Day 6

Day 6 is complete

Day 5

Day 5 is complete

Day 3 and Day4

Days 3 and 4 are Complete

Day 2

Day 2 of the homework was completed last night

Day 1

Day 1 Complete last night

20.11.2009

Much more on Macroeconomics Coming...

20.11.2009

more Macroeconomics

• RPI (Retail Price Index)- Goods in Shops, Bills, Mortgage Interest (Headline Inflation)
• CPI (Consumer Price Index)- Goods in Shops and Bills (Underlying Inflation)
• Factory Gate Prices- Prices in New Materials for suppliers

RPI and CPI are calculated according to a weighted index of average household spending set to a base year. RPIX is an RPI version of CPI.

MPC

Bank of England Governor

+ Deputy

+ '7 wise people' + People from Industry

- make a decision every month about central lending rate, they do so to reach Chancellor's inflation budget.

Rise in inflation above 3% is bad because:

• Inflation rises geometrically, so more than 3% rise will lead to accelerating inflation in the future.
• When people see inflation, their savings and investments earn less and there is an incentive to spend money before it looses value
• Higher inflation almost guarantees higher interest rates and less growth in the future
• higher inflation would damage the pound and raise import prices

What will higher interest rates do to house prices?

• It would be very difficult to pay bills for mortgages+ other bills going up.
• Less income- fewer new homes
• Maybe more repossessions or house sales?
• New mortgages- more expensive

Spare Capacity= LAS>AD , because there are unused resources in the economy.

more Macroeconomics

What GDP doesn't tell you:

• Doesn't tell you about development
• Doesn't tell you about population- you need per capita measure (GDP/population)
• Doesn't tell you about earnings or spending abroad (GNP)
• Doesn't tell you about quality of goods produced, or the quality of life, or the future direction of a country or if growth is sustainable
• Doesn't tell you about income distribution

What would you want to know about the economy?

1. Balance of Trade and Balance of Payments
2. Income Distribution
3. Unemployment
4. Exchange Rate
5. Human Development Index

• Literacy and Numeracy
• Age of Mortality
• Morbidity
• GDP per Capita
• Infant Mortality

6. Inflation

• The general tendency of prices to rise over time
• A sustained rise in prices over time
• A sustained fall in the value of money
• RPI
• CPI
• Factory Gate Prices
• RPIX
• RPIY

7. Hidden Economy

Types of Inflation

• Hyperinflation- 1000%
• Strtoinflation- 100%-1000%
• Creeping Inflation
• Demand-Pull
• Cost-Push
• Monetary
• Stagflation
• Deflation
• Disinflation

Macroeconomics

3 Key Powers or Sets of Policies:

• Fiscal- Tax, Spending, Government Budget
• Monetary- Money, Interest Rates, Ban Reserves, Borrowing and Credit
• Supply-Side- Firms, Regulations, Costs and Wages, Employment

4 Markets:

• Labour Market
• Money and Investment Market
• Exchange Market
• Market in Product goods and Services

Measurements used in Macroeconomics:

• Inflation
• GDP Growth
• Unemployment
• Balance of Trade (Imports and Exports)
• Balance of Payments (Money coming in and out which need to be balanced)

4 Theories on How Economies Work:

1. Keynesian
2. Neo-Classical or Supply-Side
3. Monetarist
4. Neo-Keynesian

Terms at the Start of the Syllabus

• Economic growth- a sustained addition to GDP. You need to be aware of things that alter the importance of the data e.g. the difference between nominal and real prices (Nominal= adjusted figure; real= nominal minus inflation). You also have to think of an economy in terms of total value and per capita value. Be careful of exchange rates and do not confuse the volume of trade with the value of trade or activity.
• National Income Statistics- An assessment from government tax figures of the size of an economy.

Introduction to Macroeconomics

Macroeconomics is different from microeconomics.

