MacroEconomics

Economic Models Cause and Effect Inverse and Direct Relationships 2 or more variables Independent variable vs dependent variable Ie: price of cell phones vs # of cell phones purchased Inverse and Direct Relationships Inverse: one variable increase while the other decrease Direct: one variable increases, the other will increase

4 main economic systems Traditional Market Command Mixed

Benefits of Market Economy In a market economy, individuals are free to pursue their own self interest Consumer Sovereignty Prices Innovation

1. Customer Sovereignty Decisions of what to produce is ultimately guided by the needs and wants of households (as consumers) Consumers use their dollars to “vote” on what types of goods and service should be produced Ie: households wanting to switch some consumption dollars from Stereos to TVs What will happen to the prices/demand/supply

Prices Prices at as an important signaling device in market economy How? By coordinating activities of buyers and sellers to STOP either too much or too little of an item being produced Higher TV prices provide businesses, lured by the chance to make higher profits, with an incentive to supply more TVs. Meanwhile, the price drop for stereos causes businesses to cut their stereo production=> shifts in production results in changes in the employment of economic resources with more resouces being used to make TVs

Innovation The incentive to make a profit in a market economy encourages innovation and entrepreneurship Helps foster advances in technology Improvements to existing products and introduction of new products

Disadvantages of Market Economy Income Distribution Without intervention by gov’t, the distrib of income in a market economy can create sig inequities Market Problems Private markers do not always operate in a way that benefits society as a whole Negative external effects of economic activity (ie: pollution) may require intervention by gov’t to prevent harm to the society Negative internal effects may also cause gov’t to step in (few companies control a product market thus depriving consumers of the advantages of competition) Instability Can display considerable instability in the total output produced from year to year Affects employment levels (increase in employment when output needs to be increased; decrease in employment when output decreases)

Benefits of Command Economy Income Distribution Economic Growth

Drawbacks of Command Economy Planning Difficulties Inefficiencies Lack of freedom

Economic Goals There are seven major economic goals: economic efficiency income equity price stability full employment viable balance of payments economic growth environmental sustainability

Complementary Goals Reaching one economic goal makes another goal easier to achieve Ie: Full employment and Economic Growth (could they be directly correlated?)

Conflicting Goals Some economics goals conflict with each other Attaining one goal makes another goal more difficulty to achieve Ie: price stability vs full employment Govt increase rate of inflation = restrain the level of production = raising unemployment Income equity vs economic efficiency

Rise of Communism “Let the ruling classes tremble at a communist revolution….Workingmen of all countries unite”

Carl Marx Workers were exploited while entrepreneurs reaped all the profit The working class should overthrow the rich and the powerful

Ideas People became became greedy with privatization Private ownership of land led to the development of class systems

Communism Class division and competition will disappear and everyone will be made equal and enjoy equal benefits Worker exploitation will be eliminated There is no ownership; everything belongs to the state and is to be shared by everyone Society will be based on cooperation, not competition The interests of individuals would be served best when the whole society benefited

Central Planning Major production and consumption decisions are made by the government based on the goals of the nation Central planners and help advance the economy much more quickly because all resources are used to achieve a nation’s objective

Example In 1928, Stalin, the leader of the Soviet Union, instituted five years plans to increase the production of capital goods The nation’s heavy industry capacity was expanded and grew to fourth in industrial output in the world

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