Difference between revisions of "Macroeconomics"

From Testiwiki
Jump to: navigation, search
(→‎Purpose)
(technical edits)
 
(14 intermediate revisions by 2 users not shown)
Line 1: Line 1:
 
[[Category: Online Modelling ]]
 
[[Category: Online Modelling ]]
−
{{assessment|moderator=Jouni Tuomisto}}
+
{{assessment|moderator=Jouni}}
  
 
{{summary box
 
{{summary box
Line 6: Line 6:
 
|answer= given current knowledge, Macroeconomics is the study of the behavior of the economy as a whole. It examines the forces that affect many firm, consumer and workers at the same time.}}
 
|answer= given current knowledge, Macroeconomics is the study of the behavior of the economy as a whole. It examines the forces that affect many firm, consumer and workers at the same time.}}
 
    
 
    
 +
==Scope==
  
−
==Scope==
+
The importance/issues/scope, which are addressed in macro economics are in brief as under: <ref>[[:en:Macroeconomics|Macroeconomics]] in Wikipedia.</ref>
  
−
The importance/issues/scope, which are addressed in macro economics are in brief as under:
+
* '''It helps in understanding the determination of income and employment'''. Late J.M. Keynes laid great stress on macro economic analysis. He, in his revolutionary book, "General Theory, Employment interest and Money", brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.
 +
* ''''Economic growth:''' The macro economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.
 +
*'''Determination of general level of prices'''. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.
 +
*'''Income shares from the national income.''' Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricardo theory, has presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend upon the ratio of investment to national income.
 +
*'''Global economic system. In macro economic analysis''', it is emphasized that a nation's economy is a part of a global economic system. A good or weak performance of a nation's economy can affect the performance of the world economy as a whole.
 +
 
 +
===Demand & Supply===
 +
 
 +
The Analysis of supply and demand shows how a market mechanism solves the three problems of ''what'', ''how'' and ''for whom''. A market blends together demands and supplies. Demand comes from consumers and who are spreading their dollars votes among available goods and services, while business supply the goods and services with the goal of maximizing their profit. <ref>[http://www.investopedia.com/university/economics/economics3.asp#axzz1lutscqRE]</ref>
 +
 +
 
 +
 
 +
'''A. The Demand Schedule'''
 +
 
 +
* A demand schedule shows the relationship between the quantity demanded and the price of a commodity other things held constant. Such a demand schedule, depicted graphically by a demand curve, holds constant other thing like family income, tastes and the price of other goods. Almost all commodities obey the ''law of downward-sloping demand'', which hold that quantity demanded falls as a good's price rise. this law is represented by a downward-sloping demand curve.
 +
* Many influence lie behind the demand schedule for the market as a whole: average family incomes, population, the prices of related goods, tastes, and special influence. When these influences change, demand curve will shift.
 +
 
 +
 
 +
'''B.The Supply Schedule'''
 +
 
 +
 
 +
* The supply schedule (or supply curve) gives the relationship between the quantity of a good that producers desire to sell- other things constant- and that good's price. Quantity supplied generally responds positively to price, so the supply curve will be upward sloping.
 +
* Element other than the good's price affect its supply. The most important influence is the commodity's production cost, determined by the state of technology and by input prices. other elements in supply include the prices of related goods, government policies and special influence.
  
 +
===Functions of Demand & Supply===
  
−
* '''It helps in understanding the determination of income and employment'''. Late J.M. Keynes laid great stress on macro economic analysis. He, in his revolutionary book, "General Theory, Employment interest and Money", brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.
 