1. You are dealing with Aggregate Supply and Aggregate Demand.
2. Economists do not agree on how it works.
3. You really need to know the Aggregate Demand and Aggregate Supply diagrams.
4. In macroeconomics 'real' prices become important. 'Real' prices are prices after the inflation. AD= C+I+G+(X-M)
5. Statistics and figures become important. GDP is the the key, not GNP.
6. Terms to know:

• Keynesianism
• Monetarism
• Supply-Side/Neo-Classical
• Neo-Keynesian

Few Important bits

1) Road Pricing

An attempt to internalize externalities by making provider pay. It covers congestion charges and road tolls

2) Landfill tax

Landfill is rubbish that is buried. It produces various gasses, especially methane. A landfill tax tries to reduce waste and encourage recycling by taxing and restriction rubbish collection

3) Carbon Offsetting

An off-set balances something. A voluntary payment to an environment fund to 'balance' the carbon you use on a flight.

4) Carbon Emissions Trading

Permits to pollute are issued and traded. If a company under-uses it's permits it can sell them, if it over-pollutes, it has to buy.

5) Renewable energy certificate

A company is forced by law to have a certificte that shows that some of it's energy comes from renewable resources:

• water/wave
• wind power
• solar power
• geothermal power

Problems with these taxes

1) Carbon Offsetting+ Carbon Trading do not reduce pollution, they just move it around

2) Congestion Charging is a regressive tax. It imposes burdens on poor people

3) Most scheme place cost burdens on businesses. In a credit crunch recession, that may create a new externality of unemployment.

4) Most Government schemes are bureaucratic. They create 'red-tape' or 'over-administration'

5) In a recession environmental externalities decline anyway: oil prices being high stop waste and so do high food prices: taxes work better than these schemes-so there may be no need for any of them.

Market Failure and Some Terms

Why do markets fail?

• Price did not reflect value because of information or time problems
• An externality could arise- something that society or other people pay for rather than the consumer or producer
• Something about the good may disrupt the market (no market in public or merit good)

A ' Tragedy of Commons' may occur because no-one has a property right.

Demand on this diagram is the same as Marginal Social Benefit.

Tools government can use to fix market failure:

1. Taxes and Subsidies
2. Government povision
3. Max and Min prices ( set prices)
4. Buffer Stock
5. Prohibition
6. Regulation: Fines, Parking, Bus Lanes.
7. Get the government to provide information
8. Control of use- license

Economic questions the government has to ask itself:

1. Will it work?
2. Side effects; Will it create new problems?
3. How do you administer it? Bureaucracy is a problem.
4. What are wider costs of regulating it?

How do you internalize the externality?

• Fine/Prohibition
• Tax
• Regulate restaurants
• Make people pay for their own healthcare
• License restaurants

Private cost- Economic cost to the parties involved or the cost to firms and consumers involved.

An External Cost- a cost to an uninvolved third party

Merit good

A Merit good is a good with a positive externality- which is beneficial for the consumer and society. It is under-consumed in a market economy. It needs to be provided or Subsidized.

Demerit good

Demerit good is cheaper for the individual than for society. It is too cheap and over-consumed. These goods need to be taxed, regulated or prohibited.

Monopoly- One firm dominates the market/ one firm is the market

Asymmety- One side has more power or knowledge. The price mechanism can not therefore work, it cant signal or incentives.

Monopony- When there is only one buyer of a good (usually in labour markets).

Moral Hazard- a feature of a market that encourage bad behavior or rewards inefficiency. e.g. self-satisfied lans or mortgages.

Homework Thursday

• Mind Map and put in blog Chapters 18, 21, 22

Homework Wednesday

• Mind map and put in blog Chapters 15, 16, 17
  

Homework Tuesday- Complete and Posted

• Question 2, page 121 and Question 3, page 122

Post by Wednesday

Homework Monday- Complete and Posted

• Question 1, page 110 and page 113 Question 2+ Question 3 and page 114 Question 4 and page 115, Question 5
  
• Make notes on externalities and public and merit good

Post by Tuesday

Homewrok Friday

• Read Chapter 16 and make notes on types of efficiency
  
• Page 104, question 1 and page 105, question 2 and page 106, question 3
  

Post everything.

