Managerial Economics Discussion question
chyann01
unit_8_econ_ppt.pptxWELCOME TO SEMINAR 8 February 25, Wed. 10-11 pm ET
MT445-01
MANAGERIAL ECONOMICS
INSTRUCTOR: PAUL CHOI, PH.D.
1
LIVE SEMINARS (Wednesday 10-11 PM ET)
Live Seminar Schedule:
• Live Seminar 1: January 7 (Wednesday 10-11 pm ET)
• Live Seminar 2: January 14 (Wednesday 10-11 pm ET)
• Live Seminar 3: January 21 (Wednesday 10-11 pm ET)
• Live Seminar 4: January 28 (Wednesday 10-11 pm ET)
• Live Seminar 5: February 4 (Wednesday 10-11 pm ET)
• Live Seminar 6: February 11 (Wednesday 10-11 pm ET)
• Live Seminar 7: February 18 (Wednesday 10-11 pm ET)
• Live Seminar 8: February 25 (Wednesday 10-11 pm ET)
• Live Seminar 9: March 4 (Wednesday 10-11 pm ET)
• Live Seminar 10: March 11 (Wednesday 10-11 pm ET)
• It is strongly suggested that you attend the graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you can complete the following assignment.
2
UNIT 8 READING
Chapter 20 discusses the measuring of the unemployment rate and the labor force participation rate; types of unemployment; the factors that determine the unemployment rate; measuring inflation; using price indexes to adjust for the effects of inflation; real versus nominal interest rates; and problems that inflation causes.
3
UNIT 8 READING
Chapter 23 discusses the aggregate expenditure model; the determinants of the four components of aggregate expenditure; the marginal propensity to consume and the marginal propensity to save; graphing macroeconomic equilibrium; the multiplier effect; and the aggregate demand curve.
4
UNIT 8 READING
Chapter 24 discusses the determinants of aggregate demand and aggregate supply. You will learn to distinguish between a movement along the aggregate curve and a shift of the curve relevant to demand or supply.
5
READING: CHAPTER 20
Measuring the Unemployment Rate & the Labor Force Participation Rate
The Household Survey
Labor Force: The sum of employed and unemployed workers in the economy.
Unemployment rate: The percentage of the labor force that is unemployed.
Discouraged workers: People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.
6
READING: CHAPTER 20
Measuring the Unemployment Rate & the Labor Force Participation Rate
The Household Survey
The Unemployment Rate measures the percentage of the labor force that is unemployed:
(Number of unemployed/Labor force) x 100
The Labor Force Participation Rate measures the percentage of the working-age population in the labor force:
(Labor force/Working-age population) x 100
7
READING: CHAPTER 20
Measuring the Unemployment Rate & the Labor Force Participation Rate
Problems with Measuring the Unemployment Rate
Although the BLS reports the unemployment rate measured to the tenth of a percentage point, it is not a perfect measure of the current state of joblessness in the economy.
The unemployment rate provides some useful information about the employment situation in the country, but it is far from an exact measure of joblessness in the economy.
8
READING: CHAPTER 20
Types of Unemployment
Frictional Unemployment: Short-term unemployment that arises from the process of matching workers with jobs.
Structural Unemployment: Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.
Cyclical Unemployment: Unemployment caused by a business cycle recession.
9
READING: CHAPTER 20
Types of Unemployment
Full Employment
Natural Rate of Unemployment:
The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.
10
READING: CHAPTER 20
Explaining Unemployment
Government Policies and the Unemployment Rate
Unemployment Insurance and Other Payments to the Unemployed:
In the United States and most other industrial countries, the unemployed are eligible for unemployment insurance payments from the government.
In the United States, these payments are equal to about half the average wage.
Unemployment insurance helps the unemployed maintain their income and spending, which lessens the personal hardship of being unemployed and also helps reduce the severity of recessions.
11
READING: CHAPTER 20
Explaining Unemployment
Government Policies and the Unemployment Rate
Minimum Wage Laws:
In 1938, the federal government enacted a national minimum wage law.
If the minimum wage is set above the market wage determined by the demand and supply of labor, the quantity of labor supplied will be greater than the quantity of labor demanded.
Economists agree that the current minimum wage is above the market wage for some workers, but they disagree on the amount of unemployment that has resulted.
