Lecture3 - Lecture 3.1 Trade Types of Trade barter and...

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Lecture 3.1 Trade: Types of Trade barter and monetary barter – trade between agents in the form of direct exchange of goods -ex? Problems with a barter economy- -need a “double coincidence of wants” -discuss single and double coincidence of wants Monetary – trade between agents using money What is money? Primarily: a medium of exchange Also: a unit of account Store of value Liquidity Ex. U.S. can produce 10 guns/day or 5 butters/day Sweden can produce 7 guns/day or 2 butters/day Draw PPF. (butter on x-axis) Even if one country is worse in the production of both goods, it has CA in making the good at which it is relatively least inefficient. -2 countries can still gain from trade Do OC table What should Sweden produce? What should U.S. produce? U.S. produces 5 butters, Sweden produces 7 guns. Acceptable prices for trade between ½ and 2/7 guns for a butter, and between ½ and 2 butters for a gun. Let price be ½ guns for a butter. Draw original PPFs together. -This example shows that trade is at least as good as no trade (shows a Pareto improvement) -Pbutter = 2 guns -Have U.S. trade 3 butters for 6 guns. -U.S. originally has 0 guns, 5 butter -Sweden originally has 7 guns, 0 butter End with U.S. having 6 guns, 2 butter and Sweden has 1 guns, 3 butter SR vs. LR again SR -agents face fixed costs and barriers to entry -at least one variable is fixed
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-usually at least several years in macro (since the ‘firm’ is an aggregate of all firms) LR -no fixed variables or costs, no barriers to entry -thought of as decades or centuries Aggregate Supply/Aggregate Demand: -aggregate all individuals into a consumer and producer -all consumption output is aggregated and is called output ( Q or Y ) -all labor will be aggregated and called employment -all prices are aggregated and known as the aggregate price level ( P ) The Invisible Hand- (Adam Smith) “describes how, by pursuing their own interests, the agents in an economy are led to promote the well- being of the economy” Quantity Demanded (Q D ) -the # of units of the aggregate good the aggregate consumer is willing and can afford to buy over a specified period of time Demand schedule -shows Q D of the aggregate good as the price level of the aggregate good changes Aggregate Demand Curve -a graphical depiction of the demand schedule Shifts along the aggregate demand curve vs. shifts of the aggregate demand curve -shifts along the aggregate demand curve only with changes in the aggregate price level What are aggregate demand shifters? -change in income, change in population, change in preferences, change in the price of related goods (substitutes/complements), consumer expectations -discussion of each with an aggregate consumer (inferior goods?) Aggregate Supply~~~ Supply shifters-# of sellers, technological change, price of inputs, profitability of other goods, producer expectations Equilibrium is a pair (P, Y) / (P, Q) / (Price level, output) Tax/subsidy example? Tax on an aggregate good (like 7% tax on everything in Minneapolis)
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Lecture3 - Lecture 3.1 Trade Types of Trade barter and...

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