IntroductionThe Principles These slides supplement the textbook, but should not replace reading the textbook
What isthe main thesis of this book? To understand the macroeconomic causes of the financial collapse of 2007-2008 and to evaluate government’ policies since 2008.
Who isFriedrich Hayek? He is an Austrian economist whose main premise is that economic planning will eventually lead to economic stagnation and loss of personal freedom.
Who isJohn Maynard Keynes? He is an economist who believed that government intervention in a stalled economy may be necessary to stimulate demand for recovery.
What isMacroeconomics? Macro means large – it deals with the performance, structure, behavior, and decision making of the whole economy.
What are some examples of Macroeconomics? • Inflation • Unemployment • Money and banking • Economic growth • Business cycles
What isopportunity cost? That which is given up in the best alternative choice when making a decision.
What are two types of opportunity cost? Financial Activity
What are some examples of opportunity cost? The money you are giving up to be a student. An activity you would rather be doing than being in class.
How is opportunity cost estimated? Opportunity cost is subjectively estimated by the individual decision maker
What is the opportunity cost of cleaning your room? It’s greater on sunny days than on rainy days
What is the opportunity cost of a city to use local taxes to pay for a park? The best alternative foregone by not building the park
What is your opportunity cost of attending college? If you make $300 a week, but you expect you could make $500 without school - your opportunity cost is $200
Should you paint the room yourself or hire someone? If you paint the room yourself, what is your opportunity cost? How much will you pay someone to paint?
What is the opportunity cost of low interest rates? Retired people and others make less money on their savings.
What does the term “margin” mean? Margin means the last unit or the last increment. For example, MR is the revenue received on the last unit of output.
What ismarginal analysis? Economists use marginal analysis to predict cause and effect. For example, how many sodas will a person buy when standing in front of a soda pop machine?
What is an example of marginal analysis? You will decide to do something if your marginal benefit exceeds your marginal cost
How many soda pops will a person buy? A consumer will purchase additional sodas as long as his marginal benefit (on the last unit) is greater than his marginal cost (on the last unit).
What is leverage? Leverage is a way of multiplying a gain or a loss.
What are examples of leverage? • Buying stock on the margin • Borrowing money to grow a business • Hiring employees • Recording this lecture
What is Price Elasticity of Demand? A measure of demand responsiveness to a change in price.
When does something face an elastic demand curve? When a business owner raises the price of his product and total revenue decreases.
When does something face an inelastic demand curve? When a business owner raises the price of his product and total revenue increases.
What ismoral hazard? Moral hazard exists when someone has a tendency to invest in something or pursue an activity without regard to potential losses.
What isan example of moral hazard? After 2008 large financial firms were bailed out by the government shielding them from their greed and protecting them from losses.
What isa consequence of moral hazard? To minimize moral hazard the government has increased regulations over large corporations.
What is rent seeking? Resources are used for personal gain without benefiting society.
What is an example of rent seeking? Companies hire lobbyists to petition Congress for favors.
“Anyone can arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury …” Judge Learned Hand
What is stock and flow of economic analysis? Flow is time dimensional – Stock is a point in time.
What are other names for stock and flow? Short run vs. long run Static vs. dynamic
Will an increase in taxes lead to an increase in government revenue? In the short run yes, in the long run maybe not.
What is Economies of Scale? As a company grows its costs decrease up to a certain point.
Should a farmer pay $50,000 for a new tractor? That depends on the size of the farmer’s operation.
Why do large corporations favor minimum wage laws and small firms do not? Economies of scale differences
What is price, cost, revenue and profit? • Price is what consumes pay • Cost is what producers pay • Revenue is total money in • Profit is money in minus money out
What is Gross Domestic Product? The dollar value of all new and final goods and services produced in a given year.
How do we measure growth? Gross Domestic Product (GDP)