12
READING: CHAPTER 20
Measuring Inflation
Price Level: A measure of the average prices of goods and services in the economy.
Inflation rate: The percentage increase in the price level from one year to the next.
13
READING: CHAPTER 20
Measuring Inflation
The Consumer Price Index
Consumer Price Index (CPI): An average of the prices of the goods and services purchased by the typical urban family of four.
14
READING: CHAPTER 20
Measuring Inflation
Is the CPI Accurate?
It is important that the CPI be as accurate as possible, but there are four biases that make changes in the CPI overstate the true inflation rate:
- Substitution bias
- Increase in quality bias
- New Product bias
-Outlet bias
15
READING: CHAPTER 20
Measuring Inflation
The Producer Price Index
Producer price index (PPI):
An average of the prices received by producers of goods and services at all stages of the production process.
16
READING: CHAPTER 20
Using Price Indexes to Adjust for the Effects of Inflation
Value in 2007 dollars =
Value in 1980 dollars x (CPI in 2007/CPI in 1980)
For some purposes, we are interested in tracking changes in an economic variable over time rather than in seeing what its value would be in today’s dollars.
In that case, to correct for the effects of inflation, we can divide the nominal variable by a price index and multiply by 100 to obtain a real variable.
17
READING: CHAPTER 20
Real versus Nominal Interest Rates
Nominal Interest Rate: The stated interest rate on a loan.
Real Interest Rate: The nominal interest rate minus the inflation rate.
Real Interest Rate = Nominal Interest Rate – Inflation Rate
Deflation: A decline in the price level.
18
READING: CHAPTER 20
Does Inflation Impose Costs on the Economy?
Inflation Affects the Distribution of Income
The extent to which inflation redistributes income depends in part on whether the inflation is anticipated—in which case consumers, workers, and firms can see it coming and can prepare for it— or unanticipated—in which case they do not see it coming and do not prepare for it.
19
READING: CHAPTER 20
Does Inflation Impose Costs on the Economy?
The Problem with Anticipated Inflation
Menu Costs: The costs to firms of changing prices
The Problem with Unanticipated Inflation
When the actual inflation rate turns out to be very different from the expected inflation rate, some people gain, and other people lose. This outcome seems unfair to most people because they are either winning or losing only because something unanticipated has happened. This apparently unfair redistribution is a key reason why people dislike unanticipated inflation.
20
READING: CHAPTER 23
Output and Expenditure in the Short Run
Aggregate Expenditure (AE):
The total amount of spending in the economy: the sum of consumption, planned investment, government purchases, and net exports.
21
READING: CHAPTER 23
The Aggregate Expenditure Model
Aggregate Expenditure Model:
A macroeconomic model that focuses on the relationship between total spending and real GDP, assuming that the price level is constant.
Aggregate Expenditure:
- Consumption (C); Planned Investment (I); Government Purchases (G); Net Exports (NX)
22
READING: CHAPTER 23
The Aggregate Expenditure Model
Aggregate Expenditure
Aggregate Expenditure = Consumption (C) + Planned Investment (I) + Government Purchases (G) + Net Exports (NX)
or
AE = C + I + G + NX
23
READING: CHAPTER 23
The Aggregate Expenditure Model
The Difference between Planned Investment and Actual Investment
Inventories: Goods that have been produced but not yet sold
Macroeconomic Equilibrium
Aggregate Expenditure (AE) = GDP
24
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
The following are the five most important variables that determine the level of consumption:
• Current Disposable Income
• Household Wealth
• Expected Future Income
• The Price Level
• The Interest Rate
25
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Consumption:
• Current Disposable Income: The most important determinant of consumption is the current disposable income of households.
• Household Wealth: Consumption also depends on the wealth of households.
A household’s wealth is the value of its assets minus the value of its liabilities.
26
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Consumption:
• Expected Future Income: Consumption also depends on expected future income. Most people prefer to keep their consumption fairly stable from year to year, even if their income fluctuates significantly.
27
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Consumption:
• The Price Level: The price level measures the average prices of hoods and services in the economy. Consumption is affected by changes in the price level.
• The Interest Rate: When the interest rate is high, the reward to savings is increased, and households are likely to save more and spend less.
