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Economics for Journalists
    Week 3: Circles & Cycles: How economies work

    Jeffrey Timmermans


Monday, 6 February, 12
Review: Supply
    & Demand
             ✤    Demand is based on the
                                                 Price
                  value consumers attach to              Supply
                  goods & services as well as
                  their income & substitute
                  goods                         Market
                                                Price
             ✤    Supply is determined by
                  suppliers’ costs
                                                         Demand
             ✤    The market price is a                   Quantity

                  summary of the supply &
                  demand in the market


Monday, 6 February, 12
Review: Supply
    & Demand
             ✤    Demand is based on the
                                                    Price
                  value consumers attach to                             Supply
                  goods & services as well as
                  their income & substitute     New Price
                  goods




                                                            {
                                                  Market      Add’l
                                                  Price     Suppliers

             ✤    Supply is determined by                                    New
                                                                            Demand
                  suppliers’ costs
                                                                        Demand
             ✤    The market price is a                                  Quantity

                  summary of the supply &
                  demand in the market


Monday, 6 February, 12
What kind of product is this?
                          Price
                                           Supply




                         Market
                         Price




                                  Demand


                                             Quantity




Monday, 6 February, 12
What kind of product is this?
                            Price
                                                   Supply




                         New Price

                          Market
                          Price




                                          Demand

                                     Q1              Quantity




Monday, 6 February, 12
What kind of product is this?
                          Price
                                                Supply




                         Market
                         Price




                                       Demand

                                  Q1              Quantity




Monday, 6 February, 12
What kind of product is this?
                            Price
                                                    Supply




                          Market
                          Price
                         New Price




                                           Demand

                                      Q1              Quantity

                                     Q2



Monday, 6 February, 12
Government Policy: Rent control
                          Price
                                  Supply




                         Market
                         Price




                                  Demand

                                    Quantity




Monday, 6 February, 12
Government Policy: Rent control
                           Price
                                                           Supply




                          Market
                          Price

                         Mandated
                          Price
                                     {    Supply
                                           Gap
                                                           Demand

                                    Quantity    Quantity     Quantity
                                    Supplied   Demanded




Monday, 6 February, 12
Types of economies

                         Command      Free-market
                         Economy         Economy

            Total                                                  No gov’t
        intervention                                             intervention




                                              U.S.
                                                     Hong Kong
                          N. Korea




                                     Sweden



Monday, 6 February, 12
Circular Flow Model




Monday, 6 February, 12
Circular Flow with Savings




Monday, 6 February, 12
Circular Flow with Inventory




Monday, 6 February, 12
The Business Cycle
    Real output

                                                 Peak                                      Trend line




                                                                         ry
                                                                              Re
                                                                                ce




                                                                      ove
                                                                                   ss
                                                                                     io




                                                                   Rec
                                                                                       n
                                                    Re
                                            ry



                                                       ce
                                         ove




                                                          ss
                                                            io
                                                              n
                                      Rec




                         Re
                           ce
                              ss
                                io
                                  n

                                                                  Trough


                                                                                             Time




Monday, 6 February, 12
U.S. Economic Growth
    (1940-2010)




                         Source: St. Louis Federal Reserve Bank




Monday, 6 February, 12
U.S. Business Cycle (1970-1980)




                         Source: St. Louis Federal Reserve Bank




Monday, 6 February, 12
Why do economies grow over
    time?




Monday, 6 February, 12
Why do economies grow over
    time?

    ✤    Population growth

    ✤    Investment

    ✤    Accumulated knowledge

    ✤    Improved productivity

    ✤    Better technology




Monday, 6 February, 12
What’s a recession?




Monday, 6 February, 12
What’s a recession?



    ✤    Two consecutive quarters of declining economic output




Monday, 6 February, 12
What’s a recession?



    ✤    Two consecutive quarters of declining economic output

    ✤    In the U.S., whatever the National Bureau of Economic Research
         (NBER) says it is!




Monday, 6 February, 12
The Regulatory Cycle

                                                  Crisis in un- or under-
                    Recession                         regulated area                    Deregulation




                         Politicians respond to                             Politicians respond to
                            people’s anger                                        companies


                      Regulation,
                  followed by quiet
                        period                    Lobbyists/companies                    Growth
                                                    seek deregulation




Monday, 6 February, 12
Market Cycles:
    Dow Theory
    ✤    Charles Dow (1851-1902)
         founded Dow Jones & The Wall
         Street Journal

    ✤    Dow noticed that prices on
         markets follow both long-term
         and short-term trends

    ✤    Short-term trends are
         reactionary and won’t
         necessarily derail long-term
         trend                           Source: Library of Congress




Monday, 6 February, 12
Dow Theory: key assumptions

    ✤    The theory assumes the price of an asset traded on a market reflects
         all available information

          ✤    A market price is the sum of all fears and the sum of all hopes

          ✤    Because a market price reflects everything market participants
               expect will happen, prices are forward looking

                ✤    Prices are news!




