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CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
31
PART VI F...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
CHAHouseholdandFirm
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair an...
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Ppt econ 9e_one_click_ch31

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Case and Fair
a good path to learn basics of economics

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Transcript of "Ppt econ 9e_one_click_ch31"

  1. 1. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 32 PowerPoint Lectures for Principles of Economics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;
  2. 2. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 2 of 32
  3. 3. © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 31 PART VI FURTHER MACROECONOMICS ISSUES Household and Firm Behavior in the Macroeconomy: A Further Look Fernando & Yvonn Quijano Prepared by:
  4. 4. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 32 Households: Consumption and Labor Supply Decisions The Life-Cycle Theory of Consumption The Labor Supply Decision Interest Rate Effects on Consumption Government Effects on Consumption and Labor Supply: Taxes and Transfers A Possible Employment Constraint on Households A Summary of Household Behavior The Household Sector Since 1970 Firms: Investment and Employment Decisions Expectations and Animal Spirits Profit Maximization Excess Labor and Excess Capital Effects Inventory Investment A Summary of Firm Behavior The Firm Sector Since 1970 Productivity and the Business Cycle The Short-Run Relationship Between Output and Unemployment The Size of the Multiplier CHAPTER OUTLINE 31 PART VI FURTHER MACROECONOMICS ISSUES Household and Firm Behavior in the Macroeconomy: A Further Look
  5. 5. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 32 Households: Consumption and Labor Supply Decisions The Life-Cycle Theory of Consumption life-cycle theory of consumption A theory of household consumption: Households make lifetime consumption decisions based on their expectations of lifetime income.
  6. 6. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 32 Households: Consumption and Labor Supply Decisions The Life-Cycle Theory of Consumption permanent income The average level of a person’s expected future income stream. In their early working years, people consume more than they earn. This is also true in the retirement years. In between, people save (consume less than they earn) to pay off debts from borrowing and to accumulate savings for retirement.  FIGURE 31.1 Life-Cycle Theory of Consumption
  7. 7. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 32 Households: Consumption and Labor Supply Decisions The Labor Supply Decision The Wage Rate Households make consumption and labor supply decisions simultaneously. Consumption cannot be considered separately from labor supply, because it is precisely by selling your labor that you earn income to pay for your consumption. According to the substitution effect of a wage rate increase, a higher wage leads to a larger quantity of labor supplied—a larger workforce. According to the income effect of a wage rate increase, if we assume that leisure is a normal good, people with higher income will spend some of it on leisure by working less.
  8. 8. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 32 Households: Consumption and Labor Supply Decisions The Labor Supply Decision Prices nominal wage rate The wage rate in current dollars. real wage rate The amount the nominal wage rate can buy in terms of goods and services. Households look at expected future real wage rates as well as the current real wage rate in making their current consumption and labor supply decisions.
  9. 9. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 32 Households: Consumption and Labor Supply Decisions The Labor Supply Decision Wealth and Nonlabor Income nonlabor, or nonwage, income Any income received from sources other than working— inheritances, interest, dividends, transfer payments, and so on. Holding everything else constant (including the stage in the life cycle), the more wealth a household has, the more it will consume, both now and in the future. An unexpected increase in nonlabor income will have a positive effect on a household’s consumption. An unexpected increase in wealth or nonlabor income leads to a decrease in labor supply.
  10. 10. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 32 Households: Consumption and Labor Supply Decisions Interest Rate Effects on Consumption A rise in the interest rate leads me to consume less today and save more. This effect is called the substitution effect of an interest rate change. There is also an income effect of an interest rate change on consumption. If a household has positive wealth and is earning interest on that wealth, a fall in the interest rate leads to a fall in interest income.
  11. 11. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 32 Households: Consumption and Labor Supply Decisions Government Effects on Consumption and Labor Supply: Taxes and Transfers TABLE 31.1 The Effects of Government on Household Consumption and Labor Supply Income Tax Rates Transfer Payments Increase Decrease Increase Decrease Effect on consumption Negative Positive Positive Negative Effect on labor supply Negative* Positive* Negative Positive *If the substitution effect dominates. Note: The effects are larger if they are expected to be permanent instead of temporary.
