Econ 100.1 AY2024-25 Sem 1 DC 2 PDF

ECON 100.1 Intro to Macro Theory & Policy Discussion Class 2 John Faust Turla University of the Philippines School of Economics September 6, 2024 For today 1 Some Economic Concepts 2 Economics as a Field 3 More on Natural...

ECON 100.1 Intro to Macro Theory & Policy Discussion Class 2 John Faust Turla University of the Philippines School of Economics September 6, 2024 For today 1 Some Economic Concepts 2 Economics as a Field 3 More on Natural Experiments 4 Graphing (Extra) JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 1 / 68 Some Economic Concepts Review Textbook definition of economics: the study of how societies choose to use scarce productive resources that have alternative uses, to produce commodities of various kinds, and to distribute them among different groups. Three fundamental questions of economic organization: WHAT goods will be produced; HOW goods will be produced; and FOR WHOM goods are produced Put simply, economics is the study of how societies can manage its limited resources despite unlimited human wants and needs1. 1 Read: choice JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 2 / 68 Scarcity There are unlimited human wants and needs, but resources2 are limited. To get something that we like, we usually have to give up something else that we also like. Making these kinds of decisions requires us to trade off one goal against another. “There ain’t no such thing as a free lunch.” ▶ Consider parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of the family income for retirement or the children’s college education. ▶ When they choose to spend an extra dollar on one of these goods, they have one less dollar to spend on some other good. If scarcity involves making a choice, what is the best choice? How can the economy make the best use of its limited resources? 2 Resources are the instruments provided by nature or by people that are used to create goods and services. So when I talk about resources, I mean inputs or factors. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 3 / 68 Weighing benefits vs. costs due to trade-offs Because people face trade-offs, making decisions requires comparing costs and benefits of alternative courses of action. In many cases, however, the cost is not as obvious as it might first appear. Consider the decision to go to college. ▶ The main benefits are intellectual enrichment and a lifetime of better job opportunities. ▶ Costs? You might be tempted to add up the money you spend on tuition, books, room, and board. Yet this total does not truly represent what you give up to spend a year in college. Two problems with this calculation: 1 It includes some things that are not really the costs of going to college. Even if you quit school, you need shelter and food. 2 This ignores the largest cost of going to college—your time. For most students, the earnings they give up to attend school are the single largest cost of their education. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 4 / 68 Opportunity costs3 Definition The opportunity cost of an item (or decision) is what you give up to get that item (or to choose that decision). It is the value of the next best alternative that the decision forces the decision-maker to forgo. When making any decision, decision-makers should be aware of the opportunity costs that accompany each possible action. 3 Opportunity cost vs. explicit money cost: The true opportunity cost of, say, a car is not its market price but the value to their potential purchasers of the other things (like refrigerators) that could have been made or purchased instead. But isn’t the opportunity cost of a car related to its money cost? Normally, yes. The two costs are usually closely tied because of the way in which a market economy sets prices. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 5 / 68 What is the best among different alternatives? Scarcity forces us to make choices. But what is the best choice given limited resources? There must be an optimal choice among the various alternatives we are confronted with. An optimal decision4 is one that best serves the objectives of the decision maker, whatever those objectives may be. It is selected by explicit or implicit comparison with the possible alternative choices. The term optimal does not mean that we, the observers or analysts, approve or disapprove of the objective itself. What is our basis (or criterion) in deciding which is optimal? 4 Much information and calculations are necessary in order to come up with such, but these are costly and difficult, making the decision-maker settle on the first possibility he/she can live with. The decision maker may be willing to choose this even though he recognizes that there might be other options that are better but are unknown to him. This way of deciding is called satisficing. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 6 / 68 Efficiency Definition In economics, we say that an economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off. If we are in a position such that a person cannot (impossible) be made better off without making someone else worse off, then this position is efficient. At this point, an exchange would therefore be inefficient. Example: If you have a bag of your favorite candies, and a friend asks for one, as long as you feel as though you are losing something by giving him one, the exchange is inefficient – even if his increase in happiness means only a slight drop in yours. