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Macroeconomics
30,000
Growth=long-run
20,000 upward trend
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Mariko J. Klasing slide 4
Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
Why does the cost of living keep rising?
3
3
1
2
1 -1
0
-3
-1
-5
-2
-3 -7
1965 1970 1975 1980 1985 1990 1995 2000 2005
Marikounemployment
J. Klasing rate inflation-adjusted mean wage (right scale) slide 9
Why learn macroeconomics?
The power of economic growth
In just one century, the U.S. economy has been completely
transformed
Life expectancy: 1900 = 50 years, today = 78 years
Education: in 1900 fewer than 10% of adults had completed
high school; today the overwhelming majority of people has at
least a high school degree
Child mortality: in 1900 one out of every 10 children born died
before the age of one; today more than 90% of children born
survive
Enormous increase in living standards: electricity, refrigerators,
cell phones, airplanes, dishwashers, …
demand equation: Q d = D (P ,Y )
shows that the quantity of laptops consumers
demand is related to the price of laptops (P) and
aggregate income (Y)
A list of the
variables
that affect Q d
A specific functional form shows
the precise quantitative relationship.
Example:
D (P,Y ) = 60 – 10P + 2Y
demand equation: P
Price
Q d
= D (P ,Y ) of laptops
supply equation: P
Price
Q s = S (P ,P C) of laptops S
Q
The supply curve
shows the relationship
between quantity D
supplied and price, Q
other things equal. Quantity
of laptops
P
Price
of laptops S
equilibrium
price
D
Q
Quantity
of laptops
equilibrium
quantity
Mariko J. Klasing slide 18
The effects of an increase in income
demand equation: P
Q d = D (P ,Y ) Price
of laptops S
An increase in income
increases the quantity P2
of laptops consumers P1
demand at each price… D2
D1
Q
…which increases Q1 Q2
Quantity
the equilibrium price of laptops
and quantity.
supply equation: P S2
Q s = S ( P , P C) Price
of laptops S1
An increase in P C
reduces the quantity of P2
laptops producers P1
supply at each price…
D
Q
…which increases the Q2 Q1
market price and Quantity
of laptops
reduces the quantity.