Lecture 4 Macroeconomics

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Lecture 4Macroeconomics

• Go over Homework 3
• Chapter 4 The Market System The Private Sector

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Homework 3, pg 68, 2, 7, 8, 10

• 2. a. False. An increase in quantity demanded
  is represented by a move up the demand curve.
• b. False. An increase in quantity supplied is
  represented by a move up the supply the curve.
• c. True. The demand curve shifts out, leading
  to a price increase.
• d. False. The supply curve shifts out,
  leading to a decline in price.

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Homework 3, pg 68, 2, 7, 8, 10

• 7. The opportunity cost of using barter is
  higher than it is with currency. The use of
  currency would reduce the cost of transactions.

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Homework 3, pg 68, 2, 7, 8, 10

• 8. California and Florida citrus are
  substitutes. Thus, as the quantity of California
  citrus declines, the supply curve shifts in,
  causing the price to rise. Consumers will then
  shift their purchases from California to Florida
  citrus. Consequently, the demand for Florida
  citrus will rise (shifting the demand curve out),
  and as a result, the price of Florida citrus will
  eventually rise also.

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Homework 3, pg 68, 2, 7, 8, 10

• 10. No. The price of trees rises because the
  demand curve shifts out as the demand for trees
  rises.

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Chapter 4 The Market System

• We learned in Ch 2 that a society can produce any
  combination of goods and services along their
  PPC.
• In a market system, how does a society choose
  which point they will produce at?

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The Power of the Consumer

• Consumers ultimately determine what goods and
  services will be produced by demanding more or
  less of products.
• Example The growth of fast food industry.
• Firms will produce what consumers demand because
  they are driven by profits.
• This consumer power is called consumer
  sovereignty.

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Consumer Sovereignty

• Consumer Sovereignty is the authority of the
  consumers to determine what is produced through
  their purchases of goods and services.
• Can you think of any new products or industries
  in the market today that were created by consumer
  sovereignty?

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Profit and Allocation of Resources

• If a product has potential to make a profit, you
  can bet that someone will use resources available
  to them to produce that product.
• If the product does not make a profit, the
  production of the product will cease and
  resources will be allocated elsewhere.

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Example - Restaurant Market
Consumers began to prefer take-out and delivery
(change in taste). Consequently, demand for
dining out (restaurants) declined, shifting
equilibrium from e1 to e2.
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Example - Restaurant Market
Consumers demand more home-delivered food (change
in taste). Thus, their increased demand shifts
the equilibrium from e1 to e2.
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Profit The Allocation of Resources

• Our examples illustrate that consumers ultimately
  determine what the firms will produce.
• As consumers tastes began to change (preferred
  delivery over dining in), restaurants responded
  to the desires of the consumer in order to
  maintain profits.

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The Flow of Resources

• Firms will produce goods and services and use the
  resources that enable them to generate the
  highest profits.
• Adam Smith described this phenomenon as the
  invisible hand.
• The invisible hand is the self-interest that
  drives firms to produce what the consumers want,
  consumers to purchase what brings them the
  greatest satisfaction, and the resource owners to
  supply the resources that are most highly valued.

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The Determination of Income

• Income and prices determine who gets what in a
  market system.
• Income is obtained by selling services and
  resources, thus, owners of resources determine
  income.
• Because of this, sellers of goods and services
  and the owners of resources are linked in the
  economy.

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Sectors of the Economy

• Private Sector Households, businesses, and the
  international sector.
• Households Buyers and the resource owners
• Businesses Sellers or Business firms
• International Households and firms in other
  countries.
• Public Sector the government.

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Households

• A household consists of one or more persons who
  occupy a unit of housing.
• What are some examples of households?
• There are more than 104 million households in the
  United States.

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Age Median Income of Households in the U.S.
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Size Distribution of Households in The United
States
The average household size in the U.S. is 2.2.
Average household sizes in high income countries
are close to the U.S., while low income countries
have household sizes that are at least twice as
large.
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Household Spending

• Household spending is also called consumption or
  consumer spending.
• Spending by the household sector in the U.S. is
  the largest component of total spending in the
  economy.

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Household Spending Income

• According to our graph, consumer spending and
  income have consistently risen from 1959 to 2002.

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Business Firms

• A business firm is a business organization
  controlled by a single management.
• Firms can be organized in three different
  manners
• Sole Proprietorship
• Partnership
• Corporation

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Sole Proprietorship

• A sole proprietorship is a business owned by one
  person who receives all the profits and is
  responsible for all the debts incurred by the
  business.
• Examples?

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Partnerships

• A partnership is a business with two or more
  owners who share the firms profits and losses.
• Partners can be individuals, estates, or other
  businesses.
• Examples?

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Corporations

• A corporation is a legal entity owned by
  shareholders whose liability for the firms
  losses is limited to the value of the stock they
  own.
• A corporation is an economic entity separate from
  its shareholders.
• If a corporation has debt, creditors cannot seek
  payment from shareholders personal wealth.
• Examples?