  
 +
The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. <ref>[[:en:Supply and demand|Supply and demand]] in Wikipedia.</ref>
 +
 +
'''A. The Law of Demand'''
 +
 +
 +
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.
 +
 +
 +
It is useful to abstract and to identify how the price and changes in the price of the good effect buyer behavior by “holding all other things constant,” or using ceterias paribus. If the prices of related goods, incomes and preferences are unchanged it is possible to describe the relationship between the price of the good (P<sub>X</sub>) and the quantity that will be purchased (Q<sub>X</sub>) in a given time (ut).
 +
 +
If
 +
 +
<math>Q_X = f_X(P_X, P_{related}, M, Preferences, ..., B)</math>
 +
 +
and the variables, Prelated, M, Preferences, ..., B do not change then
 +
 +
<math>Q_X = f_X(P_X) </math>
 +
 +
ceteris paribus. This can be considered a “demand curve”
 +
or “demand function.”
  
−
* ''''Economic growth:''' The macro economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.
+
All these functions are talking into consideration to determine the following points
  
 +
* Income
 +
* Tastes and preferences
 +
* Prices of related goods and services
 +
* Consumers' expectations about future prices and incomes
 +
* Number of potential consumers
 +
 
  
−
*'''Determination of general level of prices'''. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.
+
'''B. The Law of Supply'''
  
  
−
*'''Income shares from the national income.''' Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricardo theory, has presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend upon the ratio of investment to national income.
+
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.
  
 +
The supply function often represents a positive relationship between the price of a good and the quantity that will be produced and offered for sale. If all the independent variables (P<sub>inputs</sub>, technology, number of sellers, taxes, laws regulations,. . .except (P<sub>X</sub>) were held constant the supply might be expressed:
  
−
*'''Global economic system. In macro economic analysis''', it is emphasized that a nation's economy is a part of a global economic system. A good or weak performance of a nation's economy can affect the performance of the world economy as a whole.
 
  
−
===Demand & Supply===
+
<math>Q_{XS} = fS (P_X) </math>
  
−
The Analysis of supply and demand shows how a market mechanism solves the three problems of ''what'', ''how'' and ''for whom''. A market blends together demands and supplies. Demand comes from consumers and who are spreading their dollars votes among available goods and services, while business supply the goods and services with the goal of maximizing their profit.
+
ceteris paribus
  
 +
to determine the following matters this function is necessary to follow
  
−
'''A. The Demand Schedule'''
+
* Production costs, how much a good costs to be produced
 +
* The technology used in production, and/or technological advances
 +
* The price of related goods
 +
* Firms' expectations about future prices
 +
* Number of suppliers
  
−
* A demand schedule shows the relationship between the quantity demanded and the price of a commodity other things held constant. Such a demand schedule, depicted graphically by a demand curve, holds constant other thing like family income, tastes and the price of other goods. Almost all commodities obey the ''law of downward-sloping demand'', which hold that quantity demanded falls as a good's price rise. this law is represented by a downward-sloping demand curve.
+
==Polynomal Function==
  
 +
==Price Elasticity of Demand and Supply==
  
−
* Many influence lie behind the demand schedule for the market as a whole: average family incomes, population, the prices of related goods, tastes, and special influence. When these influences change, demand curve will shift.
 
  
 +
The '''Price Elasticity of Demand''' (sometimes simply called price elasticity) measures how much the quantity demanded of a good changes when its price changes. The precise definition of price elasticity is the percentage change in quantity demanded divided by the percentage change in the price.
  
  
−
'''B.The Supply Schedule'''
+
Goods very enormously in their price elasticity or sensitivity to price changes. When the price elasticity of a good is high, we say that the good has "elastic" demand, which means that its quantity demanded responds greatly to price changes. When the price elasticity of a good is low, it is "inelastic" and its quantity demanded responds little to price changes.
  
  
−
* The supply schedule (or supply curve) gives the relationship between the quantity of a good that producers desire to sell- other things constant- and that good's price. Quantity supplied generally responds positively to price, so the supply curve will be upward sloping.
+
For necessities like food, fuel shoes and prescription drugs demand tends to be inelastic. Such items are the staff of life and can not easily be forgone when their prices rise. By contrast, you can easily substitute other goods when luxuries like European holidays, 17- yes-old Scotch whiskey, and Italian designer clothing rise in price.  
  