Monday, 6 February, 12
Remember...

    ✤    Journalists can provide perspective and context:

          ✤    A recession isn’t the end of the world

          ✤    A growth & recovery phase won’t go on forever

                ✤    This time isn’t different!

          ✤    Regulatory response isn’t always appropriate and is influenced by
               political considerations



Monday, 6 February, 12

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Class3

  • 1. Economics for Journalists Week 3: Circles & Cycles: How economies work Jeffrey Timmermans Monday, 6 February, 12
  • 2. Review: Supply & Demand ✤ Demand is based on the Price value consumers attach to Supply goods & services as well as their income & substitute goods Market Price ✤ Supply is determined by suppliers’ costs Demand ✤ The market price is a Quantity summary of the supply & demand in the market Monday, 6 February, 12
  • 3. Review: Supply & Demand ✤ Demand is based on the Price value consumers attach to Supply goods & services as well as their income & substitute New Price goods { Market Add’l Price Suppliers ✤ Supply is determined by New Demand suppliers’ costs Demand ✤ The market price is a Quantity summary of the supply & demand in the market Monday, 6 February, 12
  • 4. What kind of product is this? Price Supply Market Price Demand Quantity Monday, 6 February, 12
  • 5. What kind of product is this? Price Supply New Price Market Price Demand Q1 Quantity Monday, 6 February, 12
  • 6. What kind of product is this? Price Supply Market Price Demand Q1 Quantity Monday, 6 February, 12
  • 7. What kind of product is this? Price Supply Market Price New Price Demand Q1 Quantity Q2 Monday, 6 February, 12
  • 8. Government Policy: Rent control Price Supply Market Price Demand Quantity Monday, 6 February, 12
  • 9. Government Policy: Rent control Price Supply Market Price Mandated Price { Supply Gap Demand Quantity Quantity Quantity Supplied Demanded Monday, 6 February, 12
  • 10. Types of economies Command Free-market Economy Economy Total No gov’t intervention intervention U.S. Hong Kong N. Korea Sweden Monday, 6 February, 12
  • 11. Circular Flow Model Monday, 6 February, 12
  • 12. Circular Flow with Savings Monday, 6 February, 12
  • 13. Circular Flow with Inventory Monday, 6 February, 12
  • 14. The Business Cycle Real output Peak Trend line ry Re ce ove ss io Rec n Re ry ce ove ss io n Rec Re ce ss io n Trough Time Monday, 6 February, 12
  • 15. U.S. Economic Growth (1940-2010) Source: St. Louis Federal Reserve Bank Monday, 6 February, 12
  • 16. U.S. Business Cycle (1970-1980) Source: St. Louis Federal Reserve Bank Monday, 6 February, 12
  • 17. Why do economies grow over time? Monday, 6 February, 12
  • 18. Why do economies grow over time? ✤ Population growth ✤ Investment ✤ Accumulated knowledge ✤ Improved productivity ✤ Better technology Monday, 6 February, 12
  • 20. What’s a recession? ✤ Two consecutive quarters of declining economic output Monday, 6 February, 12
  • 21. What’s a recession? ✤ Two consecutive quarters of declining economic output ✤ In the U.S., whatever the National Bureau of Economic Research (NBER) says it is! Monday, 6 February, 12
  • 22. The Regulatory Cycle Crisis in un- or under- Recession regulated area Deregulation Politicians respond to Politicians respond to people’s anger companies Regulation, followed by quiet period Lobbyists/companies Growth seek deregulation Monday, 6 February, 12
  • 23. Market Cycles: Dow Theory ✤ Charles Dow (1851-1902) founded Dow Jones & The Wall Street Journal ✤ Dow noticed that prices on markets follow both long-term and short-term trends ✤ Short-term trends are reactionary and won’t necessarily derail long-term trend Source: Library of Congress Monday, 6 February, 12
  • 24. Dow Theory: key assumptions ✤ The theory assumes the price of an asset traded on a market reflects all available information ✤ A market price is the sum of all fears and the sum of all hopes ✤ Because a market price reflects everything market participants expect will happen, prices are forward looking ✤ Prices are news! Monday, 6 February, 12
  • 25. Remember... ✤ Journalists can provide perspective and context: ✤ A recession isn’t the end of the world ✤ A growth & recovery phase won’t go on forever ✤ This time isn’t different! ✤ Regulatory response isn’t always appropriate and is influenced by political considerations Monday, 6 February, 12