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First Picture The Production Possibilities Frontier Tradeoffs in Pictures

First Picture The Production Possibilities Frontier Tradeoffs in Pictures. Quantity of Computers Produced. D Infeasible Pts. 3,000. C. 2,200. A. 2,000. Production. Possibilities. B Feasible but Inefficient. Frontier  Efficient Points. 1,000. Quantity of Cars Produced.

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First Picture The Production Possibilities Frontier Tradeoffs in Pictures

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  1. First PictureThe Production Possibilities FrontierTradeoffs in Pictures Quantity of Computers Produced D Infeasible Pts 3,000 C 2,200 A 2,000 Production Possibilities B Feasible but Inefficient Frontier Efficient Points 1,000 Quantity of Cars Produced 700 0 300 600 1,000

  2. Supply Equilibrium Demand Second PictureSupply and Demand Price of Ice-Cream Cone $3.00 2.50 2.00 1.50 1.00 0.50 Quantity of Ice-Cream Cones 0 1 2 3 4 5 6 7 8 9 10 11 12

  3. SupplyandDemandonParade

  4. $2.50 New equilibrium 2. ...resulting in a higher price... D2 10 3. ...and a higher quantity sold. An Increase in Demand Price of Ice-Cream Cone 1. Hot weather increases the demand for ice cream... Supply 2.00 Initial equilibrium D1 0 7 Quantity of Ice-Cream Cones

  5. S2 $2.50 2. ...resulting in a higher price... 3. ...and a lower quantity sold. A Decrease in Supply Price of Ice-Cream Cone 1. An earthquake reduces the supply of ice cream... S1 New equilibrium 2.00 Initial equilibrium Demand 10 0 1 2 3 4 7 8 9 11 12 13 Quantity of Ice-Cream Cones

  6. $5 1. A 22% increase in price... 4 Demand 50 100 2. ...leads to a 67% decrease in quantity. Elastic Demand: Quantity demanded responds dramatically to price Elasticity is greater than 1 Price Quantity

  7. Supply $5 1. A 22% increase in price... 4 100 110 2. ...leads to a 10% increase in quantity. Inelastic Supply: Quantity doesn’t respond much to priceElasticity is less than 1 Price Quantity

  8. Consumer Surplus and Producer Surplus Price A D Supply Consumer surplus Equilibrium price E Producer surplus Demand B C 0 Quantity Equilibrium quantity

  9. Efficiency of Competitive Market Equilibrium … and the Tax Wedge Price Supply Value to buyers Cost to sellers Cost to sellers Value to buyers Demand 0 Quantity Equilibrium quantity Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers.

  10. Remember MR = MC and market price is the marginal revenue of a price-taking competitive firm MR = P = MC

  11. Price of Steel Deadweight loss D F The Effects of a TariffDeadweight Loss Domestic supply A B Price with tariff C E Tariff Price without tariff World price G Imports with tariff Domestic demand Q1S Q2S Q2D Q1D 0 Quantity of Steel Imports without tariff

  12. GDP: Real and Nominal • Gross Domestic Product (GDP): the marketvalue of all finalgoods and services produced within a country during a year. GDP = C + I + G + Ex – Im = C + I + G + NX • Real GDP adjusts for inflation Nominal GDP = $GDP = P x Q $ GDP = GDP Deflator x Real GDP Real GDP = Q = $GDP/P = Nominal GDP divided by (deflated by) the GDP Price Deflator

  13. Foreign Exchange Rate: Appreciation and Depreciation • A currency appreciates when it buys more of a foreign currency. • Appreciation makes foreign goods cheaper. • Appreciation Imports Up and Exports Down. • A currency depreciates when it buys less of a foreign currency. • Depreciation makes foreign goods more expensive. • Depreciation Imports Down and Exports Up.

  14. Current Account vs. Financial Account • The balance of payments must balance Current Account + Financial Account = 0 • If we buy more goods and services from foreigners than they buy from us, we have to borrow the difference  sell them our IOUs. Capital inflows help finance domestic investment and the government’s deficit

  15. Interest Rates: Nominal and Real • Nominal Interest Rate (i): the interest rate observed in the market. • Real Interest Rate (r): the nominal rate adjusted for inflation (). Real Interest Rate = Nominal Interest Rate – Inflation Rate r = i -  • Low real interest rates spur business investment spending (the I in C + I + G + NX)

  16. Imports and Exports The demand for imports depends on current economic activity, YIM = IMa + mpi Y • “mpi” is the marginal propensity to import • Exports are exogenously determined • they depend on conditions in foreign economies, not our economy • Net exports is NX = EX – (IMa + mpi Y) orNX = NXa – mpi Y • Net expects decrease as the economy expands

  17. Demand-Side Equilibrium and the MultiplierAt equilibrium: Y = C + I + G + NX = AEIncrease in Y = Spending Multiplier x {Increase in Autonomous Spending}Multiplier = 1/(mps + mpi)

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