Monday, August 29, 2011

Intro Econ Class Notes

Just like I did last year, I am posting student notes from the class I teach for fast content:

Econ 200 Section 2 notes 8/26


Homework Review

What are your most important values? How do they affect your beliefs and actions? (question 3a)

When you analyze economic things, you first have to identify incentives (what you want) and know how it will affect you.  Also, you have to also know how to get what you want.

Economics is the combination of your personal values and facts about the world.  In order to make an action you have to know what you want and the facts about the world.  For example, if you want people to be loyal, you have to be nice and show that you are a friend.  

How would you explain a billion dollars to a young child? (question 3b)

The young child must know what a huge stack of money is so that they can relate to it.  For example, a child does not understand what it means to wrap dollar bills around

You must use some kind of tangible object that a child can understand, such as candy bars, season tickets, or other valuable objects.

Number game (question 6)

Rationality Levels

0: random

1: you assume other people are 0. So the average is 50, so the answer is 25.

2: assume others are 0. So the average is 25 and the answer is 12.5.

3: assume others are 0. So the average is 12.5 and the answer is 6.25.

Hyperrational (equilibrium solution): 0 ß- best answer

As the game continues, people get smarter and become more rational.  In the third rotation of the game, someone will begin to realize that if everyone answers 0, then everyone gets a point.  As the rotations continue, people begin to guess a lower and lower number.

Economics is about what is the societal result from everyone making their own decisions.  You have to begin to understand others' reactions.






1.       Which event in history played the biggest role in shaping our economy today?

Our American Revolution allowed us to escape from the British system of monopolies, cartels and create a more free society.  We were able to form a very different economic society.  We borrow a lot from English culture.  You need a good set of stable rules for a good economy.  The best set of rules usually comes from the bottom up (traditions).  But in some cases tradition is not best, such as in the case of slavery.  

Common Law is where decisions come from the bottom up.  Decisions are made from knowledge that is known in society for many years.  People use their knowledge to try to make decisions that are best for everyone.  New governments are bound by the existing legal system.

Civil Law is where every law is made by a legislature. 

Common law will win.  In our country, the Supreme Court can strike down a decision that goes against the common law traditions of the country.  But, you have to have some change so that you aren't stuck in the same social situations forever.  The United States is more toward the end of common law than civil law on a scale.  Other countries are at different points on the scale and may be civil law countries.

2.       Is a line of credit better for a business then loans?

Yes.  The bank allows you to borrow money if you need it.  It is like a credit card that has a borrowing limit and you don't have to pay interest rates.  You have to have someone check you out and approve you to get the line of credit so you have to pay money for the process, but it saves money for you in the future.

3.       Is inflation part of a strong economy?

The healthiest amount of inflation is about 2%.  There are costs of both inflation and deflation.  When prices changes suddenly it confuses everyone.  You have prior knowledge about how much things cost and have habits, but when prices change unexpectantly you don't know what you should do and what to buy. There has to be some small amount of inflation for wage adjustment.  If you don't pay people based on how much they produce, you will go out of business.  For example, if people produce 1% less, you can cut their pay by 1%.  A 1% cut and 0 inflation is the same as 1% raise and 2% inflation.  Right now our inflation rate is too low.  Hyperinflation is extremely bad, but deflation is also bad.  Central banking is harad because you have to figure out the perfect amount of inflation.

4.       Does minimum wage cause inflation?

When the minimum wage goes up, it does not cause inflation because it does not change the total amount of money in the economy.  It just means there is less money available for other people.  The minimum wage people have more money, but other people have less.  The distribution of money just changes.

MxV = PxY

M=money supply; V= velocity of money (how people spend their money and how quickly the financial circuit puts it back in circulation); P= price level (the consumer price index); inflation= the % change in the price lever (if the price was 200 in one year and 220 in the next year, then inflation is 10%); Y=GDP

In the short-term, the velocity of money has fallen a lot today.  The government has printed a lot more money today to compensate for the lower velocity.  The increased printing leads to increased prices.  We are having a problem because government has not printed enough money and this has caused our recession.

5.       Why does your credit score take a hit when people check it?

It is a sign that you want to borrow more money.  People think that you are trying to take out a lot of loans and that makes you seem like a higher risk.  The more loans you have, the worse your credit score because it seems like you will be paying a lot of other people.

6.       As the economic situation recovers, will it cost us more now or later (cost of living)?

Houses are cheap now so the cost of living is lower.  A lot of people want houses to be really cheap when you are looking to buy one.  People who have houses don't want prices to drop.  An economic recovery can raise the cost of living because what you want to buy will be more expensive.  Recessions are good for people with lots of cash because things are cheap, but not good for people who don't have a lot of money. However, a better economy means you can get a better job and wages will go up.

7.       Is it better to pay of student loans sooner or later?

Should be the last loan you pay off because it is subsidized.  You should pay off the highest interest loan first.  Pay off your credit card, then house, then student loan.  If stocks and bonds start to recover, you can make more money in returns than you have to pay in interest rates in loans.  If the interest rates are lower than what you get in investments, then pay off the loans first.  You want to minimize the interest rates. 

8.       Should the US start selling some of its gold reserves?

Yes.  Anyone with gold reserves should.  Gold today should not be this high.  Economic bubbles are when prices go up really high then go down (what is happening to gold).  For example, real estate prices went really high then dropped in 2008.  Gold prices could keep rising, but will probably drop.  Gold prices go up when there are indication of high inflation, which will not continue in the US.

Suppose that you knew gold prices would keep going up, you would want to hang onto the gold.  But if you had a credit card charging 17% interest, then you should sell the gold and pay off the debts.

9.       Is it better to invest in a house?

There is a huge opportunity cost.  You tie up a lot of money in a house and you have to pay a lot of interest.  You pay the bank a lot to get a loan.  A lot of times you have to buy a house to get into a better school district or raise your standard of living.  You should try to rent if you can because your money is more liquid and not tied up in a house, unless you plan to stay in the house for 10 years.  You should rent and pay off your debts while your money is in the stock market so you will have more money in the long run.  Every time you buy a house you pay a huge transaction price (6%).  People overestimate the benefits of buying a house, and underestimate the costs.

10.   Is uncertainty is killing the economy?

It may be a little true, but it isn't as big as people are claiming.  Investors and businesses hate risks and uncertainty.  People want to know what the economic situation is so that they know what to do with their money.  For example, if there is a risk that minimum wage will go up, then a person would not want to start a business.  You need to know what regulations and prices will be. 


** There are always deeper causes to things.  Always look at the long term.

No comments: