Download Demand shocks and sticky prices

23
An Introduction to Macroeconomics
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
.
Performance and Policy
• Real GDP – measures the value of final
goods and services within a nation’s borders
during a year
• Nominal GDP - $ value of goods and
services produced in a nation’s borders using
their current price during year of production
LO1
23-2
Unemployment
• You must be willing and able to work
•
– actively looking for a job
The current unemployment rate in the
US is 5.8 % - in Texas the rate is 5.2
Inflation
• Inflation is an increase in overall level
•
•
of prices
September 2014 inflation rate has
been calculated to be 1.7%
Inflation reduces the family’s
purchasing power of savings –
basically $1 of goods would cost
$1.02 in September
Modern Economic Growth
• Standard of living measured by output
•
LO3
per person – GDP Per Person (per
capita)
No growth in living standards prior to
Industrial Revolution due to the fact
that as the economy grew, so did the
population
23-6
Modern Economic Growth
• Output per person rises
• Not experienced by all countries but
a growth rate of 2% annually
doubles the average citizens
income every 35 years and again
35 years after that. (Rule of 70)
Global Perspective
•All currencies are
changed into US
dollars
•GDP is divided by
population
•Purchasing power
parity adjusts for price
differences between
countries
LO3
23-8
•
•
LO4
Savings and Investment
Saving = current consumption is less than
current output
Investment = resources are devoted to
increasing future output
• Financial investment – assets, stocks
bonds, etc.
• Economic investment is
creation/expansion of business
enterprise**Key***Investment is limited
by the amount of saving
23-9
Uncertainty, Expectations, and Shocks
• The future is uncertain and this changes
•
•
•
LO5
behavior - expectations affect investment
Shocks - What happens is not what you
expected
Demand shocks – unexpected change in
demand for g or s – economists believe
these cause short run fluctuations in GDP
Supply shocks – unexpected change in
supply of g and s
23-10
Uncertainty, Expectations, and Shocks
• Demand shocks and flexible prices
• Price falls if demand is low
• Sales are unchanged
• Production levels and
unemployment levels would be
constant – only the price changes
LO5
23-11
Demand Shocks
Flexible
Prices
Price
$40,000
$37,000
$35,000
DM
DH
DL
900
Cars Per Week
LO5
23-12
Demand shocks and sticky prices
• Prices are inflexible
• Adjusting production is very expensive
because companies operate at lowest
cost and produce constantly at optimum
output
• Maintain inventory – store extra product
but can cause a revenue issue if
maintained too long
• Sales fall, unemployment rises,
production falls
Demand Shocks
Price
Fixed Prices
$37,000
DH
DL
700
900
DM
1150
Cars Per Week
LO5
23-14
•
LO5
Sticky Prices
Many prices are sticky in the short run
– this leads to fluctuations in GDP
and employment over the course of a
business cycle
• Consumers prefer stable prices and
producers know this
• Firms want to avoid price wars
• Coke and Pepsi
23-15
Long Run Flexibility of Price
• All prices are flexible in the long run
• Firms adjust to the unexpected and
there are permanent changes in
demand