  12. 12. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 32 Households: Consumption and Labor Supply Decisions A Possible Employment Constraint on Households Households consume less if they are constrained from working. unconstrained supply of labor The amount a household would like to work within a given period at the current wage rate if it could find the work. constrained supply of labor The amount a household actually works in a given period at the current wage rate.
  13. 13. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 32 Households: Consumption and Labor Supply Decisions A Possible Employment Constraint on Households In Keynesian theory, current income determines current consumption. It is incorrect to think consumption depends only on income, at least when there is full employment. However, if there is unemployment, Keynes is closer to being correct because income is not determined by households. When there is unemployment, the level of income (at least workers’ income) depends exclusively on the employment decisions made by firms. Keynesian Theory Revisited
  14. 14. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 32 Households: Consumption and Labor Supply Decisions A Summary of Household Behavior The following factors affect household consumption and labor supply decisions:  Current and expected future real wage rates  Initial value of wealth  Current and expected future nonlabor income  Interest rates  Current and expected future tax rates and transfer payments
  15. 15. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 32 Households: Consumption and Labor Supply Decisions The Household Sector Since 1970 Consumption Over time, expenditures on services and nondurable goods are “smoother” than expenditures on durable goods.  FIGURE 31.2 Consumption Expenditures, 1970 I–2007 IV
  16. 16. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 32 Households: Consumption and Labor Supply Decisions The Household Sector Since 1970 Housing Investment Housing investment fell during the four recessionary periods since 1970. Like expenditures for durable goods, expenditures for housing investment are postponable.  FIGURE 31.3 Housing Investment of the Household Sector, 1970 I–2007 IV
  17. 17. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 32 Households: Consumption and Labor Supply Decisions The Household Sector Since 1970 Housing Investment Housing Problems Spread to the Rest of the Economy Decline in Home Prices Accelerates: Fed’s Efforts Have Only Muted Effect On Mortgage Rates Wall Street Journal
  18. 18. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 18 of 32 Households: Consumption and Labor Supply Decisions The Household Sector Since 1970 Labor Supply Since 1970, the labor force participation rate for prime-age men has been decreasing slightly. The rate for prime-age women has been increasing dramatically. The rate for all others 16 and over has been declining since 1979 and shows a tendency to fall during recessions (the discouraged- worker effect).  FIGURE 31.4 Labor Force Participation Rates for Men 25 to 54, Women 25 to 54, and All Others 16 and Over, 1970 I–2007 IV
  19. 19. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 19 of 32 Firms: Investment and Employment Decisions Expectations and Animal Spirits animal spirits of entrepreneurs A term coined by Keynes to describe investors’ feelings. The Accelerator Effect accelerator effect The tendency for investment to increase when aggregate output increases and to decrease when aggregate output decreases, accelerating the growth or decline of output.
  20. 20. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 20 of 32 Firms: Investment and Employment Decisions Profit Maximization inputs The goods and services that firms purchase and turn into output. plant-and-equipment investment Purchases by firms of additional machines, factories, or buildings within a given period. labor-intensive technology A production technique that uses a large amount of labor relative to capital. capital-intensive technology A production technique that uses a large amount of capital relative to labor.
  21. 21. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 32 Firms: Investment and Employment Decisions Excess Labor and Excess Capital Effects excess labor, excess capital Labor and capital that are not needed to produce the firm’s current level of output. adjustment costs The costs that a firm incurs when it changes its production level— for example, the administration costs of laying off employees or the training costs of hiring new workers.
  22. 22. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 32 Firms: Investment and Employment Decisions Inventory Investment inventory investment The change in the stock of inventories. Stock of inventories (end of period) = Stock of inventories (beginning of period) + Production - Sales The Role of Inventories
  23. 23. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 32 Firms: Investment and Employment Decisions Inventory Investment desired, or optimal, level of inventories The level of inventory at which the extra cost (in lost sales) from lowering inventories by a small amount is just equal to the extra gain (in interest revenue and decreased storage costs). The Optimal Inventory Policy
  24. 24. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 24 of 32 Firms: Investment and Employment Decisions A Summary of Firm Behavior The following factors affect firms’ investment and employment decisions:  Firms’ expectations of future output  Wage rate and cost of capital (the interest rate is an important component of the cost of capital)  Amount of excess labor and excess capital on hand
  25. 25. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 32 Firms: Investment and Employment Decisions A Summary of Firm Behavior The most important points to remember about the relationship among production, sales, and inventory investment are  Inventory investment—that is, the change in the stock of inventories—equals production minus sales.  An unexpected increase in the stock of inventories has a negative effect on future production.  Current production depends on expected future sales.
  26. 26. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 26 of 32 Firms: Investment and Employment Decisions The Firm Sector Since 1970 Plant-and-Equipment Investment Overall, plant-and-equipment investment declined in the four recessionary periods since 1970.  FIGURE 31.5 Plant-and-Equipment Investment of the Firm Sector, 1970 I–2007 IV
  27. 27. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 32 Firms: Investment and Employment Decisions The Firm Sector Since 1970 Employment Growth in employment was generally negative in the four recessions the U.S. economy has experienced since 1970.  FIGURE 31.6 Employment in the Firm Sector, 1970 I–2007 IV
  28. 28. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 28 of 32 Firms: Investment and Employment Decisions The Firm Sector Since 1970 Inventory Investment The inventory/sales ratio is the ratio of the firm sector’s stock of inventories to the level of sales. Inventory investment is very volatile.  FIGURE 31.7 Inventory Investment of the Firm Sector and the Inventory/Sales Ratio, 1970 I–2007 IV
  29. 29. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 29 of 32 Productivity and the Business Cycle productivity, or labor productivity Output per worker hour; the amount of output produced by an average worker in 1 hour. In general, employment does not fluctuate as much as output over the business cycle. As a result, measured productivity (the output- to-labor ratio) tends to rise during expansionary periods and decline during contractionary periods.  FIGURE 31.8 Employment and Output over the Business Cycle
  30. 30. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 30 of 32 Productivity and the Business Cycle Productivity in the Long Run Productivity figures can be misleading when used to diagnose the health of the economy over the short run, because business cycles can distort the meaning of productivity measurements. Output per worker falls in recessions because firms hold excess labor during slumps. Output per worker rises in expansions because firms put the excess labor back to work. Neither of these conditions has anything to do with the economy’s long-run potential to produce output.
  31. 31. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 31 of 32 The Short-Run Relationship Between Output and Unemployment Okun’s Law The theory, put forth by Arthur Okun, that in the short run the unemployment rate decreases about 1 percentage point for every 3 percent increase in real GDP. Later research and data have shown that the relationship between output and unemployment is not as stable as Okun’s “Law” predicts.
  32. 32. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 32 of 32 The Short-Run Relationship Between Output and Unemployment discouraged-worker effect The decline in the measured unemployment rate that results when people who want to work but cannot find work grow discouraged and stop looking, dropping out of the ranks of the unemployed and the labor force. Let E denote the number of people employed, let L denote the number of people in the labor force, and let u denote the unemployment rate. In these terms, the unemployment rate is u = 1 – E/L The unemployment rate is 1 minus the employment rate, E/L.
  33. 33. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 33 of 32 The Size of the Multiplier The value of the multiplier in reality is smaller than the simple multiplier. We can now summarize why. 1. There are automatic stabilizers. 2. The interest rate and the crowding-out effect. 3. The effect of expansionary policy on the price level. 4. The fact that firms hold excess capital and excess labor. 5. There are inventories. 6. There are people’s expectations. In practice, the multiplier probably has a value of around 1.4. Its size also depends on how long ago the spending increase began. The Size of the Multiplier in Practice
  34. 34. CHAHouseholdandFirm © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 34 of 32 accelerator effect adjustment costs animal spirits of entrepreneurs capital-intensive technology constrained supply of labor desired, or optimal, level of inventories discouraged-worker effect excess capital excess labor REVIEW TERMS AND CONCEPTS inputs inventory investment labor-intensive technology life-cycle theory of consumption nominal wage rate nonlabor, or nonwage, income Okun’s Law permanent income plant-and-equipment investment productivity, or labor productivity real wage rate unconstrained supply of labor
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