arc elasticity formula: PES = (%ΔQs) / (%ΔP) = (ΔQs / average Qs) / (ΔP / average P)
• Measured using the point elasticity formula: PES = (dQs / dP) × (P / Q)
• A vertical supply curve has zero elasticity.
• A horizontal supply curve has infinite elasticity.
• When two supply curves intersect, the steeper curve has lower price elasticity of supply.
• Any straight-line supply curve starting at the origin has an elasticity equal to 1, regardless of its slope.
• If the supply curve passes through the origin, Qs = bP, and PES = 1.

Income Elasticity of Demand (IED)

• Measures the responsiveness of demand to changes in consumer income.
• Formula: YED = (%ΔQd) / (%ΔY)

Determinants of IED

• The degree of ‘necessity’ of the good:
  • Basic goods have low income elasticity of demand.
  • Luxury goods have high income elasticity of demand.
• Normal goods: Demand increases as income increases.
  • If IED > 1, the share of consumer income spent on the good increases as income increases.
  • If 0 < IED < 1, the share of consumer income spent on the good decreases as income increases.
• Inferior goods: Demand decreases as income increases (negative IED). Examples include supermarket value lines and bus journeys.

Income and Substitution Effects of Price Change

• Normal Good: As the price of good X rises:
  • Substitution Effect: Consumers substitute away from good X due to its higher relative price.
  • Income Effect: Consumers' real income falls, leading to a reduction in consumption of good X.
  • Both effects reinforce each other, leading to a significant decrease in the quantity of X demanded.
• Inferior Good: As the price of an inferior good X rises:
  • Substitution Effect: Consumers substitute away from good X due to its higher relative price.

Explore economic concepts and policies, including the impact of COVID-19 and climate change. Discuss monetarist and Keynesian perspectives, supply-side and demand-side policies, and exchange rate strategies. Understand the challenges of global economic harmonization and the responses to economic crises.