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 7 / 68 Efficiency Definition In economics, we say that an economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off. It follows that if we are in a position such that a person can (possible) be made better off without making someone else worse off, then this position is inefficient. At this point, an exchange would be efficient. Example: If you accidentally purchase a pair of shoes that do not fit you but fit your friend, and your friend buys the same pair of shoes that do not fit her but fit you – you would both be made better off by trading shoes. You arrive at an efficient outcome if you trade shoes. The position you were in before the trade was inefficient. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 8 / 68 Efficiency Imprecise Definition: “Avoiding Waste” Suppose you are a farmer who grows strawberries. But you hate them. In fact, it’s not clear why you’re growing them. Probably, you just inherited the farm that has strawberries on it. And realizing that you don’t like the taste, you throw them away. This is wasteful. Being wasteful, it’s not efficient. So, how would you eliminate the waste and achieve a more efficient outcome? I could give the strawberries to my neighbor who likes them very much. Because efficiency implies avoiding waste, society is getting the maximum benefits from its scarce resources. Note: Efficiency does not mean that outcomes are necessarily fair, ethical, or equitable, but it reflects an important idea about economic outcomes. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 9 / 68 Economics as a Field Some models discussed 1 Theory of inflation: printing too much money causes prices to increase more rapidly M =⇒ P 2 Returns to education: each additional year of education causes your future wages to rise 3 Circular flow model of the economy: how pesos flow through markets among households and firms 4 Competitive market (supply and demand): numerous price-taking buyers and sellers of a homogeneous good or service JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 10 / 68 Economic Model 5: The Production Possibility Frontier Each economy has a stock of limited resources. In deciding what and how things should be produced, the economy is in reality deciding how to allocate its resources among the thousands of different possible commodities and services. It must choose among different potential bundles of goods (what), select from different techniques of production (how), and decide in the end who will consume the goods (for whom). To answer these three questions, every society must make choices about the economy’s inputs and outputs. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 11 / 68 Economic Model 5: The Production Possibility Frontier Inputs or factors of production are commodities or services that are used to produce goods and services. ▶ Land: natural resources ▶ Labor: human time spent in production ▶ Capital: outputs of an economy that are produced in order to produce yet other goods) Outputs are the various useful goods or services that result from the production of processes and are either consumed or employed in further production. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 12 / 68 Economic Model 5: The Production Possibility Frontier The PPF is an analytical tool that shows the maximum amounts of production (outputs) that can be obtained by an economy, given its technological knowledge and quantity of inputs available. ▶ Key assumption: resources are fully employed ▶ Menu of choices the economy can choose from The PPF can be used to illustrate the following concepts: ▶ Efficiency, that is, when the economy achieves the maximum amount of output possible given the economy’s inputs ▶ Trade-offs and opportunity costs which is a result of scarcity or limited resources ▶ Inefficiency, that is, when the economy has unemployed resources ▶ Unattainable or infeasible points ▶ Pushing the PPF outward or economic growth JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 13 / 68 Economic Model 5: The Production Possibility Frontier You have a production possibility frontier showing a hypothetical economy that produces warships and grains only. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 14 / 68 Economic Model 5: The Production Possibility Frontier Points along the frontier, A, B, and C, are efficient points, because they achieve the maximum amount of output possible, given the economy’s inputs and technology. Point D is an inefficient point since it does not maximize the level of output possible given the current resources and technology. Point E is an unattainable point. The economy cannot produce its corresponding level of output, given its current resources and technology. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 15 / 68 Economic Model 5: The Production Possibility Frontier Because resources are limited, society has to face trade-offs along the frontier. Trade-off is choosing to produce or consume one thing that entails giving up another thing. The value of the trade-off or the value of what you give up in order to gain something else is called the opportunity cost or the value of the good or service foregone. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 16 / 68 PPF: Trade-offs and Opportunity Costs JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 17 / 68 PPF: Trade-offs and Opportunity Costs When the economy moves from A to B, society produces 100 more cars at the expense of producing 200 fewer computers. The opportunity cost of 100 cars is 200 computers. Simply, one car is to two computers. Notice that the opportunity cost is measured as the slope of the PPF. However, this is not constant. This depends on the shape of the PPF. The opportunity cost of a car is highest when the economy is producing many cars and few computers such as point E. When the economy is producing few cars and many computers such as at point F, the frontier is flatter, and the opportunity cost of a car is lower. Economists believe that production possibilities frontiers often have this bowed shape. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 18 / 68 PPF: Trade-offs and Opportunity Costs When the economy is using most of its resources to make computers, the resources best suited to car production, such as skilled autoworkers, are being used in the computer industry. Because these workers probably are not very good at making computers, increasing car production by one unit will cause only a slight reduction in the number of computers produced. Thus, at point F, the opportunity cost of a car in terms of computers is small, and the frontier is relatively flat. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 19 / 68 PPF: Trade-offs and Opportunity Costs In contrast, when the economy is using most of its resources to make cars, such as at point E, the resources best suited to making cars are already at work in the car industry. Producing an additional car means moving some of the best computer technicians out of the computer industry and turning them into autoworkers. As a result, producing an additional car requires a substantial loss of computer output. The opportunity cost of a car is high, and the frontier is steep. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 20 / 68 PPF: Trade-offs and Opportunity Costs What is the opportunity cost of producing a car? −∆(quantity of computer) ∆(quantity of cars) What is the opportunity cost of producing a computer? ∆(quantity of cars) −∆(quantity of computers) The PPF shows the trade-off between the outputs of different goods at a given time, but the trade-off can change over time. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 21 / 68 PPF: Shift vs. Movement A movement along the PPF is characterized by society’s desire to alter its production allocation given the same amount of resources A shift of the PPF is characterized by a change in the society’s amount of resources because of external factors ▶ Increase in labor or capital available ▶ Technological change JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 22 / 68 Opportunity costs JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 23 / 68 Opportunity costs The opportunity cost of one good represents the amount of other goods that must be given up to obtain one unit more of a particular good. Note it does not require a concept of money or price. Math review: slope of a line y2 − y1 m= x2 − x1 rise m= run Slope of a curve: a straight line that just touches, but does not cross, a curved line at a particular point; used to measure the slope of the curve at that point. PPF that is concave to the origin: As we move down along the PPF to produce each additional unit of one good, more and more units of other good need to be sacrificed. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 24 / 68 PPF: Example Construct the production-possibility frontier (PPF) Suppose that a farming community in the Philippines produces two essential commodities: fruits and vegetables, using labor as their primary resource. The community has 800 hours of labor available for production. Producing one kilogram of fruits requires 2 hours of labor while cultivating one kilogram of vegetables consumes 0.4 hours of labor. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 25 / 68 PPF: Example In this problem, 800 hours of labor is the total number of labor hours available for either the production of fruits or vegetables. A kilo of fruits requires 2 labor hours and a kilo of vegetables requires 0.4 labor hours. Suppose x = fruits produced in kilograms y = vegetables produced in kilograms lx = labor hours required to produce fruits ly = labor hours required to produce vegetables Thus, mathematically, we have lx · x + ly · y = 800 =⇒ 2x + 0.4y = 800 JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 26 / 68 PPF: Example Using the mathematical equation, we can construct a schedule of production possibilities5 : Possibilities Fruits Vegetables A 0 2000 B 80 1600 C 160 1200 D 240 800 E 320 400 F 400 0 5 Points A and F are extreme possibilities in which all labor hours are dedicated to the production of either vegetables or fruits, respectively. In between these two extreme possibilities, there are many other alternatives. The intermediate values generated must be consistent with the opportunity costs of producing either goods, i.e., the slope of the PPF which is rise over run. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 27 / 68 PPF: Example Recall the slope-intercept form of a linear function. We can rewrite the mathematical equation we got earlier into one of these where we express a variable as a function of the other: y = −5x + 2000 x = −0.2y + 400 We can clearly identify the slope. But let us use the former to graph our PPF where the quantity of vegetables (y-variable) is on the y-axis and the quantity of fruits is on the x-axis (x-variable). JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 28 / 68 PPF: Example Computing intermediate values between extreme production possibilities, these must be consistent with the opportunity cost or slope of the PPF. Possibilities Fruits Vegetables A 0 2000 B 80 1600 C 160 1200 D 240 800 E 320 400 F 400 0 JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 29 / 68 PPF: Example Computing intermediate values between extreme production possibilities, these must be consistent with the opportunity cost or slope of the PPF. (1) From point A to point B: yB − yA 1600 − 2000 −400 = = = −5 xB − xA 80 − 0 80 (2) From point B to point C: yC − yB 1200 − 1600 −400 = = = −5 xC − xB 160 − 80 80 (3) And so on until reaching the other extreme of the PPF JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 30 / 68 PPF: Example JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 31 / 68 Economic Models Two important properties of all models: 1 Economists know that a model is only an approximation and accordingly understand that the model is not exactly correct. 2 A model makes predictions that can be tested with data. Nevertheless, a model is a good starting point for discussion. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 32 / 68 The Role of Economists 1 Scientists: try to explain the world (discussed previously) 2 Policy advisors: try to improve it JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 33 / 68 The Economist as Policy Adviser Economic analysis: 1 Describes what people actually do—what is (positive economics) 2 Recommends what people, including society, ought to do—what ought to be (normative economics) The first application is descriptive, and the second is advisory. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 34 / 68 Positive Economics vs. Normative Economics Positive economics involves potentially verifiable or refutable propositions. It does not need to be correct; it simply must be testable. Positive economic analysis generates objective descriptions. ▶ “If the price of gasoline rises, people will buy less gasoline.” ▶ “The imposition of quotas on oil in the 1950s led to higher domestic prices and the more rapid depletion of our natural resources.” ▶ “Minimum-wage laws cause unemployment.” Normative economics is almost always dependent on subjective value judgments. Normative economic views cannot be proved false because they are based on value judgments. ▶ “The price of gasoline is too high.” ▶ “If the government wishes to restrict the importation of oil in a way that is least costly to the government and consumers, tariffs are preferable than quotas6.” ▶ “The government should raise the minimum wage.” 6 A tariff is a tax on a particular class of imports or exports, while a quota limits the number, or monetary value, of goods that can be imported or exported. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 35 / 68 More on Natural Experiments in Economics Natural Experiments in Economics JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 36 / 68 Randomized Controlled Trials JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 37 / 68 Randomized Controlled Trials Randomized controlled trials (RCTs) provide the strongest evidence for causal (cause and effect) relationships. Example: “Back to Work” Program from Haynes et al. (2012) Starting with a group of people, randomly divide them into a control group and a treatment group. Perform some intervention on the treatment group (e.g. have them attend a ‘back to work’ program), then see how the outcomes differ. Let’s say 70% of the treatment group find a job compared to 40% of the control. If the two groups were perfectly randomized, and if nobody dropped out of the study, then the differences in the results are presumably not due to differences between groups because they should be more or less “identical” in terms of age, socioeconomic background, etc. Since the ‘back to work’ program is the only important difference between the groups, we conclude that it caused the 30 percentage point improvement in employment outcomes. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 38 / 68 Randomized Controlled Trials RCTs however are expensive and time-consuming to conduct. They are also limited in the kind of questions they can ask due to ethical and feasibility reasons. ▶ Suppose you want to know whether being exposed to pollution stunts a child’s cognitive development. A university ethics board is unlikely to allow you to put some children into a treatment group, give them a hearty dose of pollution and then see what happens. ▶ If you want to know how strong institutions affect long-run economic growth, you cannot assign good institutions to one country, bad institutions to a neighbouring one and then wait 300 years to watch it all unfold. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 39 / 68 Natural Experiments Natural experiments can provide answers to these kind of questions. These arise when comparable individuals or groups of people are sorted by “nature” into something like a control and treatment group. They differ from RCTs because they are not consciously designed by a researcher. The key assumption is that there are comparable groups, and one group is randomly affected by forces outside their control (“nature”). If this assumption holds, we can causally interpret the results. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 40 / 68 Natural Experiments Image on the left shows night light intensity in the Korean Peninsula The contrast between darkness and light provides initial understanding of how people experience huge differences in economic growth and development that might be attributed to the difference in governance and institutions. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 41 / 68 Education and Income Question: How much more would one earn if one chooses to study longer? An initial attempt to answer this question could involve looking at data on how people’s earnings relate to their education. In every conceivable context, people with more years of education have higher incomes. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 42 / 68 JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 43 / 68 Education and Income So, can we conclude that an extra year of education adds an extra seven per cent on your income? The answer to this question is no – people who choose a long education differ in many ways from those who choose a short education. For example, some people may be talented at studying and at working. These people are likely to continue studying, but they would still probably have had a high income even if they hadn’t. It may also be the case that only people who expect education to pay off choose to study longer. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 44 / 68 Education and Income Joshua Angrist and Alan Krueger7 showed how we can use a natural experiment to examine whether additional years of education affect future income. In the US, children can leave school when they turn 16 or 17, depending on the state where they go to school. Because all children who are born in a particular calendar year start school on the same date, children who are born early in the year can leave school sooner than children born later in the year. 7 Angrist, J. D., & Krueger, A. B. (1991). Does compulsory school attendance affect schooling and earnings?. The Quarterly Journal of Economics, 106 (4), 979-1014. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 45 / 68 JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 46 / 68 Education and Income When Angrist and Krueger compared people born in the first and fourth quarters of the year, they saw that the first group had, on average, spent less time in education. People born in the first quarter also had lower incomes than those born in the fourth quarter. As adults they thus had both less education and lower incomes than those born late in the year. Because chance decides exactly when a person is born, Angrist and Krueger were able to use this natural experiment to establish a causal relationship showing that more education leads to higher earnings: the effect of an additional year of education on income was nine per cent. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 47 / 68 The Effects of Minimum Wage In the early 1990s, the conventional wisdom among economists was that higher minimum wages lead to lower employment because they increase wage costs for businesses. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 48 / 68 Digression When governments step in to interfere with supply and demand, prices no longer fill the role of rationing. In such cases, quantity supplied need no longer equal quantity demanded; minimum floors such as a policy on minimum wage lead to excess supply (surpluses), while maximum ceilings such as the case of interest ceiling lead to excess demand (shortages). ▶ A price floor is the lowest price that one can legally charge for some good or service. ▶ A price ceiling is the highest price that can be charged for a product or service. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 49 / 68 Digression The figure depicts the labor market. The horizontal axis shows the quantity of labor, while the vertical axis measures wage. The demand curve shows the quantity demanded for labor (i.e., the firms who hire/recruit workers). The supply curve shows the quantity supplied for labor (i.e., the workers who look for jobs). JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 50 / 68 Digression Because the minimum wage is a price floor, it causes a surplus. The quantity of labor supplied exceeds the quantity demanded. The result is unemployment. Thus, while the minimum wage raises the incomes of those workers who have jobs, it lowers the incomes of workers who cannot find jobs. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 51 / 68 The Effects of Minimum Wage However, the evidence supporting this conclusion was not fully convincing. There were indeed many studies that indicated a negative correlation between minimum wages and employment. But did this really mean that higher minimum wages led to higher unemployment? To investigate how increased minimum wages affect employment, David Card and Alan Krueger8 used a natural experiment. In the early 1990s, the minimum hourly wage in New Jersey was raised from 4.25 dollars to 5.05 dollars. 8 Card, D., & Krueger, A. B. (1994). Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. The American Economic Review, 84 (4), 772-793. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 52 / 68 JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 53 / 68 The Effects of Minimum Wage They surveyed 410 fast-food restaurants9 in New Jersey and the neighbouring eastern Pennsylvania before and after the rise of hourly minimum wage. They then compared employment growth at stores in New Jersey and Pennsylvania. They identified a treatment group (restaurants in New Jersey) and a control group (restaurants in eastern Pennsylvania). ▶ There was no increase in the hourly minimum wage in neighbouring Pennsylvania. ▶ There were differences between the two states, but it is likely that the labour markets would evolve similarly close to the border. ▶ There was no apparent reason to believe that any factor (such as the economic situation) apart from the increase in the minimum wage would affect employment trends differently on either side of the border. 