Changes

Economists have their own terminology which, as you’ve seen in this course, is often different from common usage.  In economics, the basic terms of wages, interest, rent and profit are all redefined.  Here we go:

Economists have their own terminology which, as you’ve seen in this course, is often different from common usage.  In economics, the basic terms of wages, interest, rent and profit are all redefined.  Here we go:

“'''''[[Economic wages]]'''''” are payments for the worker’s opportunity cost of time.  When a student earns $7 per hour working for a dry cleaners, those wages are payments for his opportunity cost of time.  He could be working someone else making money.

“'''''[[Economic wages]]'''''” are payments for the worker’s opportunity cost of time.  When a student earns $7 per hour working for a dry cleaner, those wages are payments for his opportunity cost of time.  He could be working someone else making money.

“'''''[[Economic rent]]'''''” is the payment for a perfectly inelastic input.  If increasing the payment does not increase the supply of the input, then this extra amount above cost is a “rent”.  It is similar, but not identical, to rent paid on scarce land.  Increasing the rent does not increase the supply the land.  The supply is limited.

“'''''[[Economic rent]]'''''” is the payment for a perfectly inelastic input.  If increasing the payment does not increase the supply of the input, then this extra amount above cost is a “rent”.  It is similar, but not identical, to rent paid on scarce land.  Increasing the rent does not increase the supply the land.  The supply is limited.

==Interest==

==Interest==

“There’s no free lunch,” according to the famous saying.  “It costs money to make money” is another aphorism.  Most bank's ATMs charge $2 or $3 just to withdraw cash from your account at a different bank.

“There’s no free lunch,” according to the famous saying.  “It costs money to make money” is another aphorism.  Most banks' ATMs charge $2 or $3 just to withdraw cash from your account at a different bank.

If you asked me to loan you $1000, then I might answer: why?  What’s in it for me?  You would then say that you promise to give it back.  I would then say why should I give it to you in the first place?  If I just keep the money, then I won’t have to worry about your giving it back.

If you asked me to loan you $1000, then I might answer: why?  What’s in it for me?  You would then say that you promise to give it back.  I would then say why should I give it to you in the first place?  If I just keep the money, then I won’t have to worry about your giving it back.

How can you compare future money to present money?  By calculating the “present value of money.”  That is how much one would need in the present which, with investment, would equal the proposed future payment.  We use the interest rate to determine how much something today should be worth in the future, or how much a payment promised in the future is worth today.

How can you compare future money to present money?  By calculating the “present value of money.”  That is how much one would need in the present which, with investment, would equal the proposed future payment.  We use the interest rate to determine how much something today should be worth in the future, or how much a payment promised in the future is worth today.

If I promise to give you $100 in 5 years, and the interest rate is 5% annually, then ask yourself how much you would need today to generate that same $100 in 5 years.  It would be less than $100, because you could earn interest on it.  In fact, you would only need $100 divided by (1.05) times itself 5 times (i.e, 1.05 x. 1.05 x 1.05 x. 1.05 x. 1.05)

If I promise to give you $100 in 5 years, and the interest rate is 5% annually, then ask yourself how much you would need today to generate that same $100 in 5 years.  It would be less than $100, because you could earn interest on it.  In fact, you would only need $100 divided by (1.05) times itself 5 times (i.e., 1.05 x. 1.05 x 1.05 x. 1.05 x. 1.05)

Using a calculator, that comes to $78.35.  That’s amazing, isn’t it?  Receiving $100 in 5 years is equivalent to only $78.35 today, assuming an interest rate of 5%.

Using a calculator, that comes to $78.35.  That’s amazing, isn’t it?  Receiving $100 in 5 years is equivalent to only $78.35 today, assuming an interest rate of 5%.

== Banking and the Federal Reserve System ==

== Banking and the Federal Reserve System ==

Created in 1913, the Federal Reserve system is a network of 12 banks (one for each Federal Reserve district around the country) that serve as a "bank for banks."  In each district, hundreds of banks (and thousands of bank branches or offices) belong to the local Federal Reserve Bank and rely on it for loans and deposits.  The vast majority of all bank deposits in the United States are with banks that belong to the Federal Reserve system.

Created in 1913, the Federal Reserve System is a network of 12 banks (one for each Federal Reserve district around the country) that serve as a "bank for banks."  In each district, hundreds of banks (and thousands of bank branches or offices) belong to the local Federal Reserve Bank and rely on it for loans and deposits.  The vast majority of all bank deposits in the United States are with banks that belong to the Federal Reserve System.

