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Professor CottonSpring 2009
Economics 212Introductory Macroeconomics
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What do economists study?Are NBA referees biased in favor of athletes of
their own race? How does going to college affect your lifetime
earnings?Which government policies effectively decrease
smoking or obesity? What do interest groups buy with political
contributions?Why are some countries rich and some countries
poor? What’s the best way to increase employment or
fight a recession?
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What do economists do?Apply rigorous logical and mathematical
techniques to formally and carefully analyze problems
Economic Theorists develop modelsA simple model can help us better understand an
issueFocusing on only the most important aspects of a
problem, allows us to develop the greatest intuition
Empirical Economists test the modelsUse statistical techniques to test the modelsEconometrics
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Most economics questions fit in 1 of 2 categories:
MICROeconomics MACROeconomicsIndividual behavior
(e.g., firms, people, households)
How many employees will GM lay off?
What characteristics determine if Joe goes to college?
Joe’s income or GM profit
How much of the “pie” do you get?
Aggregate or average behavior (e.g., country)
Total unemployment in the economy?
What policies determine the average level of education?
Gross Domestic Product
How big is the entire “pie”? How do we make it bigger?4
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MacroeconomicsDeals with the classic issues in economics:UnemploymentInflationNational Output & National IncomePopulation GrowthEconomic GrowthBond PricesMoney & Banking
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Which questions are Macro?Are NBA referees biased in favor of athletes of
their own race? How does going to college affect your lifetime
earnings?Which government policies effectively decrease
smoking or obesity? What do interest groups buy with political
contributions?Why are some countries rich and some countries
poor? What’s the best way to increase employment or
fight a recession?
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Consider Econ if you’re interested in:Business including Marketing and FinanceGovernment / Political ScienceLawInternational studiesSociology PsychologyStatistics / Applied Mathematics
Some books to read, if interested: The Logic of Life by Tim HartfordFreakonomics by Steven Levitt and Stephen
DubnerSuper Crunchers by Ian Ayres
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About MeProf. Christopher CottonPh.D. from Cornell University in 2008B.A. in Economic from Michigan State in 2001Worked as a consultant between undergrad and
grad school
My research is in Microeconomics, not MacroWhy did I want to teach Intro Macro?
The material is essential for understanding current events
The first macro class that I took as an undergraduate student…
I will ignore some of the things typically covered in intro economics and focus on the topics that will help you carry on a conversation about the current state of the US economy8
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What you needA copy of the Case and Fair textbook
Buy a USED copy, it doesn’t even have to be the most current edition (look for edition 7 or 8, edition 6 will work in a pinch)
You must be willing to keep up on the material. It is challenging, and the lectures will help but only if you understand the material from the previous lecture.
Good skills in Algebra, and the ability to draw and interpret graphs given data.
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Topic 1: Basic Economic Principals
Law of Diminishing ReturnsProduction Possibilities FrontierSupply and Demand
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Factors of Production• Factors of production are the inputs used
to create outputs (goods and services) for consumption
1. Natural Resources2. Labor3. Capital Goods (Produced Means of
Production)
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What if we increase all of the factors of production by the same amount?Question:
Suppose 2 farmers working 4 acres of land with 1 tractor and 1 bag of seeds can produce 1 ton of corn.
Then how many tons of corn can be produced by 4 equally competent farmers working 8 equally productive acres of land with 2 tractors and 2 bags of seeds?
Answer:
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What if we increase only one of the factors of production? Example 1Question:
Suppose 2 farmers working 4 acres of land with 1 tractor and 1 bag of seeds can produce 1 ton of corn.
Then how many tons of corn can be produced by 4 equally competent farmers working 4 acres of land with 1 tractors and 1 bags of seeds?
Answer:
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What if we increase only one of the factors of production? Example 2Question:
Suppose 2 farmers working 4 acres of land with 1 tractor and 1 bag of seeds can produce 1 ton of corn.
Then how many tons of corn can be produced by 200 equally competent farmers working 4 acres of land with 1 tractors and 1 bags of seeds?
Answer:
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Law of Diminishing ReturnsIf one factor of production is increased, while
the other factors of production remain unchanged, then eventually, the marginal increase in output from an additional unit of input will be lower than the marginal increase in production from the previous unit of input.
e.g., the benefit of adding the 101st worker is less than the benefit of adding the 100th worker. (Assuming the other factors of production are fixed.)
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Law of Diminishing ReturnsGraph:
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A scary interpretationThomas Malthus (1798): food production
and population growth
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Malthusian Theory of Pop GrowthThe world cannot support a population
above a certain levelTherefore, world population will be kept in
line through “positive” and “preventative” checks.