9 This is an industry where pay is low and minimum wages matter. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 54 / 68 JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 55 / 68 The Effects of Minimum Wage Result: Card and Krueger found that an increase in the minimum wage had no effect on the number of employees. Possible explanations: 1 Firms can transfer increased costs to consumers in the form of higher prices without significant reductions in demand. 2 Firms that dominate their local labor market can keep wages low. An increased minimum wage thus means that more people want to work, leading to increased employment. When firms have such power over the market, we cannot determine in advance how employment will be affected by changes to the minimum wage. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 56 / 68 Graphing (Extra) Graphs of a Single Variable JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 57 / 68 Graphs of Two Variables: The Coordinate System JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 58 / 68 Graphs of Two Variables: The Coordinate System The coordinate system displays two variables on a single graph. We can graph ordered pairs on a two-dimensional grid. ▶ The first number in each ordered pair, called the x-coordinate, tells us the horizontal location of the point. ▶ The second number, called the y-coordinate, tells us the vertical location of the point. ▶ The point with both an x-coordinate and a y-coordinate of zero is known as the origin. The two coordinates in the ordered pair tell us where the point is located in relation to the origin: x units to the right of the origin and y units above it. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 59 / 68 Graphs of Two Variables: Scatterplot A scatter plot simply plots scattered points. The coordinate system makes the correlation between two variables easy to see. ▶ A positive correlation shows that variables move in the same direction. ▶ A negative correlation demonstrates that the two variables in focus move in opposite directions. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 60 / 68 Curves in the Coordinate System Economists prefer looking at how one variable affects another, holding everything else constant. Take a look at the demand curve. The demand curve traces out the effect of a good’s price on the quantity of the good consumers want to buy. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 61 / 68 Curves in the Coordinate System This table shows the number of novels Emma buys at various incomes and prices. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 62 / 68 Curves in the Coordinate System JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 63 / 68 Curves in the Coordinate System The line D1 shows how Emma’s purchases of novels depend on the price of novels when her income is held constant. Because the price and the quantity demanded are negatively related, the demand curve slopes downward10. 10 The demand curve is downward-sloping, indicating that a higher price reduces the quantity of novels demanded. Because the quantity of novels demanded and the price move in opposite directions, we say that the two variables are negatively related. Conversely, when two variables move in the same direction, the curve relating them is upward-sloping, and we say that the variables are positively related. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 64 / 68 Curves in the Coordinate System JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 65 / 68 Curves in the Coordinate System The location of Emma’s demand curve for novels depends on how much income she earns. The more she earns, the more novels she will purchase at any given price, and the farther to the right her demand curve will lie. ▶ Curve D1 represents Emma’s original demand curve when her income is $40,000 per year. ▶ If her income rises to $50,000 per year, her demand curve shifts to D2. ▶ If her income falls to $30,000 per year, her demand curve shifts to D3. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 66 / 68 Curves in the Coordinate System JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 67 / 68 Curves in the Coordinate System The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered as we move along the line. For a fairly flat upward-sloping line, the slope is a small positive number. For a steep upward-sloping line, the line is a large positive number. For a downward-sloping line, the slope is a negative number because the changes in x and y move in opposite directions: if x increases, y decreases, and if x decreases, y increases. For a fairly flat downward-sloping line, the slope is a small negative number. For a steep downward-sloping line, the slope is a large negative number. A horizontal line has a slope of zero because in this case the y-variable never changes. A vertical line is said to have an infinite slope because the y-variable can take any value without the x-variable changing at all. JF Turla (UPSE) ECON 100.1 Discussion Class 1 September 6, 2024 68 / 68 END