Long ago the economy relied on "commodity monies," which consisted of a commodity (such as silver or gold) serving the function of money.  To buy food or pay rent, someone would pay with silver or gold pieces.  But now we use "bank-debt money," such as paper dollars.  Special markings on each dollar bill signify which of the 12 Federal Reserve banks issued that dollar bill.

Long ago the economy relied on "commodity monies," which consisted of a commodity (such as silver or gold) serving the function of money.  To buy food or pay rent, someone would pay with silver or gold pieces.  But now we use "bank-debt money," such as paper dollars.  Special markings on each dollar bill signify which of the 12 Federal Reserve banks issued that dollar bill.

Keynesian economics is a theory that began with a British economist named John Maynard Keynes (1883-1946).  He became a favorite of liberals and his theories of economics were one reason England declined from being the greatest power in the world in the 19th century to a weak nation that could not fully defend itself against Germany in World War II (1940-1945).

Keynesian economics is a theory that began with a British economist named John Maynard Keynes (1883-1946).  He became a favorite of liberals and his theories of economics were one reason England declined from being the greatest power in the world in the 19th century to a weak nation that could not fully defend itself against Germany in World War II (1940-1945).

His theory was the opposite of free-market or classical economics.  Keynes insisted that government interference with the market was desirable and necessary.  Keynes claimed that government spending was needed to reduce unemployment and stimulate economic growth.  Under Keynesian economics, the more government spends, the better it is for the economy.  Keynes argued that big deficits (excess of government spending over revenue) were actually a good thing to bring an economy out of a recession.

His theory was the opposite of free-market or classical economics.  Keynes insisted that government interference with the market was desirable and necessary.  Keynes claimed that government spending was needed to reduce unemployment and stimulate economic growth.  Under Keynesian economics, the more government spends, the better it is for the economy.  Keynes argued that big deficits (excess of government spending over revenue) were actually a good thing to bring an economy out of a recession.

This course focuses on Microeconomics, while Keynesian economics is a topic in Macroeconomics, which is the study of national economies rather than individual firms and consumer decisions.  So there will not be any questions on a CLEP Microeconomics exam about Keynesian economics.  But you will see this term used in debates about the federal budget and overall economy, and its basic meaning is this:  increase government spending to stimulate the economy and reduce unemployment.  This did not work well for England in the 20th century, as it went from being the greatest economy to one that is weaker than the economy of the United States and several other nations.

This course focuses on Microeconomics, while Keynesian economics is a topic in Macroeconomics, which is the study of national economies rather than individual firms and consumer decisions.  So there will not be any questions on a CLEP Microeconomics exam about Keynesian economics.  But you will see this term used in debates about the federal budget and overall economy, and its basic meaning is this:  increase government spending to stimulate the economy and reduce unemployment.  This did not work well for England in the 20th century, as it went from being the greatest economy to one that is weaker than the economy of the United States and several other nations.

2.  Which is true about the average fixed costs (AFC) of a firm?

2.  Which is true about the average fixed costs (AFC) of a firm?

(a) a firm can eliminate these costs by shutting down in the short run.

(a) A firm can eliminate these costs by shutting down in the short run.

<br>(b) as output increases, AFC decreases

<br>(b) As output increases, AFC decreases.

<br>(c) as output increases, AFC increases

<br>(c) As output increases, AFC increases.

<br>(d) AFC is part of average variable costs

<br>(d) AFC is part of average variable costs.

Briefly explain your answer.

Briefly explain your answer.

5.  A monopolistic competitive firm has the following characteristic that ''is lacking'' for a perfectly competitive firm:

5.  A monopolistic competitive firm has the following characteristic that ''is lacking'' for a perfectly competitive firm:

(a) There are low barriers to entry

(a) There are low barriers to entry.

<br>(b) MR = MC in the long run.

<br>(b) MR = MC in the long run.

<br>(c) P > MC

<br>(c) P > MC

8.  Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually.  How much should you pay me today to receive $1000 in two years?  Show your work.

8.  Suppose I will pay you $1000 in two years, and the interest rate is 10% per year, compounded annually.  How much should you pay me today to receive $1000 in two years?  Show your work.

===Honors:===

===Honors===

Answer question 9, and then 2 out of the following 4 questions:

Answer question 9, and then 2 out of the following 4 questions: