11.02.08 - ECONOMICS 1 Professor Kenneth Train 11/2/08...

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ECONOMICS 1 Professor Kenneth Train 11/2/08 Lecture 19 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE The Difference between a Micro and Macro approach to the Economy Equilibrium without Full Employment: A Contradiction? Today we’re going to talk about one of the most interesting things in economics. The Great Depression raised the enormous question: How is it that you can have a recession that doesn’t seem to go away? How can we be in something that looks like equilibrium and yet have an excess supply of labor? That sounds like dis-equilibrium; something should change and move us toward a new equilibrium. But it didn’t look like anything was happening.This was very perplexing for economists because we all think about supply and demand dynamics. The view at the time was if you have excess demand, supply will increase to meet that demand. Why wasn’t this happening with labor? John Maynard Keynes’ Explanation The solution to that problem was in John Maynard Keynes ’ economics. When you see the reason that this doesn’t happen it’s clear why. Then we wonder why we would ever have expected it to occur in the first place. The history of thought was that equilibrium could not be compatible with an excess labor supply, and yet it was. Keynes came up with an explanation for that. He expressed it in a rather florid way, but since then we’ve explained his ideas with mathematics. Linking Equilibrium to Aggregate Output This is a subtopic for how our aggregate output is determined. Our economy contracted in the third quarter of this year. How does aggregate output get determined? In answering that you can find out why you can have aggregate output without full employment and without full use of your resources. EQUILIBRIUM In a broad sense equilibrium can be very easily defined: Amount Produced (Y) First, when you look at the economy as a whole you recognize that there’s a total amount produced, which we denote with “Y.” Aggregate Expenditure (AE) And then there’s an amount that everyone combined wants to buy and that’s AE, which is planned aggregate expenditure. Equilibrium is when Y = AE. In a deep sense, it’s clear what equilibrium has to be: when the amount produced is the amount people want to buy. If it’s less, we have excess demand for products. Firms expand production and Y increases. If people don’t want to buy, firms cut their
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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11.02.08 - ECONOMICS 1 Professor Kenneth Train 11/2/08...

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