Prof. Dohan Eco 101 Spring 2009 4

Required Course Materials

1. Text: Macroeconomics: Principles and Policy,Baumol and Blinder, 11thEdition, 2009

A. Buy new at the QC Bookstore bundled with the Aplia Prepaid Printed Access Card.

B. Buy a used text from the Bookstore, Amazon, etc. (must be 11th edition) for less than $110. (If the price of the used book alone is over $110, you are better off buying a new bundled package).

C. Then, buy an Aplia Access Card customized for Baumol and Blinder, Macro, 11e at the Bookstore or simply pay the $70 online with a credit card.

2. Aplia customized for Baumol and Blinder, Macro 11e. If you bought the bundle from the bookstore, simply “pay” for it by using the code in the accompanying Aplia Access Card. If you did not purchase the “bundle”, you may pay for Aplia on line with a credit card, or purchase it separately at the bookstore.

3. Wall Street Journal, (15-week subscription $19.95. Sign-up in class.)

Course website: www.profdatqcecon.org: latest announcements, new homework assignments, vocabulary lists, class notes, old quizzes and exams and the most recent updated syllabus. I do not use Blackboard very much.

Start using Aplia tonight, risk-free! Log onto to www.aplia.com and register for Baumol and Blinder 11e

Spring 2009 using the Course Key:4KCM-BDV7-4VF6. If you are in the morning class, select the “AM 101” section and if you are in the afternoon class, select the “PM 101” section. You can use Aplia free until February 15 before you must pay using the ways described above.

Graded Aplia problems are important, sowatch out for closing times! Do the practice problems after you read the chapter but before the lecture and before you do the graded problem sets. Then, after the lecture do the graded problem set and finish it before Sunday. All graded problem sets close on Sunday at 11:30 pm and will not be reopened. Start the graded problem sets Friday or Saturday. You can always change your answers until closing on Sunday. You can always go back to the practice problem sets. Remember Aplia counts between 10% - 40% of your grade.

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Basic Economic Concepts

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Read

Ch.

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Aplia &

Written homework
Tues / Jan. 27 / 7 Major Concepts for all time: Key assumptions (not always true) underlying economic theory: rational behavior, (the invisible hand of Adam Smith of maximizing your own individual well-being), profit maximization, perfect knowledge, competiton. Opportunity cost, Marginal analysis: comparing marginal costs and benefits as a way of choosing, the power of market forces, comparative advantage, trade as a win-win situation, national government policy can limit economic fluctuations and improve resource allocation, policy trade-offs efficiency and equality, employment and price stability, importance of productivity growth. Money defined: a generalized claim on goods and services. Money is not real and hence is the root of all confusion. MRD 01/20/09. Meanings of words in economics versus accounting, the financial press and Congress: investment, capital, profit, cost to the taxpayers. Materialism and happiness. Property rights are divisible.
Tues / Jan. 27 / Assignment: Log on to Aplia and register for the appropriate AM or PM section. Read how to use Aplia and the first chapter on line, do the practice and graded math pre-tests. / Ch.1. / Aplia
Thur / Jan. 29 / The importance of algebra, graphs, and slopes in understanding economics. Intro to Supply and Demand and Market Clearing Price using algebra and graphing a function. / 1 App / Aplia Math Tutorial
By / Sunday / Assignment: Aplia: Evaluate your math abilities with a graded pre-test on Aplia / Math Pre-Test
Tues / Feb. 3 / An Overview of the American economy: mixed market economy, private production of most goods and services. National Government provides just laws and order, guaranteeing appropriate non-infringing rights and freedoms, effective and efficient regulations (environmental, consumer protection, financial sector, gun registration), provision of public type goods, production of some services, responsibility of macroeconomic goals at the national level. Organization of the American economy: the private sector from corporations to not-for-profits. Circular flow of money, goods and services, taxes, etc. Look at the charts. / Ch. 2 / Pract. Aplia, Look at charts in text
Tues / Feb. 3 / Markets versus central planning, property rights and economic institutions, information costs, transaction costs. Characteristics of goods and services: private-type goods & resources (mutually exclusive or rival uses) versus public type goods (non-rival use or little cost per extra user) and how they affect the world economy today. Downloading music? Can you download a car? Invention, patents. “Private” resources = labor, natural resources and capital versus the “public-type” resource of technology. / Notes on line / Vocab list on line
II / Why Economic reasoning today is key to understanding almost all social and political issues.
Thur / Feb. 5 / Law of diminishing marginal product. marginal benefit, marginal cost, and the principles of optimal choice. Application: Best levels of pollution. War on drugs: MC>MB? Risk taking versus insurance. Framing the Question and Decisions: stroke management, flying versus driving. Irrational behavior. Obesity, gambling, smoking and the brain. From resources to a production function by hiring the right number of workers. Total and marginal productivity of an input. Law of diminishing marginal product. Malthusian world Practical application. Maximizing net output the workers. / Lect. Notes / Aplia,
Hwk 1, Hwk 2
Tues / Feb. 10 / Production possibility frontier and opportunity costs. The two-product model with limited labor resources. What are costs? Increasing relative opportunity costs at full employment, but no social opportunity cost if unemployment. What is the real social cost of rescuing banks and distressed homeowners if we have unemployed resources? Different economic theory and policy depending on whether you have excess demand pushing you outside the PPF or inadequate demand dropping you inside the PPF. Why the bailout costs the taxpayers nothing? / Ch.
3. / Hwk 3
PPF
Aplia
Pract.
Thurs, Feb 12, Lincoln Birthday: College Closed