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Multinational Businesses

• Many firms are now global.
• A global firm (multinational business) is a firm
  that owns and operates producing units in foreign
  countries.
• Examples?

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10 Largest Firms Around the World (as of 2002)
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Business Spending

• When we talk about investments in every day
  terms, we are usually referring to financial
  transactions such as buying real estate, stocks,
  bonds, etc.
• In economics, investments refer to the spending
  on capital goods to be used in producing goods
  and services.
• Business investment spending tends to fluctuate
  widely over time.

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U.S. Investment Spending

• Business spending is an important factor in
  determining the economic health of a nation.
• If business spending decreases, this can cause
  U.S. and world economies to grow slowly or even
  decline.

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The International Sector

• Nations of the world can be separated into two
  categories
• Industrialized Countries (developed countries)
• Developing Countries
• Developing countries greatly outnumber
  industrialized countries (see pages 86-87).

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Developing Countries Trade

• Most of the developing countries are concentrated
  in Africa Asia.
• These countries have a low profile in national
  trade.
• U.S. trade tends to be concentrated with other
  industrialized nations and neighboring countries
  (Canada and Mexico).

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The World Bank

• The World Bank (an international organization
  that makes loans to developing nations) uses per
  capita income to classify industrial market
  economies. These are the wealthiest nations and
  are considered developed or industrialized.
• Some of the oil-exporting countries are still
  considered developing even though they are
  high-income oil-exporting nations (ex Kuwait,
  Saudia Arabia).

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Industrial Market Economies
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Industrial Countries

• The economies of industrialized nations are
  highly interdependent (money flows from country
  to country as economic conditions change).
• Because of this, industrialized nations pay close
  attention to each others economic policies.

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Developing Countries

• Many developing countries struggle to
  industrialize due to their huge debts.
• The amount of money owed often exceeds their
  annual sale of goods and services to the rest of
  world.
• Developing countries also suffer from a
  phenomenon called brain drain.
• Brain drain is the emigration of highly educated
  and skilled professional and technical manpower
  from the developing to the developed countries.

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Imports and Exports

• Imports are products that a country buys from
  other countries.
• Exports are products that a country sells to
  other countries.

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Direction of U.S. Trade
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Trade

• A trade surplus exists when imports are less than
  exports.
• A trade deficit exists when imports exceed
  exports.
• Net exports is the difference between the value
  of exports and the value of imports (Net exports
  exports - imports).

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U.S. Net Exports

• We see that around 1976, the U.S. began to run a
  trade deficit.
• This means that our net exports have been
  negative (our imports have exceeded our exports)

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Linking the Sectors

• All three sectors within the private sector
  households, firms, and international interact
  with one another.
• This can be illustrated in a circular
  flow-diagram ( a model showing the flow of output
  and income from one sector of the economy to
  another).

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The Circular FlowHouseholds and Firms
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Households, Firms, Foreign Countries
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Review

• 1. In a market system, who decides what goods and
  services are produced?
• a. The large firms
• b. The multinational firms
• c. Consumers
• d. The national economy
• e. Some regional economic segment of the United
  States

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Review

• 2. The idea that in a market system the consumer
  determines what is to be produced is called
• a. caveat emptor.
• b. imperial rule.
• c. consumer sovereignty.
• d. business sovereignty.
• e. consumer monopoly.

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Review

• 3. In economics, the invisible hand is not
• a. the self-interest that drives firms to provide
  what consumers want to buy.
• b. what leads consumers to use their limited
  incomes to buy the goods and services that give
  them the most satisfaction.
• c. what induces resource owners to supply
  resource services where they are most highly
  valued.
• d. a term attributed to Adam Smith.
• e. government intervention in the economy.

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Review

• 4. The private sector refers to
• a. households only.
• b. households and the government.
• c. households, businesses, and the international
  sector.
• d. households and businesses only.
• e. the government.

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Review

• 5. T F Household spending is called
  investment.

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Review

• 6. The three basic types of businesses in the
  United States are
• a. enterprises, partnerships, and corporations.
• b. corporations, proprietorships, and
  partnerships.
• c. partnerships, firms, and proprietorships.
• d. corporations, households, and proprietorships.
• e. partnerships, multinationals, and corporations

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Review

• 7. In economics, investment includes all of the
  following activities except
• a. the purchase of an office.
• b. the purchase of tools.
• c. the purchase of stocks or bonds.
• d. the purchase of machinery.
• e. the purchase of a warehouse.

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Review

• 8. When the value of net exports is positive,
• a. there is a trade deficit.
• b. imports exceed exports.
• c. imports are less than exports.
• d. exports equal imports.
• e. None of these

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Worksheet

• Complete Trade Worksheet.
• You may work in groups or individually.

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Homework 4

• Page 94, 1, 2, 4, 5