The Aggregate Consumption Function
The meaning of aggregate consumption function, which shows how
personal disposable income affects consumer spending.
C = F(YD, YE, W
C = consumption spending
Y = income
YD = disposable income
YE = expected future income
1. social efficiency: welfare is maximized
-> s = d; Mc(sf) = P (df)
2. Technical or productive efficiency: Mc=min ATC
->allocative efficiency - were allocating the factors of production for the
most efficient firms
3. Profit maximization: Mr=MC
The aggregate price level
The aggregate price level is a measure of the overall level in the economy.
To measure the aggregate price level, economists calculate the cost of purchasing a
A price index is the ratio of the current cost of htat
Savings and investment spending
3 types of capital: human, physical, financial
financial capital only shows up indirectly, in savings and investment spending
money market: a market for liquidity (short-term model)
2 kinds of assets: highly liquid asset, a
Macroeconomics examines the aggregate behavior of the economy (that is, how the actions of
all individuals and firms in the economy interact to produce a particular economic performance).
Example: How high or low is the overall price level in the economy
Inflation and Deflation
Based on certain indexes CPI, GDP Deflator, PPI
There was a volatility in inflation rate prior to 1981, and relative stability after 1981.
-Policy decision by the federal reserve.
-Ensure full employment
-Ensure price stability
Interest Rate Effect
Interest rate effect - if we see interest rates rise, prices rise- investment and
consumption will fall.
Aggregate demand and Aggregate supply
GDP (Y) = F(costs of production + mark-up)
The investment function is I = I(r)
where r is r
MD = F(i, seasonal factors, e, Y, PL.)
Money demand curve
things that shift it:
changes in aggregate price level
changes in real GDP
changes in technology
changes in institutions
According to the liquidity preference model, the inte
Is it an oligopoly?
to determine market structure, economists use a measure called the HerfindahlHirschman Index (HHI)
the HHI for an industry is the square of each firm;s share of market sales summed over
the firms in the industry
Principle of Economics
What is economics?
-economics is the study of choice under conditions of scarcity.
-economists think in cost of alternatives
-economics is a social science.
-Individual choice is the decision by a perso
Excise Tax - a tax on sales of a good or services.
- raises the price paid by buyers and
- reduces the price received by sellers
Drive a wedge between the two:
it doesnt matter if you shift the demand curve or the supply curve
the incidence of a tax is a
In order to develop principles and make predictions about markets and how
producers will behave in them, economists have constructed four principle
models of market structure: