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Tests ???? 2006 Test on Units 4 & 5 – After the AP Test, Monday May 15. Your last textbook test! 10 point Bonus Homework for unit 4 due Friday May 5. All Homework for unit 4 after the AP Test, Monday May 15. A week break of Wal-Mart and Daddy Day Care. Final two weeks the state of our current U.S. and global economy and Freakonomics. Your Choice last essay to be scored as a test on one of the last topics. The Demand for Resources CHAPTER TWENTY-SEVEN Product Market Burgers P Factor Markets CELL S D2 D P S S Q Land P P D D2 D S Q Entrepreneurship P Q D Markets Move in Unison! D2 S D2 D2 Q Labor D Q Capital Determinants of Resource Demand or Factor Demand(CELL) Changes in Product Demand Changes in Productivity 1 - Quantities of Other Resources 2 - Technological Progress 3 - Quality of the Resource Prices of Other Resources Supply & Demand Product and Factor Markets S S P P D Quantity Product Market D Quantity Factor Market CELL What if Product Demand Falls Product and Factor Markets S S P P D Quantity Product Market D Quantity Factor Market CELL What if Product Demand Falls Product and Factor Markets S S P P D Quantity Product Market D Quantity Factor Market CELL What if Demand Falls Product and Factor Markets S S P P D Quantity Product Market D Quantity Factor Market CELL Supply & Demand Product and Factor Markets S S P P D Quantity Product Market D Quantity Factor Market CELL What if Factor Demand Increased? Product and Factor Markets S S P P D Quantity Product Market D Quantity Factor Market CELL What if Factor Demand Increased? Product and Factor Markets S S P P D Quantity Product Market D Quantity Factor Market CELL Failure to Know Difference Between Product and Factor Markets Major Miss for the AP Exam S S P P D Quantity Product Market D Quantity Factor Market CELL Marginal Productivity Theory of Resource Demand Resource Demand as a Derived Demand Marginal Product (MPP=^TP/^Q) Marginal Revenue Product (MRP) Productivity (MRP=MPP*Po) Product Price (MRP=^TR/^Q) Marginal Resource Cost (MRC) – in a purely competitive resource market MRC=Price Rule for Employing a Single Resource: MRP = MRC Optimum Combination of Resources Rules for multiple inputs! Least-Cost Combo Rule MPP of Labor MRC of Labor MPP of Capital MRC of Capital Profit-Maximizing Combination MRPL MRPC MRCL MRCC 1 For nonmath people: if MRP = MRC then MRP/MRC = 1 Ha Ha Ha – Factor Markets are Fun! 1 The Product Market S Individual Firms Households Signals D Individual Firm Product Market Household s = MC S P* d = MR q* P* Q* P* s D d q* The Product Market signals both Households and Individual Firm the price of products. The signals indicate P* to both. Based on its cost of producing one more firms determine how much. Based on their demand consumer determine how many. Workers Factor Market Labor Individual Firms s = MSC S P* d = MSB P* MRC P* MRP D q* Q* q* The Factor Market signals both Workers and Individual Firms the price of labor & the wage of labor. The signals indicate P* to both. Based on its revenue/worker(mrp) vs. its costs(mrc) firms determine how many workers to hire (mrp=mrc). Based on their Marginal Benefit vs. Marginal Cost workers determine whether or not they will work for this wage (msc=msb). Supply & Demand: Labor in a Competitive Firm and Market Wage Rate (dollars) S D Target Workers Wc S = MRC Wc ($6.85) D = MRP (S mrp’s) d = mrp (1000) Quantity of Labor Quantity of Labor Individual Firm Market Supply & Demand: Labor in a Competitive Firm and Market Wage Rate (dollars) S ($6) W c D Marginal Resource Cost (MRC) will be constant and equal to S = MRC resourceWprice c (the wage rate) D = MRP (S mrp’s) d = mrp (1000) Quantity of Labor Quantity of Labor Individual Firm Market Labor Market Theory The Real World Will Get You! • Human Capital – Education = Income • Sorting Mechanism – Hoops • Radical View – Rich Dad Poor Dad • Dual Labor Market – Good Job v Bad Job Market 3,500,000 • Fast food workers lead the nation in minimum wage jobs • McDonalds Corp #1 at hiring minimum wage workers in the world • How many minimum wage workers does McDonalds own? CAUSES OF INCOME INEQUALITY-Unit V 1 - Ability Differences 2 - Education and Training: Human Capital & Sorting Mechanism Theories 3 - Discrimination 4 - Tastes and Risks 5 - Unequal Distribution of Wealth Radical Theory 6 - Market Power 7 - Luck, Connections, and Misfortune Good Job, Bad Job Market EQUALITY-EFFICIENCY TRADEOFF Wage Rate (dollars) Monopsonistic Labor Market MRP DD MRC S=MRC The MRC of a Monopsonist is Pulled Above the Supply Wc Wm MRP DD Qm Qc Quantity of Labor Monopsonistic Labor Market Wage Rate (dollars) MRC Price paid for resources less than in a Competitive Market MRP S MRP = MRC Profit Max S(MRC)=DD(MRP) Wc Wm MRP Qm Qc Quantity of Labor Qm units of labor hired less than in a Competitive Market Monopsonist & Minimum wage… MRC Wage Rate (dollars) S Wc Wg Wm D Qm Q g Qc Quantity of Labor Goodwill, Buy American Demand-Enhancement Model Wage Rate (dollars) S Wu ...by increasing product demand ...by increasing productivity ...by increasing the price of substitutes Wc D2 D1 Qc Qu Quantity of Labor Occupational Licensing Exclusive or Craft Union Model S Wage Rate (dollars) 2 S1 Wu ...restrictive membership policies ...occupational licensing Doctors, Lawyers Teachers…. Wc D Qu Qc Quantity of Labor Close Shop Model ...by organizing virtually all S workers and thereby control of the supply curve for labor Wage Rate (dollars) Inclusive Unionism Wu Wc D Qu Qc Quantity of Labor ECONOMIC RENT Note: Fixed Total Supply means... Perfectly Inelastic Supply therefore... Demand Determines Price! Determination of Land Rent Changes in the demand for land... Land Rent (dollars) Inelastic Supply... 0 Copyright McGraw-Hill, Inc., Q Acres of Land Determination of Land Rent Changes in the demand for land... Land Rent (dollars) S 0 S Acres of Land Inelastic Supply... combines with demand... Q Determination of Land Rent Changes in the demand for land... Land Rent (dollars) S R1 Inelastic Supply... combines with demand... to determine RENT D1 0 S Acres of Land Q Determination of Land Rent Changes in the demand for land... Land Rent (dollars) S If demand decreases... R1 D1 0 S Acres of Land Q Determination of Land Rent Changes in the demand for land... Land Rent (dollars) S If demand decreases... Rent decreases. R1 R2 D1 D2 0 S Acres of Land Q Determination of Land Rent Changes in the demand for land... Land Rent (dollars) S R1 If demand decreases... Rent decreases. ...and decreases R2 D1 R3 0 D2 D3 S Acres of Land Q Determination of Land Rent Changes in the demand for land... Land Rent (dollars) S R1 If demand decreases... Rent decreases. ...and decreases ...and decreases R2 D1 R3 0 D2 D3 S D4 Acres of Land Q Economic Rent & Stardom? Changes in the demand for a fixed resource... Brett Favre’s Salary S $100,000,000 Pure Economic Rent $99,800,000! D Would play for $200,000 for love of the game! $200,000 0 Perfectly Inelastic Supply... combines with demand... to determine Salary! 