Aggregate Demand & Aggregate Supply

1. Is war good or bad for the economy?

• Based on a number of factors, war could be good or bad for the economy. One primary example is the economic boom in the United States during World War II. As the United States entered the war overseas, the federal government had to designate more resources to the military. In the short-term, government purchases of goods and services increased almost five fold from 1939 to 1944. This huge expansion in aggregate demand almost doubled the economy's production of goods and services and led to a 20% increase in the price level. As a result, unemployment fell from 17% in 1939 to about 1% in 1944 which was the lowest recorded level in U.S history. On the opposite end, war could be negative on the economy in the long-term resulting in increased taxes and exhausted resources.

2. What are the opportunity cost of using resources in wars?

• The opportunity cost of using resources in wars is the decrease of government spending towards social programs, energy and environmental issues. In addition, the natual resources utilized to support the war take away from domestic consumption.

3. How would a war affect aggregate supply?

• A war would affect aggregate supply if suddenly some firms experience an increase in their costs of productions. For example, a war in the Middle East might interrupt the shipping of crude oil, thus driving up the cost of producing oil products. Crude oil is a key input into the production of many goods and services. U.S firms that produce gasoline, tires, and many other products experience rising costs, and they find it less profitable to supply their output of goods and services at any given price level. The result is a leftward shift in the aggregate-supply curve, which in turn leads to stagflation. 

4.  Graph the shift in aggregate supply. What happens to output and the price level?

 

     Adverse Shift in Aggregate Supply



Production & Growth- Group C

List the determinants of  a country's productivity and give an example of each.

• Physical Capital per Worker- the stock of equipment and structures that are used to produce goods and services.
• Example: The machines that enable a jewelry manufacturer to make their rings.
• Human Capital per Worker- the knowledge and skills that workers acquire through education, training and experience.
• Example: Investment in education,training, health insurance, teachers and libraries.
• Natural Resources per Worker- the inputs into the production of goods and services that are provided by nature, such as land, rivers and mineral deposits.
• Example: trees, sunshine, soil, water, plants, animals, oil, coal, and metals.
• Technological Knowledge- society's understanding of the best ways to produce goods and services.
• Common knowledge- Henry Ford introduced assembly lines in auto manufacturing, but other companies in other industries followed suit.
• Proprietary- Apple develops a new phone and patents it, and then has exclusive rights to produce that phone for a certain period of time.

Two hundred years ago, 80% of the U.S. labor force worked in the farming industry. Today, farming accounts for only 2% of U.S. jobs. The U.S. population certainly has not decreased over the last 200 years. Using production function concept(s) discussed in the text, explain why you think this change has occurred.

• In present America, farming only accounts for 2% of the U.S labor force instead of 80% due to technological knowledge and physical. As farming skills and tools advanced throughout the 200 year span, it required less labor and increased productivity for the population. The invention of large tractors, seeders, harvesters, and irrigation devices heavily contributed to the farming industry shift. As a result, people left the farming industry and gained the opportunity to receive higher education and specialize in other areas of the labor force. 

You and four friends become shipwrecked on the deserted island "Hav-a-lot." This island has many natural resources like fresh water, fish, edible fruit and edible wildlife. Given what you have learned so far in this class, discuss how you, as the island leader, would organize this new society to maximize production, and thus, maximize your chances of surviving. Be sure to use economic terms discussed in this course in your answer.


As the island leader under this strenuous circumstance, I would first locate the fresh water because it is the most critical natural resource for our survival. The task of gathering fish, edible fruit and wildlife will be divided and assigned to the individual with the comparative advantage. One person will gather fruit as it requires minimal skill to produce large quantities. Next, one person will hunt for wildlife and another will gather fish as well as collect water because both tasks involve connection to the water supply. Lastly, two will use trees to build a place of shelter because increased labor is required in this area. Natural resources located on the island such as trees and minerals will be used to create tools for hunting, fishing, cooking food, building shelter and containing water supply. As labor is divided, all five of us on the island will reap the benefits from each daily gathering by sharing and trading with each other. This system will produce the maximum productivity from each worker, because the division of labor increases the quantity of inputs. As all members of the island have reassurance that areas involving food, water and shelter will be provided, they will contribute at the highest level of production. 

Wages & Me- Interactive Tutorial

The Effect of Supply & Demand on Wages


1. What occupation did you choose?

• Financial Manager

2. Was the job description listed for your chosen profession?

• Plan, direct, or coordinate accounting, investing, banking, insurance, securities and other financial activities of a branch, office or department of an establishment.

3.  About how many Americans are employed in that occupation?

• 484, 910

4. What is the mean annual wage for that occupation?

• $123,260

5. What is the annual wage rate for the lowest-paid ten percent of workers in that occupation?

• $59,630

6. What is the annual wage rate for the highest-paid ten percent of workers in that occupation?

• Equal or greater than 187, 199

7. Find the mean annual income for that occupation for residents in your state.

• 135,760

8. How does your state's mean annual income for that occupation compare to the national mean income for that occupation?

• It is greater by 12,500

9. If there is a difference, what do you think is the primary reason for that difference?

• The cost of living in DC is high compared to the national level. This may explain the increase in mean annual income compared to the rest of the nation.

10. Will you stay in your state for your career, or do you think you will move away? Why?

• I believe it is best for me to stay in DC for my career because out of all states, it has the highest concentration of jobs and location quotients in this occupation. 

Supply & Demand- Group C

Consider the market for minivans. For each of the events listed below, identify which of the determinants of demand or supply are affected. Also, indicate whether demand or supply increases or decreases and the resulting effect on price and quantity demanded.


A) People decide to have more children

• As people decide to have more children there is a shift in the demand curve to the right due to a change in the number of buyers. The demand for minivans increases and the resulting effect is a rise in both price and quantity demanded.  

B) A strike by steel workers raises steel prices

• The rise of steel prices would shift the supply curve to the left due to the change in input prices. The supply for minivans decreases and as a result, the price rises and the quantity supplied decreases.

C) The price of sport utility vehicles rise

• As the price of sport utility vehicles rise, there is a shift in the demand curve to the right as SUV's are substitutes for minivans. The demand for minivans increases and as a result, both price and quantity demanded rise.

D) The stock market crash lowers people's income

• As the stock market crash lowers people's income, there is a shift in the demand curve to the left due to the change in consumer income. The demand for minivans decreases and as a result, the price falls and the quantity demanded falls.