III. Supply and Demand: the heart of microeconomics: Economic rationality? Is it realistic?

Tues / Feb 17 / Supply, Demand and Market Clearing The downward sloping demand curve measures the marginal benefit of each additional unit to buyers and the willingness to pay. Consumer surplus. Market demand curve = horizontal sum of individual demand curves for a private good. Supply curves represent a willingness to sell at a stated price and depend on marginal costs and market structure (perfect competition, monopolistic competition, oligopoly or monopoly. Market equilibrium and it meanings (clearing the market with prices). Markets are not always fair but are very efficient in allocating goods and resources. Understand the meaning of efficiency. Net consumer surplus. Substitute versus complementary goods. Elasticity. Two functions of prices: 1.Allocation of goods to people willing to pay that price or more and obtaining supply from producers who can produce at that price or lower. 2. providing (market) signals about the relative opportunity cost of buying or producing one good vs. another good. / Ch.
4 / Hwk 4
Aplia
Pract.
Thur / Feb. 19 / Shifts in the curves versus movement along curves. Interdependence of markets (How Bush’s ethanol-from-corn policy caused all food prices to rise). A shift in demand or supply curves along usually causes a change in the equilibrium price AND the quantity (with a few exceptions). / Ch.
4 / Aplia
Pract
Tues / Feb 24 / A simple algebraic model of a market and market clearing prices. We develop a simple algebraic model during this lecture and use it to determine the market clearing price and quantity. / Ch.
4 / Hwk 5
S & D
Thur / Feb. 26 / Applications of supply & demand: price & non-price rationing, price supports & price ceilings. Showing an excise taxes in an algebraic model: cigarette and alcohol taxes and public health. Who pays the taxes? Proposed tax on carbon, oil products and with refund to all equally. / Ch.
4. / Hwk 6
Aplia
Pract
Tues / Mar. 3 / Market failure and the need for government. The sub prime mortgage crisis illustrates the importance of government regulations of those areas of the market where it is difficult to get understandable and quality information. Private costs and benefits and external costs and benefits. Socially best price is where social marginal benefit = social marginal cost SMC = Private cost + external cost, etc. Asymmetric information, principal agent problem (auto mechanic and mortgage broker) and bad decisions. Importance of impartial information and why it is a public good. Adverse selection and moral hazard in risk management. Common property (whaling), “Public goods” pricing, the free rider and efficiency. Global warming as a public “bad”. / Lect.
Notes on line / Vocab
List
III.
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DETERMINANTS OF NATIONAL INCOME, EMPLOYMENT, OUTPUT & ECONOMIC GROWTH
Thur / Mar 5 / Macroeconomic Issues: inflation, unemployment ->loss output + personal depression + social unrest. Growth. Economic fluctuations create risk for individuals. The Great Depression. Hyperinflation, Crop Failures and Starvation, Immigration. Is the material standard of living the basis of happiness? What about health? Security? Opportunity? Absence of starving beggars on the street? Some equality in income distribution? Measuring growth rates: (Ct+1- Ct /Ct) x 100 is percent growth rate of consumption from t to t+1 where DC = Ct+1- Ct or the change in consumption during the period Ct / Ch.
5 / Aplia
Pract
Aplia quiz on market & S&D
Tues Mar. 10 FIRST MID-TERM, in class and online on Aplia Covers Ch. 1-5, all in-class materials, Aplia Problems, vocabulary
Thur / Mar. 12 / Goals of macroeconomic policy and the role of the Federal government in managing the macroeconomics of the economy through taxation, spending, transfer payments. What is the purpose of taxation at the national level? To reduce consumption so as to free up just enough resources for gov’t needs. The importance of effective regulations a consistent legal structure, and societial ethics. The microeconomics of government interference in markets. The absense of perfect information. External costs. Provision of public goods. Consumer protection when consumers can not get or understand the correct information to make a decision. / Ch.