28
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Consumption:
• The Consumption Function: The relationship between consumption spending and disposable income.
• Marginal Propensity to Consume (MPC): The slope of the consumption function: The amount by which consumption spending changes when disposable income changes.
MPC = ∆C/∆YD
29
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Consumption:
• The Consumption Function:
We can also use the MPC to determine how much consumption will change as income changes:
MPC = ∆C/∆YD or
Change in consumption =
Change in disposable income x MPC
30
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
The Relationship between Consumption and National Income:
• Disposable income = National income – Net taxes
We can rearrange the equation like this:
National income = GDP
= Disposable income + Net taxes
31
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Income, Consumption, and Saving:
• National income = Consumption + Saving + Taxes
Change in national income = Change in consumption + Change in saving + Change in taxes
Y = C + S + T and ∆Y = ∆C + ∆S + ∆T
To simplify, we can assume that taxes are always a constant amount, in which case ∆T = 0, so the following is also true:
∆Y = ∆C + ∆S
32
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Income, Consumption, and Saving:
• Marginal Propensity to save (MPS):
The change in saving divided by the change in disposable income.
∆Y/ ∆Y = ∆C/∆Y + ∆S/∆Y or,
1 = MPC + MPS
33
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Planned Investment:
The Four Most Important Variables that Determine the Level of Investment are:
• Expectations of Future Profitability
• The Interest Rate
• Taxes
• Cash Flow
34
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Planned Investment:
Expectations of Future Profitability:
• The optimism or pessimism of firms is an important determinant of investment spending.
The Interest Rate:
• A high Interest Rate results in less investment spending, and a lower interest rate results in more investment spending.
35
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Planned Investment:
Taxes:
• Firms focus on the profits that remain after they have paid taxes.
Cash Flow:
• Cash Flow: The difference between the cash revenues received by a firm and the cash spending by the firm.
36
READING: CHAPTER 23
Determining the Level of Aggregate Expenditure in the Economy
Net Exports:
The following are the three most important variables that determine the level of net exports:
• The price level in the United Sates relative to the price levels in other countries.
• The growth rate of GDP in the United Sates relative to the growth rate in other countries.
• The exchange rate between the dollar and other currencies.
37
READING: CHAPTER 23
Graphing Macroeconomic Equilibrium
The Important Role of Inventories:
• Whenever planned aggregate expenditure is less than real GDP, some firms will experience an unplanned increase in inventories.
38
READING: CHAPTER 23
Graphing Macroeconomic Equilibrium
39
READING: CHAPTER 23
Determining Macroeconomic Equilibrium
• Planned Aggregate Expenditure (AE) = Consumption (C) + Planned Investment (I) + Government Purchases (G) + Net Exports (NX)
• Unplanned Change in Inventories =
Real GDP (Y) – Planned Aggregate Expenditure (AE).
40
READING: CHAPTER 23
The Multiplier Effect
• Autonomous Expenditure: An expenditure that does not depend on the level of GDP.
• Multiplier: The increase in equilibrium real GDP divided by the increase in autonomous expenditure.
• Multiplier Effect: The process by which an increase in autonomous expenditure leads to a larger increase in real GDP.
41
READING: CHAPTER 23
The Multiplier Effect
A Formula for the Multiplier
1/(1 – MPC)
Multiplier = Change in equilibrium real GDP divided by Change in autonomous expenditure
= 1/(1 – MPC)
42
READING: CHAPTER 23
The Multiplier Effect
43
READING: CHAPTER 23
The Multiplier Effect
Summarizing the Multiplier Effect
1. The multiplier effect occurs both when autonomous expenditure increases and when it decreases.
2. The multiplier effect makes the economy more sensitive to changes in autonomous expenditure than it would otherwise be.
3. The larger the MPC, the larger the value of the multiplier.
4. The formula for the multiplier, 1/(1 – MPC), is oversimplified because it ignores some real-world complications, such as the effect that an increasing GDP can have on imports, inflation, and interest rates.
44
READING: CHAPTER 23
The Aggregate Demand Curve
• Aggregate Demand Curve: A curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure.
45
READING: CHAPTER 24
Aggregate Demand
Aggregate Demand and Aggregate Supply Model: A model that explains short-run fluctuations in real GDP and the price level.