Homework Thursday- Complete, See Blog

• Summarize all notes taken during the week

Homework Wednesday- Complete and Posted

• Page 85, all questions
• Practice diagrams, Unit 13
• Do question on Cars, Page 91

Post everything on Thursday

Homework Tuesday- Complete and Posted

• Page 80, question 1 and Page 81, question 2 and Page 82, question 3+ post by Wednesday
• Mind Map Chapter 5
  

Homework Monday- Complete and Posted

• Page 65-66, do questions and post Tuesday.
• Read Chapter 10
• Page 78-79 do questions and post Tuesday.
• Revise diagrams on market failure
• Mind Map chapter 4
  

Homework Sunday- Complete and Posted

• Page 55, question 2, handwritten, has to be posted on Monday.
• Read chapter 9 and practice diagrams on demand and supply.
• Question 2, page 62 and Question 3, page 63. Posted on Monday
  

Taxes (part 1)

Direct Taxes

• Income tax
• Wealth tax

Both of these Taxes affect the demand curve.

You can also have direct taxes on suppliers company tax, which would affect the supply curve. ( It would affect elasticity though, it would only shift the curve.)

Indirect taxes

These are taxes where government takes the money once you have done something (other than just earn money) e.g. Once you buy a good, there might be a tax on it.

• Ad Volorem (VAT), value added tax
• Specific, Excise or Unit taxes

Excise tax

(.75-1.0 is what the producer pays and 1.0-1.25 is what the consumer pays)

If the demand is more elastic in this graph, producer pays more, but when the demand is inelastic, consumer pays.

A problem with excise tax, is that often they seen unfair, so smuggling occurs, if the tax is too high, besides this, tax evasion can be noticed too.

These taxes are not charged in duty-free, in airports, so ones who travel avoid them.

Value Added Tax (VAT)

VAT is a percentage tax on the volume of goods sold, so in UK people usually pay 17.5% on most items (15% now)

Why do governments tax?

1. To get a revenue, might damage demand or supply. It may encourage excess demand, because suppliers supply less than people want. From that, black market, queues, shortages and tax avoidance is derived.
2. If it wishes people to stop using a good
3. To compensate for the 'true' cost of an activity.

How elasticity affects tax?

1. If demand is price elastic, suppliers will pay more tax
2. If demand is inelastic, the government can raise a great deal of revenue

Governments also worry about tax being regressive, proportionate or progressive.

• Proportionate tax- same tax for everybody
• Regressive tax- Tax that affects poor more than the rich
• Progressive tax- Is when more is taken from the rich, rather than the poor

Why have subsidies?

A subsidy is the opposite of the tax, to reduce unit cost. A purpose of a subsidy is to encourage production or it is given in an emergency. It can be 'hidden' as a regulation or tax rule that favors national companies.

Economic Statistics

Consumer indicators.

• Consumer indicators are economical statistics and allow us to interpret the future performance and analyze economic performance.
• Economic indicators include such indices and economic reports such as: unemployment, Consumer Price Index, GDP, Money Supply, Stock Market Prices etc.

Misleading economic statistics

1. GDP measures national output. Using official statistics GDP measures National output. However there are some variances e.g. You spend £1000 on vegetables annually, but then you decide to grow everything from seed in your garden. Therefore your expenditure falls by £1000, so then National output appears to fall too, even-though you are still consuming the same amount of vegetables.
2. GDP per capita. e.g. US GDP per capita is $20000, when Tanzania GDP per capita is only $500. Does this mean that living standards are severely worse in Tanzania? It does not, due to currency value dollar will ' go a lot further' in Tanzania rather than in US, so for example to rent an apartment in LA would cost around $500 and in Tanzania, you could rent a similar apartment for only $20. In fact Tanzania's economy is underestimated, because a lot of people grow and consume their own food, without claiming an income.

Some people may interpret this chart is showing a fall in GDP, even-thought it seems as it is, it is actually increasing, but at a slower rate.

This might seem confusing for some as the vertical axes show GDP growth, but we actually want to know about GDP, and this is where rates of change and absolute change can be confused.

How can economic indicators be used to mislead people?

A good example would be the GDP of Korea. It's GDP ranking has fallen down to number 15 in the world and GDP per capita fell below $17000. Some may derive a conclusion from the given data that Korean economy is simply slipping, but it is not the case here. Both figures are quite misleading and do not reveal the entire truth about Korean economy.

Everytime Korea is talking about being one of the relatively largest economies based on the GDP, it is trying to give an impression that it is one of the best performing economies in the world, but again this is not the case here.

Nation's GDP is used for comparative purposes to determine whether nation's economy has grown or contracted. The real indicator of economy's performance is GDP per capita.

Korea's per capita GDP is much worse than it's GDP. If GDP is hovering between 13-15th places in the world, per capita GDP is around 48-50th. This ranking is not only unflattering, it also 'underscores' Korea's claiming of being an economically advance country. There are at least 33 countries with a much higher people's income and a lower GDP than Korea.

GDP and GDP per capita were used here to mislead the general public about Korean economic strength.

Most Korean's economy is developing basing their information on GDP, which in fact does not indicate economy's performance. It is easy to mislead people who do not have a deep understanding in economics.

Elasticity; Demand for Goods

Demand for Goods.

You can have demand for normal goods.

-inverse relationship between price and demand.

Demand for inferior goods.

-demand for goods that are cheap and available to low-income people.

Some goods are in derived demand, meaning that this demand emerges from something else.

Some goods are in composite demand , this is where demand for one thing is composed of two distinct and exclusive demands.

DO NOT CONFUSE COMPOSITE DEMAND WITH JOINT SUPPLY

Joint supply is where two goods come from the same source at the same time.

Elasticity.

Inelastic demand.

• Goods are usually necessities
• Things people are addicted to
• Markets are 'sticky'

Elastic demand.

• Consumers are very sensitive to price change
• Goods can be traded very quickly

Price Elasticity of Demand is the relationship between price and demand or responsiveness of price to demand.

PED= % Change in Demand/ %Change in Price

If elasticity is 1 or more= Elastic (+/- can be neglected in this case)

If elasticity is 0 or near zero= Inelastic

• It is easy to substitute an elastic good
• It is easy to abandon it
• Consumers are sovereign, price makers

Both demand and supply can be price inelastic or elastic.

Demand.

• Necessities
• Compulsory products
• Public goods

Supply.

• Agricultural goods can be limited by geography
• Non-renewable sources are limited by quantity
• Limited by cost or number of firms

Types of Demand.

PED= % Change in Quantity Demanded/ % Change in Price

Price Elasticity of Supply= % Change Quantity Supplied/ % Change in Price

Income Elasticity of Demand= % Change Quantity Demanded/ % Change of Income

Cross Elasticity of Demand= % Change Quantity Demanded of Good A/ % Change in Prices for Good B

Supply/Demand curves; Types of Goods; Types of Economy.

Why does the demand curve slope down?

• People are willing to pay more if there are fewer goods
• People might find that rare things are more useful-more utility. Demand curve might show marginal utility
• People might be indifferent when prices are not high

Why does the supply curve slopes upwards?

• Resources run down
• Costs go up
• Lots of firms produce, so profit goes down

Consumer and Producer surplus.

Producer surplus is a difference between what a producer would have sold for and what they actually sell for.

Consumer surplus is a difference between what a consumer would pay and what he actually pays. Surplus utility or surplus satisfaction.

Surplus is a benefit but only in terms of planning and anticipation.

Substitute and Complementary goods.

Substitute goods:

• Goods that can be used instead of another
• The benefit from the goods is similar or the same as from the other
• Direct relationship in terms of cross-elasticity

Complementary goods:

Are goods that are bought together:

• Cars and Petrol
• Bread and Butter
• Tea and Biscuits

Free Market Economy

• Lot's of suppliers
• Consumer sovereignty
• Price Mechanism

Mixed Economy

• Some degree of government control
• Some free markets
• Same prices do not reflect pure cost

Command Economy

• Government control
• Plan
• State business

Cool Factor.

Cool factor is opportunity cost of not having an ipod or individual benefit of having it.

Imputed Value.

Imputed value is a value an individual gives to a thing.

Comparative advantage.

Comparative advantage- if costs of production differ, countries should trade. Costs will be explained in terms of different opportunity cost.

Types of goods.

• Normal good- if price goes up, demand goes down; if price goes down, demand goes down
• Inferior good- if income went down, the demand would go up, alternatively if income went up, demand would go down.
• Giffen good- a kind of substitute when goods are expensive or scarce.
• Veblen good- luxury goods with imputed value. ( Price up, demand up)

Quick recap of topics covered at CIC

Here are the topic that have been covered so far at college.

Microeconomics is about one market, one demand, one supply.

Basic economic problem.

• Scarcity
• Unlimited wants can be broken up into luxury goods and necessary goods
• Scarce resources are divided into non renewable resources and renewable or sustainable resources.

Price system.

What does the price do?

1. Allocates
2. Indicates (Where resources go)
3. Incetivizes

What is price?

- Price is where demand and supply meet- equilibrium.

Demand is only affected by three things:

1. Tastes and fashion
2. Another goods such as complementary or connected goods
3. Income

Supply is affected by:

1. Resources
2. Number of suppliers
3. Costs

Free Market System.

Free market system answers to the basic question by using the price mechanism.

Free market system has several advantages and disadvantages.

Advantages:

• Should, if free, balance resources
• Runs itself
• Shouldn't be waste
• Encourages productivity and innovation discovery
• Indicates
• Allocates
• Incenitivizes

Disadvantages:

• Completely amoral
• No space for social cost or benefit
• Sometimes information fails
• Not all suppliers or consumers are equal
• Government and society do regulate the market.

What is the importance of economics?

“Economics is a social science that studies individual and group decisions on how to use scarce resources to satisfy wants and needs”- Oxford Dictionary of Economics.
In a much simpler language, economics is a science that studies how people and groups make decisions, which would allow them to use the resources to the full potential and get the most out of them. It analyses how well the limited resources that are available are converted to satisfy the human wants and need. The behaviour of individuals, companies and various institutions are closely examined in order to avoid recession, inflation and high unemployment.
Study of Economics is divided into two main “pieces”: Macroeconomics and Microeconomics, each one of these focuses on different aspects of Economics. Macroeconomics looks at factors such as inflation, interest rates, unemployment, recession and how to avoid or reduce an already exciting problem using monetary and fiscal policies. Microeconomics, on the other hand, looks at individual people and businesses, looks at their behaviour concerning where to invest and what is the best way to spend earned money. It also investigates the firms that are trying to maximise their profits, looks at them individually and one firm competing another.
Macroeconomics and Microeconomics are two most essential parts in economics. They look at the behaviour of people, government, and businesses, poor government policies that can create inflation and recession. Macroeconomics has ways of “fighting” with recessions using Monetary and Fiscal policies. An English economist John Maynard Keynes first introduced these antirecessionary policies in 1936. Monetary policy is aimed to stimulate economic activity changing interest rates and the supply of money. Fiscal policy, is the one which is directly aimed to fight recession by increasing government spending or lowering taxes. These “tools” seem to work very well, although they are powerful means to fight recession, they too have their limitations.
Microeconomics looks closer into Supply and Demand issues. Demand is determined by the consumers, when Supply by the producer, microeconomics focuses on how these determine the prices of goods, it looks even closer at individuals with very limited income and how they get most happiness from that. It also examines competition between different firms and businesses, the problems which may be caused by the lack of completion between businesses, worst problem than can be resulted from the lack of competition is monopoly, or no competition at all. Usually in order to increase the prices monopoly businesses restrict their output, this creates problems for consumers, it “hurts” their interests.
Economics is quite a scarce science, which looks at many everyday factors that we face, consumption of goods, what we demand, whether we can afford to buy what we want, and we cant what to we do to maximise our happiness with the income that’s available. It also looks into behaviour of competitive firms and businesses, government policies, inflation and recession. Economics provides us with ways of balancing out demand and supply, avoiding inflation and recession.
Monetary and Fiscal policies help prevent recession by increasing money supply and government spending.
There are some ways of preventing the economy from failing, preventing inflation. There may be a trade off for example, attempts to increase economic growth may cause inflation. Also if a government tries to decrease inflation, this can lead to unemployment.
Economics is a science that closely studies all of this. Without economics, in my view, people would suffer, there would be high poverty no economic stability, there would be no markets, maybe we would not be able to exist without it. Frankly, it is quite hard for me to imagine a world without economics. It seems as such an essential science for today’s world. Economics “is important to our social life, political life, economic life and daily life.” (source)

Bibliography
“Economics for dummies” by Peter Antonioni and Sean Masaki Flynn
“Economics” by Richard G. Lipsey and K. Alec Chrystal
“Oxford Dictionary of Economics” by John Black, Nigar Hashimzade and Gareth Myles.