  
−
* Element other than the good's price affect its supply. The most important influence is the commodity's production cost, determined by the state of technology and by input prices. other elements in supply include the prices of related goods, government policies and special influence.
+
Economic factors determine the size of price elasticities for individual goods: elasticities tend to be higher when the goods are luxuries, when substitute are available, and when consumer have more time to adjust their behavior.  
  
−
===Boundaries===
 
  
−
    * Boundaries define which parts of the reality are taken into the assessment and which are excluded within
+
===Calculating Elasticities===
−
      spatial, temporal and other dimensions.
 
  
−
===Scenarios===
+
If we can observe how much quantity demanded changes when price changes, we can calculate the elasticity. The precise definition of price elasticity, E<sub>p</sub>, is the percentage change in price, For convenience, we drop the minus signs, so elasticities are positive.
  
−
    * Scenarios define particular conditions that are of interest irrespective whether they describe
+
We can calculate the coefficient of price elasticity numerically according to the following formula:
−
      reality or not (e.g. what-if scenarios).
 
  
−
===Intended users===
+
Price elasticity of demand= E<sub>p</sub>= percentage change in quantity demanded/ percentage change in price
  
−
    * Intended users are those for whom the assessment is made.
+
In practice, Calculating elasticities is somewhat tricky so  The formula for the Price Elasticity of Demand (PEoD) is:
  
−
===Participants===
+
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
  
−
    * Participants are those who may participate in the making of the assessment.  
+
Calculating the Price Elasticity of Demand
−
      The minimum group of people for a successful assessment is always described.
+
You may be asked the question "Given the following data, calculate the price elasticity of demand when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question. (Your course may use the more complicated Arc Price Elasticity of Demand formula.
−
      If some groups must be excluded, this must be explicitly motivated.
 
  
−
==Definition==
 
  
−
Upload a causal diagram and change the right name here.
+
Calculating the Percentage Change in Quantity Demanded
  
−
[[image:Causal diagram.PNG|thumb|Add a legend for you diagram.]]
+
The formula used to calculate the percentage change in quantity demanded is:
  
−
===Decision variables===
 
  
−
    * Decision variables: decisions that are considered.
+
  [QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
−
   
 
−
===Indicators===
 
  
−
    * Indicators: outcome variables of interest.
 
  
−
===Value variables===
+
By filling in the values we wrote down, we get:
  
−
    * Value variables: value judgements (usually about indicators).
+
[110 - 150] / 150 = (-40/150) = -0.2667
  
−
===Other variables===
+
We note that % Change in Quantity Demanded = -0.2667 (We leave this in decimal terms. In percentage terms this would be -26.67%). Now we need to calculate the percentage change in price.
 +
Calculating the Percentage Change in Price
 +
Similar to before, the formula used to calculate the percentage change in price is:
  
−
    * Other variables: any variables that link to the causal network and are within the boundaries of the assessment.
+
[Price(NEW) - Price(OLD)] / Price(OLD)
  
−
===Analyses===
+
By filling in the values we wrote down, we get:
  
−
    * Analyses: statistical and other analyses that contain two or more variables, e.g. optimizing.
+
[10 - 9] / 9 = (1/9) = 0.1111
  
−
===Indices===
+
We have both the percentage change in quantity demand and the percentage change in price, so we can calculate the price elasticity of demand
  
−
    * Indices: lists of particular locations along spatial, temporal, or other dimensions.
+
Final Step of Calculating the Price Elasticity of Demand
−
+
We go back to our formula of:
−
==Result==
 
  
−
    * Results of indicators and assessment-specific analyses.
+
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
  
−
===Results===
+
We can now fill in the two percentages in this equation using the figures we calculated earlier.
  
−
===Conclusions===
+
PEoD = (-0.2667)/(0.1111) = -2.4005
  
−
    * Conclusions are based on the results, given the scope.  
+
When we analyze price elasticities we're concerned with their absolute value, so we ignore the negative value. We conclude that the price elasticity of demand when the price increases from $9 to $10 is 2.4005.
  