1 Q All Pro Quarter Backs with 100+ Games Started without a miss Factor Market Theory • Land earns Rent, or Economic Rent • Labor earns Wages or Salary • Capital earns Interest • Entrepreneurship earns Economic Profit Interest Rate and the Role of the Interest Rate: Interest & Total Output: RGDP Interest & Capital Investment Interest & R&D Investment Nominal Interest Rates vs. Real Interest Rates Loanable Funds Theory of Interest Nominal i = Real i + Rate of Inflation Interest Rate i, (percent) MS 8% 4% Inflation +4% Real Interest Rate 8% Nominal Interest Rate MD M1 Quantity of Loanable Funds Rate of interest, i (percent) The Money Market MS 10 7.5 i 5 2.5 MD 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Rate of interest, i (percent) The Money Market Sm1 Sm 10 Any Micro 7.5 Or any Macro AP ie Question concerning 5 Interest Rate uses this 2.5 Dm Graph!!!! 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Rate of interest, i (percent) The Money Market MS – Fed controls MS OMO, RRR, DR, FFR 10 7.5 i 5 MD – Fiscal Policy: G,T, Surplus, Deficit 2.5 0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars) Transmission Graphs Real rate of interest, i Monetary Policy and Equilibrium GDP Sm1 8 R 10 i R 8 6 6 10 Dm 0 Quantity of money demanded and supplied MEI Investment Demand 0 Amount of planned investment, I Price level AS MEI – Marginal Efficiency of Investment As interest falls more Investment becomes Possible and Profitable! P1 AD1 Real domestic output, GDP Real rate of interest, i Monetary Policy and Equilibrium GDP Sm1 8 R 10 i R 8 6 6 10 Dm 0 Quantity of money demanded and supplied MEI Investment Demand 0 Amount of planned investment, I Price level AS P1 AD1 Real domestic output, GDP If the money supply increases to stimulate the economy.... Real rate of interest, i Monetary Policy and Equilibrium GDP Sm1 Sm2 8 R 10 i R 8 6 6 10 Dm 0 Quantity of money demanded and supplied Price level AS P2 P1 AD1 AD2 Real domestic output, GDP MEI Investment Demand 0 Amount of planned investment, I Real rate of interest, i Monetary Policy and Equilibrium GDP Sm1 Sm2 8 R 10 i R 8 6 6 10 Dm 0 Quantity of money demanded and supplied MEI Investment Demand 0 Amount of planned investment, I Price level AS P2 P1 If the money supply increases again.... AD1 AD2 Real domestic output, GDP Real rate of interest, i Monetary Policy and Equilibrium GDP Sm1 Sm2 Sm3 8 R 10 i R 8 6 6 10 Dm 0 MEI Investment Demand 0 Quantity of money demanded and supplied Amount of planned investment, I Price level AS P3 P2 P1 AD1 AD2 Real domestic output, GDP AD3 Long Run Effects: 1. Increased planned investment will lead to increased AS 2. Canceling effect: AD up, MD up, i up, and I down, = AD down 3. i down = international $ down, PL up = X down Real rate of interest, i Fiscal Policy and Equilibrium GDP Sm1 Price level 10 AD1 AD2 Real domestic output, GDP R 10 i 8 R 6 0 PI2 MEI PI1 Amount of planned investment, I 8 6 0 Dm2 Dm1 Quantity of money demanded and supplied Long Run Effects: 1. Decreased planned investment will lead to decreased AS 2. Canceling effect: I down, AD down, MD down, and i down, = AD up 3. i up = international $ up, PL down = X up SCARCE RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR What’s missing???? SCARCE RESOURCES PROPERTY RESOURCES LAND CAPITAL HUMAN RESOURCES LABOR ENTREPRENEURIAL ABILITY ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE MAKES POLICY DECISIONS ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE MAKES POLICY DECISIONS SOURCE OF INNOVATION ENTREPRENEURIAL ABILITY TAKES THE INITIATIVE MAKES POLICY DECISIONS SOURCE OF INNOVATION THE RISK BEARER RESOURCE PAYMENTS PROPERTY RESOURCES LAND CAPITAL RENT INTEREST HUMAN RESOURCES LABOR ENTREPRENEUR WAGES PROFIT & LOSS