Macroeconomics Notes - Opportunity Cost, Supply & Demand - PDF

Ch.2 “The Power of Trade and Comparative Advantage” ​ Trade & Preferences Trade can increase value among individuals ​ Example: The Story of the Founder of eBay (Products move from people who value them less, to those who value them more) ​ Specialization, Productivity, and the Divis...

Ch.2 “The Power of Trade and Comparative Advantage” ​ Trade & Preferences Trade can increase value among individuals ​ Example: The Story of the Founder of eBay (Products move from people who value them less, to those who value them more) ​ Specialization, Productivity, and the Division of Knowledge When people trade, it allows them to specialize in producing one thing rather than trying to produce everything they need. Absolute Advantage (Accounting) vs Comparative Advantage (Opportunity Cost/ Economics) ​ Absolute Advantage is achieved when one producer is able to produce a competitive product using fewer resources, or the same resources in less time (Martha Stuart has an Absolute Advantage in ironing. She can iron a shirt better and in less time than someone else. Should she iron her own shirt, NO SHE’D BE WASTING HER TIME. She’s better off producing her TV show) ​ Comparative Advantage considers the opportunity cost when assessing the viability of a product, accounting for alternative products. Opportunity Cost is the value of the next-best alternative when a decision is made, it’s what is given up. ​ Comparative Advantage A principle that states that a nation has a production activity that incurs less than that of another nation, which means that the trade between the two nations can be beneficial to both if each specializes in the production of a good with a lower relative opportunity cost. The key is that the difference in opportunity cost allows each country to produce something more cheaply than the other. #1 - Production Possibility (OUTPUT) Cars Laptops Japan 20 70 Germany 20 50 #2 - Units of Labor Computers Shirts  France 12 units (workers) of labor 2 units of labor Italy 1 unit of labor 1 unit of labor The easiest way to solve these questions? -​ Find Opportunity Cost -​ Let parties specialize according to their comparative advantage. -​ Decide whether trade will take place or not OPPORTUNITY COST TABLE Cars Laptop Japan Sacrifices #? Laptops ? Cars Germany ? Laptops ? Cars What’s the opportunity cost of Producing 1 Car in Japan? 1x70 / 20 = 3.5 Laptops What’s the Opportunity Cost of Producing 1 Laptop in Japan? ↖️ 20 Cars 70 Laptops 1 Cars 1 Laptop 1x20 / 70 = 0.286 Germany 20 Cars 50 Laptops 1 Car 1x50 / 20 = 2.5 Laptops Absolute Advantages (Can produce more with given resources): -​ Japan In Laptops Comparative Advantages (Lower # of sacrifices): -​ Germany In Cars  SPECIALIZING Cars Laptops Japan 0 70 Germany 20 0 Computers Shirts France 12 2 Italy 1 1 Find Opportunity Cost: 1 x 12/2 = 6 1 x 2 /12 = 0.6 Labor Table SHORTCUT For Opportunity Cost 20 70 20 50 Divide across () 🔽 Flip and divide again () 20/70 = 0.286 70/20 = 3.5 20/50 = 0.4 50/20 = 2.5 Italy has a comparative advantage in producing computers France in shirts  ​ The Production Possibility Frontier (PPF) It shows all the combinations of goods a country can produce, given its productivity and supply of units. (The steeper (when it steeper, you’re sacrificing more) the curve, the higher the opportunity cost) TIP: More labor = NOT DOING WELL Adam Smith on trade: “What applies to countries, applies to people” Trade & Globilization “Globalization is the advantage of human cooperation across national borders” ​ Opportunity Cost and Comparative Advantage Ch. 3 - Supply & Demand -​ The demand for curve for oil -​ Consumer surplus -​ What shifts the demand curve -​ Important demand shifters Income, Population, Price of substitutes, Price of complements, Expectations, and Tastes Demand Demand Curve: A function that shows the quantity demanded at various prices. (Meauseres the amount consumers are willing to pay for a good or service) Example: Black Friday’s change in prices -​ When the price changes, the quantity changes. And when the price of something is higher, only those who truly need it will pay a higher price. When the price is lowered, ANYONE can easily purchase the good or service. Price (Y) Quantity Demanded (X) $ 55 5 $ 20 25 $5 50 ^ Downward Curve Horizontal: The quantity buyers are able/willing to purchase at a given price Vertical: Maximum price buyers are willing to pay  Law of Demand Derivation: Each additional unit of something is worth less than the previous unit Marginal means ONE The lower the cost, the greater the quantity demanded Exceptions: Luxury goods (people want to be different. So when anyone can buy a designer product they like, they'll no longer want it. (viewed as less exclusive) Consumer Surplus “The gain from an exchange” Price paid vs Price willing to pay MOST (Positive): When someone was willing to pay the maximum price LEAST (Negative): When someone was willing to pay under the market price Consumer Surplus = Area of Triangle = ½ * Tri-Base * Tri-Height ( ½ * (Q1 - 0) * (P2-P1) ) A change in price results in a curve called the change in quantity demand. Normal Goods: Goods for which demand increases when incomes increase. Example: Preferred Goods; Pencils, Inferior Goods: Goods for which demand decreases when income rises. Example: Ramen Noodles, Luxury Goods: Goods that are purchased as a symbol of “status” Examples: Fragrances, Watches, Elevators In A House, AS PRICES GO DOWN QUANTITY INCREASES Griffin Good - COMPLETE OPPOSITE ( Demand Up-Quantity Up; D-Down- Q-Up ) Shift In Demand: Complements - Goods that are often consumed together. Example: (Cereal & Milk; Hotdogs & Buns) (Decrease In Price —> Decrease In Demand) “There’s A Sale Going On, You Could Get More” Population - Substitute Market - Two goods that can serve the same purpose. ​ Example: Choosing Between Coke and Pepsi (Consumers will buy the one where they feel they’re getting a “better deal”) Expectations - Demand for everything goes up due to everyone expecting a storm ​ Example: Toilet Paper. Water, Eggs, Milk, Batteries, … (NO CHANGE IN PRICE) Tastes - ​ Example: Frozen Fruits > Normal (Due To Mold) ______________________________________________________________________________ Supply Curve - Shows how much of a good suppliers are willing to supply at a different price Price High —> Supply More GDP (Gross Domestic Product) - The market value of all finished goods and services produced within a country in a given period of time. -​ Within US Borders -​ Only count the GDP from when it was initially produced and sold. -​ GDP GROWTH RATE GDP(Current) - GDP (Historic) / GDP(Historic) x 100 = GDP GROWTH RATE (%) GNP (Gross National Product) - an estimate of the total value of all the products and services turned out in a given period by the means of production owned by a company’s residents. -​ Non-US Countries/Companies; Dual Citizenships -​ Is this the final step? Or is there another step before it’s able to be put on shelves -​ Working in the US? (US GDP and their country’s GNP) Real vs Nominal GDP Real (Calculated using prices at the time of sale (not adjusted for inflation)) Nominal (Have been adjusted for changes in inflation) -​ TO CONTROL INFLATION, FIND REAL GDP -​ TO FIND “GDP PER CAPITA”, DIVIDE BY POPULATION  -​ National Spending Approach to Calculating GDP (Y = C + I + G + NX) -​ Y (Nominal GDP) -​ C (Consumption (Private spending on goods and services) / Employees -​ I (Investment (Private spending on tools, plants, and equipment) / Businesses -​ G (Government Purchases (Except transfer payments) / MIlitary, ect. -​ NX (Exports - Imports)/(Net Exports) -​ Value of Exports minus the Value of Imports The Factor Income Approach (................): the other side of the spending coin 1.​ Employee Compensation (Income To Workers) 2.​ Rent (Income TO Landlords) 3.​ Interest (Income to Owners of Capital) 4.​ Profit (Interest to Business) GDP = Employee Compensation + Rent + Interest + Profit GDP DOES NOT INCLUDE (...........) GDP is a rough estimate of the standard of living in a nation -​ It can’t distinguish between a positive economic indicator(increased spending due to disposable income and negative indicators(increased spending on credit cards due to loss of wages or declining real values of wages). -​ Doesn’t capture the distribution or growth and, as a result, cannot reflect inequality. -​ Developing countries can seem much poorer since home production isn’t included in the GDP Chapter 7: The Wealth of Nations & Economic Growth ​ Understandng the wealth of nations ​ Incentives & Institutions Economic Growth is defined as increases in living standards over long periods. Living Standards are the level of economic prosperity at a given time. Best measured by the level of rel GDP Economic Growth is the change or progress inliving standards over periods of 50 or 100 years or more. Best measured by the growth rate of real GDP per capita. -​ Factors of production - physical capita, human capita, and technigical knowledge. -​ Incentives -​ Institutions - laws; regulations; customs; practices; orginizations; social norms that structure incentives. Physical Capita - The stock of tools that include machines, structures, and equipment. Human Capita - The productive knowledge and skills that workers acquire through education, training, and experience. Technological Knowledge - Focuses on effectives and innovation. It allows for the more effiicienct production of more and better good and services. Rule of 70 is a calculation for how many years it’ll take for your money (or investment) to double given a specified rate of return. (IF YOU’RE GIVEN TWO, SUBTRACT THE DIFFERENCE) Year2 ( current year ) - Year1 / Year 1 - 1 x100 = Growth Chapter 9 Savings, Investments, and the Financial System Part #1 Who saves the money? (Savers) → (Financial System) → (Investors / Borrowers) ​ The supply of savings ​ The demand to borrow ​ Equilibrium in the market for loanable funds ​ The Role of Intermediaries: Banks, Bonds, and Stock Markets No production is involved with bonds. Bonds = Debt The government has a monopoly over money. They’ll print money as/when … Interest-Based Banking - Asset Based Banking - The Origin of Money -​ Barter Problems w/ Barters - Mutual coincidence of wants, Portability, Fusability, Durability -​ Coinage (Coins / ”Precious Metals” appreciate over time, compared to paper money. -​ Fiat Money (Paper Currency) Aggregate Income / GDP(Y) = C + G + I + NX Y - C - G = I (S=Savings) Debt = Consumption beyond income 4 Major factors determine the Supply of Savings -​ Smoothing Consumption (Borrowing (FAFSA for degree), Saving (Income higher than consumption), Dissaving (dying with debt or working forever to pay it off) ) -​ Impatience (“I Need To Consume TODAY”) -​ Marketing & Psychological Factors (uncertainty about the future) (makes people want to buy something they don’t need) -​ Interest Rates (compounding on borrow money) *Positive Time Preference: The desire to have goods and services sooner rather than later “Click Here, Pay Later” Other Impactors -​ MARKET FOR LOANABLE FUNDS: It occurs when supplies of loanable funds (savers) trade with demanders of loanable funds (borrowers). Trading in the market for loanable funds determines the equilibrium interest rate.