 
==See also==
 
==See also==
 +
 +
* [[:en:Multi-criteria decision analysis|Multi-criteria decision analysis]]
 +
* [[:en:Weighted sum model|Weighted sum model]]
 +
* [[:en:Analytic Hierarchy Process|Analytic Hierarchy Process]]
 +
* [[:en:Preference Ranking Organization Method for Enrichment Evaluation|Preference Ranking Organization Method for Enrichment Evaluation]]
 +
* [[:en:Aggregated indices randomization method|Aggregated indices randomization method]]
  
 
==References==
 
==References==
  
 
<references/>
 
<references/>
 +
 +
* Economics (eighteenth edition), Samuelson and Nordhaus

Latest revision as of 11:56, 10 February 2012


Main message:
Question:

What is Macro economic Model? How to use this method in practice?

Answer:

given current knowledge, Macroeconomics is the study of the behavior of the economy as a whole. It examines the forces that affect many firm, consumer and workers at the same time.


Scope

The importance/issues/scope, which are addressed in macro economics are in brief as under: [1]

  • It helps in understanding the determination of income and employment. Late J.M. Keynes laid great stress on macro economic analysis. He, in his revolutionary book, "General Theory, Employment interest and Money", brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.
  • 'Economic growth: The macro economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.
  • Determination of general level of prices. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.
  • Income shares from the national income. Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricardo theory, has presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend upon the ratio of investment to national income.
  • Global economic system. In macro economic analysis, it is emphasized that a nation's economy is a part of a global economic system. A good or weak performance of a nation's economy can affect the performance of the world economy as a whole.

Demand & Supply

The Analysis of supply and demand shows how a market mechanism solves the three problems of what, how and for whom. A market blends together demands and supplies. Demand comes from consumers and who are spreading their dollars votes among available goods and services, while business supply the goods and services with the goal of maximizing their profit. [2]


A. The Demand Schedule

  • A demand schedule shows the relationship between the quantity demanded and the price of a commodity other things held constant. Such a demand schedule, depicted graphically by a demand curve, holds constant other thing like family income, tastes and the price of other goods. Almost all commodities obey the law of downward-sloping demand, which hold that quantity demanded falls as a good's price rise. this law is represented by a downward-sloping demand curve.
  • Many influence lie behind the demand schedule for the market as a whole: average family incomes, population, the prices of related goods, tastes, and special influence. When these influences change, demand curve will shift.


B.The Supply Schedule


  • The supply schedule (or supply curve) gives the relationship between the quantity of a good that producers desire to sell- other things constant- and that good's price. Quantity supplied generally responds positively to price, so the supply curve will be upward sloping.
  • Element other than the good's price affect its supply. The most important influence is the commodity's production cost, determined by the state of technology and by input prices. other elements in supply include the prices of related goods, government policies and special influence.

Functions of Demand & Supply

The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible. [3]

A. The Law of Demand


The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.


It is useful to abstract and to identify how the price and changes in the price of the good effect buyer behavior by “holding all other things constant,” or using ceterias paribus. If the prices of related goods, incomes and preferences are unchanged it is possible to describe the relationship between the price of the good (PX) and the quantity that will be purchased (QX) in a given time (ut).

If

Failed to parse (Missing <code>texvc</code> executable. Please see math/README to configure.): Q_X = f_X(P_X, P_{related}, M, Preferences, ..., B)

and the variables, Prelated, M, Preferences, ..., B do not change then

Failed to parse (Missing <code>texvc</code> executable. Please see math/README to configure.): Q_X = f_X(P_X)

ceteris paribus. This can be considered a “demand curve” or “demand function.”