Aggregate Demand and Aggregate Supply: In the short run, real GDP and the price level are determined by the intersection of the aggregate demand curve and the short-run aggregate supply curve.
46
READING: CHAPTER 24
Aggregate Demand
Aggregate Demand Curve: A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
Short-Run Aggregate Supply Curve: A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.
47
READING: CHAPTER 24
Aggregate Demand
Why is the Aggregate Demand Curve Downward Sloping?
GDP has four components: consumption (C), investment (I), government purchases (G), and net exports (NX). If we let Y stand for GDP, we can write the following:
Y = C + I + G + NX
48
READING: CHAPTER 24
Aggregate Demand
Why is the Aggregate Demand Curve Downward Sloping?
The Wealth Effect: How a Change in the Price Level Affects Consumption
The impact of the price level on consumption is called the wealth effect.
49
READING: CHAPTER 24
Aggregate Demand
Why is the Aggregate Demand Curve Downward Sloping?
The Interest-Rate Effect: How a Change in the Price Level Affects Investment
The impact of the price level on investment is known as the interest-rate effect.
50
READING: CHAPTER 24
Aggregate Demand
Why is the Aggregate Demand Curve Downward Sloping?
The International-Trade Effect: How a Change in the Price Level Affects Net Exports
The impact of the price level on net exports is known as the international-trade effect.
51
READING: CHAPTER 24
Aggregate Demand
Shifts of the Aggregate Demand Curve versus Movements Along It
An important point to remember is that the aggregate demand curve tells us the relationship between the price level and the quantity of real GDP demanded, holding everything else constant.
52
READING: CHAPTER 24
Aggregate Demand
53
READING: CHAPTER 24
Aggregate Demand
54
READING: CHAPTER 24
Aggregate Demand
The Variables that Shift the Aggregate Demand Curve
The variables that cause the aggregate demand curve to shift fall into three categories:
• Changes in government policies
• Changes in the expectations of households and firms
• Changes in foreign variables
55
READING: CHAPTER 24
Aggregate Demand
The Variables that Shift the Aggregate Demand Curve
• Changes in Government Policies
- Monetary Policy: The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
- Fiscal Policy: Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
56
READING: CHAPTER 24
Aggregate Demand
The Variables that Shift the Aggregate Demand Curve
• Changes in Expectations of Households and Firms
If households become more optimistic about their future incomes, they are likely to increase their current consumption.
57
READING: CHAPTER 24
Aggregate Demand
The Variables that Shift the Aggregate Demand Curve
• Changes in Foreign Variables
If firms and households in other countries buy fewer U.S. goods or if firms and households in the United States buy more foreign goods, net exports will fall, and the aggregate demand curve will shift to the left.
58
READING: CHAPTER 24
Aggregate Supply
The Long-Run Aggregate Supply Curve
Long-Run Aggregate Supply Curve: A curve that shows the relationship in the long-run between the price level and the quantity of real GDP supplied.
59
READING: CHAPTER 24
Aggregate Supply
The Long-Run Aggregate Supply Curve
60
READING: CHAPTER 24
Aggregate Supply
The Long-Run Aggregate Supply Curve
The Long-Run Aggregate Supply Curve: Changes in the price level do not affect the level of aggregate supply in the long run. Therefor, the long-run aggregate supply curve (LRAS) is a vertical line at the potential level of real GDP.
Each year, the long-run aggregate supply curve shifts to the right, as the number of workers in the economy increases, more machinery and equipment are accumulated, and technological change occurs.
61
READING: CHAPTER 24
Aggregate Supply
The Short-Run Aggregate Supply Curve
The three most common explanations as to why a short-run aggregate supply curve slopes upward include:
1. Contracts make some wages and prices “sticky.”
2. Firms are often slow to adjust wages.
3. Menu costs make some prices sticky.
Menu Costs: The costs to firms of changing prices.
62
READING: CHAPTER 24
Aggregate Supply
Shifts of the Short-Run Aggregate Supply Curve versus Movements Along It
It is important to remember the difference between a shift in a curve and a movement along a curve.