Positive checks – Increase the death rate
Preventative checks – Decrease the birth rate
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World Population – graph itYear Population
10,000 BC 1 million
950 AD 250 million
1600 500 million
1804 1 billion
1927 2 billion
1961 3 billion
1974 4 billion
1987 5 billion
2000 6 billion
2011 7 billion
Note that data and graph are from Wikipedia’s entry on World Population. Just because I use Wikipedia for lecture data, does not mean you should use it as a main source for your papers. However, you should always give credit to your sources, even if it is Wikipedia.
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World Population – graph it
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So, what happened?What didn’t Malthus account for?
What happened around the major kink in the graph?
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Another example – US OutputYear Total
Output ($ billions)
Population (millions)
1935 73 127
1950 295 152
1965 719 194
1980 2,784 227
1995 7,265 263
Total output is US Gross Domestic Product, as provided by the BEA. Population figures come from the US Census
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Important Questions:
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Production Possibilities Frontier (PPF)Definition: the maximum level of production in
an economy, given its factors of productionGraph an example for an economy that can
only produce 2 goods (e.g., guns & butter)
If the economy is producing along its PPF, it cannot produce more of one good without giving up some production of another good.
If the economy is inside its PPF, it can do better
Can’t be outside of the PPF24
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Royal Colony of South Carolina, 1750You’re the “economic” advisor. Suppose you
have 1000 workers with equal sized farms spread across the colony. Your workers can either farm rice or corn.
If you put all of your inputs into corn production, then you produce 10,000 bushels of corn
If you put all of your inputs into rice production, then you produce 3,000 bushels of rice
What happens if you devote 900 workers and 900 acres to corn production, and the rest to rice production?
What about a 50-50 split?
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Opportunity costsDefinition: The best alternative we forgo, or
give up, when making a decision.
Illustrated by movement along a PPFWhat is the opportunity cost of producing
100 bushels of corn? What is the opportunity cost of producing
100 additional bushels of corn?
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What happens to the PPF when…A fleet of ships land on the shore with 500 new
farmers looking to settle in South Carolina?Someone invents a more efficient plow?Rice production technology improves?Disease kills off 500 farmers?A hurricane increases flooding throughout the
colony?The royal governor outlaws corn production?Coastal farmers go on strike, refusing to work?
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Where on the PPF?To be on the PPF, need “full employment” of
factors of production.Much of macroeconomics policy is trying to get
production as close to the PPF as possible.
But at which point on the graph does production take place?Depends on what people want or needCommand Economy (government decides,
central planner)Market Economy (individuals decide own actions)
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Supply and Demand, introKey model for analyzing the market economy
Supply– How much of a good or service firms are willing to supply at different prices
Demand– How much of a good or service individuals want to buy at different prices
Equilibrium (“market-clearing”) Price– The price at which the number of goods supplied equals the number of goods demanded.
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Example: Demand for BourbonIndividual Demand for Bourbon
Barak ObamaJohn McCainHillary ClintonMitt Romney
Demand for BourbonSum of individual demand
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Example: Supply for BourbonCalculated in the same fashion
Individual Supply of BourbonJack’s distilleryJim’s distillery
Supply of BourbonSum over all distilleries
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Example: Market for BourbonBring supply and demand together
Equilibrium Price and Quantity
Reality: How do we interview all buyers and sellers?We don’t. Although there are ways to estimate
supply and demand It’s a model that helps us better understand
market interactions
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The Invisible HandThe “invisible hand”
If the price is above the equilibrium price…If the price is below the equilibrium price…
Price CeilingsRent in NYCGas during crisis
Price FloorsFarm price supports
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Elasticity
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Demand for cigarettesDemand for hamDemand for gasolineDemand for apple juiceSupply for apples
What determines the shape?
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Shifts in supply and demand
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Market for CokePrice of Pepsi increases (substitute)Price of pizza decreases (complement)New health reports show it’s bad for youSugar increases in priceTrade reform make it easier to import soda from
MexicoGovernment sends stimulus check to all citizens
Hot dog market when bun price increasesMiller Beer market when Bud price increasesSport coat market when UM requires them in
classMilk market when price of hay increases
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Shifts in supply and demand
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Shifts in demandComplement or substitute price changeShifts in tasteShifts in income
Shifts in supplyInput price changeChange in technology
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Labor Market
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Supply is made up of individual workersDemand is from firms and organizations
(counterintuitive?)
Minimum wage laws