6 / Aplia
Pract
Thur / Mar. 12 / GDP measured two ways: expenditure approach on final goods and services: C +gross I + G + X – M. All at market prices (nominal GDP) and then corrected for changes in prices (real GDP). Income approach based on the value-added at each stage of production (wages, interest, rent, profit (corp. & other), depreciation (incorporation of capital goods into product or service) & indirect business taxes. (also deflated for increased wages etc).
What is not counted? Double counting of inputs (coal ->electricity->power supply for factories -> final goods (dresses, cars, restaurants). Illegal goods (bads?), non-market production and even trade and DIY activities at home, Activities not using scarce resources: capital gains, gifts, transfers, sale of used goods (used cars, housing). OK, what about the sale of public-type goods (downloaded music). What about large prisons and using resources for war or recovering from natural disasters. What about losing the charm of the farm, the lost of languages and regional dress & customs. / 8.A / Hwk 7
Aplia
Pract
Tues / Mar. 17 / How to understand prices indexes and deflators used adjust for inflation. % ∆ in cost of a “typical market basket of goods and services. Real versus nominal GDP. Real wages, real interest, real value of house and other such things. Problems with indices: Price indices overstate inflation: substitute away from relatively expensive good, failed to reduce prices to measure external costs on society, hard to measure utility of new goods, services, medicines, music and the loss of artisanship in production. Mass production of private goods versus creative production of public goods (art, music, buildings, gardens) and unique experiences. / 6.A / Hwk 8
Aplia
Pract
Thur / Mar. 19 / Sources of measured economic growth. GDP per capita and its growth over time depends on the growth of productivity. Growth: theory and sources of productivity growth: growth of capital stock from investment, technological progress and improved labor quality (experience, health, training, education, labor relations). / Ch.
7 / Aplia
Pract
Thur / Mar 19 / Benefits and Costs of Economic Growth and Measuring Economic and Human Wellbeing. Do higher real personal incomes and more choice increase happiness? Or relative income. Social tranquility. How do we value Global Warming? Are the Chinese people as a whole benefiting from their rapid economic growth? Or dying? Importance of balanced growth of private income and saving, public goods and services, (environmental quality, the arts, infrastructure, education and care for the disadvantaged…). Importance of balanced responsible growth for social security and your generation. Fewer private material goods -> better standard of living. Health, recreation, education, cultural, green space, equity - not mindless video games, Hummers, and 8000 ft2 houses and a new dress for every party and helicopter skiing. / Ch
7 / Aplia
Pract
IV
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DETERMINATION OF ACTUAL GDP, AND CURRENT FISCAL POLICIES - 2009
Tues / Mar 24 / Determinants of Consumption: Consumptiont = f(disposable incomet, wealtht, tastest, healtht, neighbors’ consumptiont, demographicst, advertisingt, change in choicet, weathert, natural disasterst, earnings on savingst, expectationst.). Classical economic theory was that changes in the interest rates would equate savings and investment and leads to full employment. Not True! Great Depression / Ch
8 / Hwk 9
Plot C
Principal determinant of consumption according to John Maynard Keynes (1936) is disposable income, not interest rates. This meant that the economy did not naturally move toward full employment. Indeed, the government may have to frequently “stimulate” the national economy. Household disposable income Ydi = GDP-depreciation – retained earnings – taxes + transfer payments (Social Security, gov’t interest, unemployment payments) = disposable income = money available to spend. Some economic models adjust for debt payments from purchases of goods (houses, home equity loans) in the past. Why is this important? Is it having an impact on our economy today? Permanent versus temporary changes in Ydi (disposable income) / Hwk 10