Variables that Shift the Short-Run Aggregate Supply Curve
- Increases in the Labor Force and in the Capital Stock
- Technological Change
- Expected Changes in the Future Price Level
63
READING: CHAPTER 24
Aggregate Supply
64
READING: CHAPTER 24
Aggregate Supply
Variables that Shift the Short-Run Aggregate Supply Curve
Expected Changes in the Future Price Level
The SRAS curve shifts to reflect worker and firm expectations of future prices
1. If workers and firms expect that the price level will rise by 3 percent, from 100 to 103, they will adjust their wages and prices by that amount.
2. Holding constant all other variables that affect aggregate supply, the short-run aggregate supply curve will shift to the left. If workers and firms expect that the price level will be lower in the future, the short-run aggregate supply curve will shift to the right.
65
READING: CHAPTER 24
Aggregate Supply
Variables that Shift the Short-Run Aggregate Supply Curve
Adjustments of Workers and Firms to Errors in Past Expectations about the Price Level.
Unexpected Changes in the Price of an Important Natural Resource
- Supply Shock: An unexpected event that causes the short-run aggregate supply curve to shift.
66
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
Long-Run Macroeconomic Equilibrium
In long-run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the LRAS curve.
67
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
68
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
69
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
70
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
71
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
Recessions, Expansion, and Supply Shocks
The Short-Run and Long-Run Effects of a Decrease in Aggregate Demand
In the short run, a decrease in aggregate demand causes a recession.
In the long run, it causes only a decrease in the price level.
72
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
Recession
1. A decline in investment shifts AD to the left, causing a recession.
2. As firms and workers adjust to the price level being lower than they had expected, costs will fall and cause SRAS to shift to the right.
3. Equilibrium moves with a lower price level.
73
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
Recessions, Expansion, and Supply Shocks
The Short-Run and Long-Run Effects of an Increase in Aggregate Demand
In the short run, an increase in aggregate demand causes an increase in real GDP.
In the long run, it causes only an increase in the price level.
74
READING: CHAPTER 24
Macroeconomic Equilibrium in the Long Run and the Short Run
Recessions, Expansion, and Supply Shocks
Supply Shock
Stagflation: A combination of inflation and recession, usually resulting from a supply shock.
75
READING: CHAPTER 24
A Dynamic Aggregate Demand and Aggregate Supply Model
We can create a dynamic aggregate demand and aggregate supply model by making three changes to the basic model.
• Potential real GDP increases continually, shifting the long-run aggregate supply curve to the right.
• During most years, the aggregate demand curve shifts to the right.
• Except during periods when workers and firms expect high rates of inflation, the short-run aggregate supply curve will be shifting to the right.
76
READING: CHAPTER 24
A Dynamic Aggregate Demand and Aggregate Supply Model
The Recession of 2007-2009
The recession began in December 2007, with the end of the economic expansion that had begun in November 2001. Several factors contributed to bring on the recession:
• The end of the housing “bubble.”
• The financial crisis.
• The rapid increase in oil prices during 2008.
77
UNIT 8 DISCUSSION
Topic 1
Discuss the differences between unemployment and underemployment and give examples of each. Which do you think is a more serious “problem” for the economy? How might underemployment be addressed through government policy?
78
UNIT 8 DISCUSSION
Topic 2
In this unit, you discussed some of the problems associated with inflation. List one of these problems and describe a situation in which you encountered this problem.
79
UNIT 8 ASSIGNMENT
Instructions Summary: Please Read Unit 8 Assignment Instructions
• Please answer the following questions located in the template document. Submit the file as a Microsoft Word ® document to the Dropbox when completed.
80
SEMINAR
Read About Graded Seminars
Attending seminars is important to your academic success. They (seminars) will allow you to review the important concepts that are presented in each unit, discuss work issues in your lives that pertain to these concepts, ask your instructor questions and allow you to come together in real time with your fellow classmates.
There will be a seminar in units 1 through 10 in this course. You must either attend the seminar or complete the Alternative Seminar Assignment in order to obtain the points for this part of class.
81
UNIT 8 SEMINAR
Unit 8 Alternative Assignment:
• It is strongly suggested that you attend the graded seminar at the regularly scheduled time. If you are unable to attend the seminar, you must complete the following alternative assignment to earn points for this part of the class.
View this week’s archived Seminar and write a 1 page paper, double spaced that summarizes the Seminar and what you learned.
Once completed, submit your alternative assignment to the Seminar Dropbox.
82
