$ D Q/yr Economics Review Economics – allocation of scarce resources to the unlimited wants of people Demand is a schedule of the maximum quantity consumed.

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Presentation transcript:

$ D Q/yr Economics Review Economics – allocation of scarce resources to the unlimited wants of people Demand is a schedule of the maximum quantity consumed at alternative prices

$ Q/yr Supply Supply curve is the MC above the AVC for each firm Supply is a schedule of quantities of output that will be offered for sale at alternative prices Shutdown price MC AVC

Welfare Economics Consumer surplus (a) Producer surplus (b) Total Revenue (b + c) $ P 1 a b c D q 1 Q/yr s

Welfare Economics Important Assumptions –Equal Marginal Utility of a dollar for all consumers and producers –No Externalities –No pubic goods $ P 1 a b c D q 1 Q/yr s

Welfare Economics Policy will often create a Deadweight Loss Example of a sales tax –Portion of Tax Paid by Consumers (Blue) –Portion of Tax Paid by Producers (Red) –Deadweight Loss (Black) $ P1P1 a b c D q1q1 Q/yr s P* - tax P* q*

Macro Economics Review Monetary and Fiscal Policy Tools Fiscal Policy –Spend –Taxation Monetary Policy –Increase Money Supply (Easy Money policy) Buy securities Decrease discount rate Decrease reserve requirement –Decrease Money Supply (Tight Money policy)

Interest Rate Qt Money I0I0 S$ D$ Tight Money Policy Increases the Interest Rate Snew$

Interest Rate Value US$Qt MoneyV$ 0 I0I0 V$ S$ D$ Tight Money Policy Increases the Value of the Dollar

Interest Rate Value US$Qt MoneyV$ 0 I0I0 V$ S$ D$ Tight Money Policy Increases the Interest Rate

Interest Rate Value US$Qt MoneyV$ 0 I0I0 V$ S$ D$ Easy Money Policy Decreases the Value of the US Dollar

Interest Rate Value US$Qt MoneyV$ 0 I0I0 V$ S$ D$ Increasing Taxes Decreases the Value of the US Dollar

Domestic Demand Domestic SupplyExcess Supply Demand Exports Qt Export 0 Price 0 World Price 0 Qt TradedQt per Year QS 0 Impact of Stronger US Dollar on Trade Stronger US Dollar makes prices of US products more expensive to ROW If prices of exports are higher SHOW this as a lower Export Demand Lower exports and Quantity supplied in the US Lower US price Higher price in ROW World Price 1 Price 1 Qt Export 1 New Demand Exports

Macro Economic Impacts on Agriculture Inflation in prices of inputs Ag very dependent on purchased inputs Income statement affects of inflation Profit = TR – TC Profit = (P Y * Q Y ) – (P X *Q X )– I * (Loan + P X *Q X ) Inflation raises P x and real interest rate I Inflation raises P Y about 66% as much but 5 years later

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