Please memorize the formula for percentage change, don’t push it aside as unimportant:
Here is a graph of a typical supply and demand curve and equilibrium in the market for pizza:
On this graph the quantity demanded, supplied, and exchanged is 8 slices.
Now, changes in some factors make the demand or supply curve shift:
Reasons to shift Demand Curve:
- Change in tastes and preference of the consumer.
- Change in income; normal or inferior good.
- Change in the prices of other goods; complements or substitutes in consumption.
- Change in the number of consumers (population).
Reasons to shift the Supply Curve:
- Change in the costs of production i.e. the cost of inputs (parts) of the good, better technology, taxes.
- Change in the number of producers (size of the market).
- Change in prices of other goods. i.e. substitutes or complements in production.
- Changes in nature; expectations.
Remember that an increase is a rightward shift in the supply or demand curve and a decrease is a leftward shift in the supply or demand curve.
Next, be aware and know the distinction between positive and normative statements.
Normative statements are subjective statements rather than objective statements – i.e. they carry value judgments; A value judgement is a subjective statement of opinion rather than a fact that can be tested by looking at the available evidence
Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence. Positive economics deals with objective explanation and the testing and rejection of theories.
Here is the of examples, with the answers that we did during my sessions: PositiveorNormativeexercise
Things you should review on your own:
One reason for and one reason against raising the minimum wage.
One reason for and one reason against inequality
Impact of Payroll tax
Questions from all quizzes that were handed out. Ask at review session if you do not know the answers.
Money is created by making loans. When a bank makes a loan, it lends out money that didn’t exist before.
Monetary policy has to do with controlling the money Supply and Interest Rates. Understand the difference from Monetary and Fiscal policy.
The FED’s (Federal Reserve Bank) toolbox consists of:
1. Open Market Operations
2. Discount Rate
3. Required Reserve Ratio
So what actions affect the money supply, and how?
|Increase the Money Supply||Decrease the Money Supply|
|Buy Bonds||Sell Bonds|
|Decrease Discount Rate||Increase Discount Rate|
Be familiar with this graph and the difference between long run and short run.
Here are reasons to shift each curve:
Why the AD might shift:
- Shifts arising from
- Consumption (9/11)
- Investment (taxation)
- Government Purchases (elections)
- Net Exports ($/euro)
Why the Long Run AS might shift:
- Shifts arising
- Natural Resources
- Technological Knowledge
Why the Short Run AS might shift:
- Shifts arising
- Labor (immigration)
- Natural Resources (fracking)
- Expected Price Level
Other important topics:
Policymakers may respond to a recession in one of the following ways:
- Do nothing and wait for prices and wages to adjust.
- Take action to increase aggregate demand by using monetary and fiscal policy.
The costs of inflation are:
- Shoe-leather costs:
- Menu costs
- Relative price variability
- Tax distortions
- Confusion and inconvenience
- Arbitrary redistribution of wealth.
Videos and Handouts
GDP exercise: GDPexercise
CPI exercise: CPIExercise
Salary Exercise: SalaryExercise