All these functions are talking into consideration to determine the following points

  • Income
  • Tastes and preferences
  • Prices of related goods and services
  • Consumers' expectations about future prices and incomes
  • Number of potential consumers


B. The Law of Supply


Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

The supply function often represents a positive relationship between the price of a good and the quantity that will be produced and offered for sale. If all the independent variables (Pinputs, technology, number of sellers, taxes, laws regulations,. . .except (PX) were held constant the supply might be expressed:


Failed to parse (Missing <code>texvc</code> executable. Please see math/README to configure.): Q_{XS} = fS (P_X)

ceteris paribus

to determine the following matters this function is necessary to follow

  • Production costs, how much a good costs to be produced
  • The technology used in production, and/or technological advances
  • The price of related goods
  • Firms' expectations about future prices
  • Number of suppliers

Polynomal Function

Price Elasticity of Demand and Supply

The Price Elasticity of Demand (sometimes simply called price elasticity) measures how much the quantity demanded of a good changes when its price changes. The precise definition of price elasticity is the percentage change in quantity demanded divided by the percentage change in the price.


Goods very enormously in their price elasticity or sensitivity to price changes. When the price elasticity of a good is high, we say that the good has "elastic" demand, which means that its quantity demanded responds greatly to price changes. When the price elasticity of a good is low, it is "inelastic" and its quantity demanded responds little to price changes.


For necessities like food, fuel shoes and prescription drugs demand tends to be inelastic. Such items are the staff of life and can not easily be forgone when their prices rise. By contrast, you can easily substitute other goods when luxuries like European holidays, 17- yes-old Scotch whiskey, and Italian designer clothing rise in price.


Economic factors determine the size of price elasticities for individual goods: elasticities tend to be higher when the goods are luxuries, when substitute are available, and when consumer have more time to adjust their behavior.


Calculating Elasticities

If we can observe how much quantity demanded changes when price changes, we can calculate the elasticity. The precise definition of price elasticity, Ep, is the percentage change in price, For convenience, we drop the minus signs, so elasticities are positive.

We can calculate the coefficient of price elasticity numerically according to the following formula:

Price elasticity of demand= Ep= percentage change in quantity demanded/ percentage change in price

In practice, Calculating elasticities is somewhat tricky so The formula for the Price Elasticity of Demand (PEoD) is: 

PEoD = (% Change in Quantity Demanded)/(% Change in Price)

Calculating the Price Elasticity of Demand You may be asked the question "Given the following data, calculate the price elasticity of demand when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question. (Your course may use the more complicated Arc Price Elasticity of Demand formula.


Calculating the Percentage Change in Quantity Demanded

The formula used to calculate the percentage change in quantity demanded is: 


[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)


By filling in the values we wrote down, we get: 

[110 - 150] / 150 = (-40/150) = -0.2667

We note that % Change in Quantity Demanded = -0.2667 (We leave this in decimal terms. In percentage terms this would be -26.67%). Now we need to calculate the percentage change in price. Calculating the Percentage Change in Price Similar to before, the formula used to calculate the percentage change in price is: 

[Price(NEW) - Price(OLD)] / Price(OLD)

By filling in the values we wrote down, we get: 

[10 - 9] / 9 = (1/9) = 0.1111

We have both the percentage change in quantity demand and the percentage change in price, so we can calculate the price elasticity of demand

Final Step of Calculating the Price Elasticity of Demand We go back to our formula of: 

PEoD = (% Change in Quantity Demanded)/(% Change in Price)

We can now fill in the two percentages in this equation using the figures we calculated earlier. 

PEoD = (-0.2667)/(0.1111) = -2.4005

When we analyze price elasticities we're concerned with their absolute value, so we ignore the negative value. We conclude that the price elasticity of demand when the price increases from $9 to $10 is 2.4005.

See also

References

  1. ↑ Macroeconomics in Wikipedia.
  2. ↑ [1]
  3. ↑ Supply and demand in Wikipedia.
  • Economics (eighteenth edition), Samuelson and Nordhaus
Retrieved from "http://www.opasnet.org/testiwiki/index.php?title=Macroeconomics&oldid=23718"