ECONOMICSECONOMICS - - “science of scarcity”“science of scarcity”-the study of the choiceschoices people make in an effort to satisfy

their unlimited needs unlimited needs and and wantswants from limited resourceslimited resources.

Single - noSingle - no tax on 1tax on 1stst

$7,550$7,550

35%35%

33%33%

28%28%

25%25%

15%15%

10%10%

$$7,5507,550 $150,150$150,150 $$326,450326,450

Standard DeductionStandard Deduction[$5,150-dependent[$5,150-dependent] ]

00 $71,950$71,950 $$326,450+326,450+$$29,70029,700

10%10% 15%15% 25%25% 28%28% 33%33% 35%35%

Marg

inal

Marg

inal Tax R

ate

s T

ax R

ate

sFlat Tax on Income: Flat Tax on Income: same % of income, different amounts, sosame % of income, different amounts, so ProportionalProportionalFlat Tax on Products: Flat Tax on Products: same amount, different % of income, sosame amount, different % of income, so RegressiveRegressive

I only have I only have to pay the to pay the FICA tax.FICA tax.

Progressive

Progressive – takes a la

rger % fro

m high income groups

– takes a la

rger % fro

m high income groups

[$15,100-married filing jointly][$15,100-married filing jointly][$10,750-HH][$10,750-HH][7,550-single[7,550-single]]

Regressive–

Regressive– takes a larger % from low income groups

takes a larger % from low income groups

ProportionalProportional && RegressiveRegressive TaxesTaxes

$100,000$100,000

ProportionalProportional – – takes same 20%takes same 20% [[not amountnot amount] from all income groups] from all income groups2020%%

$30,000$30,000 $40,000$40,000 $50,000$50,000

2020%%

3030%%

1010%%

$30,000$30,000 $40,000$40,000 $50,000$50,000

PayPay $20,000 $20,000PayPay $10,000 $10,000[So,[So, not same amountnot same amount but same %, 20%]but same %, 20%]

I’m a “lowI’m a “lowincomer.”incomer.”

Example:Example: MedicareMedicare – 1.45% on all income earned.– 1.45% on all income earned.

Take that, you Take that, you “low incomer.”“low incomer.”

Example:Example: Sales TaxSales Tax

At first the job seeker optimistically looks looks for his next jobfor his next job..

Then, after many rejections, he becomes a reluctantdiscouraged workerdiscouraged worker.

With pressure frombill collectors (and hiswife), he holds up a he holds up a 7-11 7-11 & & shoots a clerkshoots a clerk.

And – the Texas Justice System will

tell him to,““Take that.”Take that.”

Eventually he is caught and incarceratedincarcerated.

And his kids will cry because they no longer can go can go to collegeto college.

And – how did President George W. And – how did President George W. Bush do in college economics? Bush do in college economics?

Let’s take a look at his Let’s take a look at his college transcript.college transcript.

Econ 71/ 72Econ 71/ 72

Gov 73 /71Gov 73 /71

Overall average 77Overall average 77 Kerry’s overall college ave. was 76.Kerry’s overall college ave. was 76.

““So - If your son or daughter is having So - If your son or daughter is having aa hard hard timetime in in economics, don’t worry about it. They are economics, don’t worry about it. They are on schedule to be President on schedule to be President of theof the United States.” United States.”

QDQD22QDQD11

PricePrice QDQD

InverseInverse relationshirelationshipp

$299.00$299.00

DD Reasons For Reasons For Downsloping “D”Downsloping “D” Curve Curve1. Income EffectIncome Effect –current buyers buy more.2. Substitution EffectSubstitution Effect– new buyers now purchase.3. Diminishing MarginalDiminishing Marginal UtilityUtility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered.

Change in QDChange in QD1. Price changePrice change2. MovementMovement [up/down the demand curve]3. Point to pointPoint to point [along the curve]

iPod Touch [8 GB]iPod Touch [8 GB]

““D”D” refers to the ““whole curvewhole curve”.”. [“all prices”“all prices”]““QD”QD” refers to a “point on the curve”“point on the curve”

based on a “particular price.”“particular price.”

““Demand Shifters” [TIMER]Demand Shifters” [TIMER]1. 1. TTaste [aste [directdirect]]2. 2. IIncome [normal-ncome [normal-directdirect] [inferior-] [inferior-inverseinverse]]3. 3. MMarket Size [number of consumers-arket Size [number of consumers-directdirect]]4. 4. EExpectations [of consumers about future *price-xpectations [of consumers about future *price-directdirect, , about future availability-about future availability-inverseinverse, or about future income–, or about future income–directdirect..5. 5. RRelated Good *Prices [substitutes-elated Good *Prices [substitutes-directdirect] [complements-] [complements-inverseinverse]]

Change in “D” [curve]Change in “D” [curve]1. Non price changeNon price change [[“TIMER”“TIMER”]]2. Whole “D” curve shiftsWhole “D” curve shifts[There is a change in “QD” but it isnot caused by a change in “price.”[QD-”single price”QD-”single price”; D-”all prices”D-”all prices”]

ComplementComplement[[inverseinverse]]

SubstituteSubstitute

[[DirectDirect]]ButterButter BreadBread BagelsBagels

PP

DD33 DD11 DD22

QDQD33 QDQD11 QDQD22

DD11 DD22

PPPP11

QDQD11

PP22

DD11

DD22

DD

PP

QDQD22

1. “Non price Level”“Non price Level” change-either CC, IIgg, GG, or XXnn2. “Whole AD curve” shifts“Whole AD curve” shifts[There is a change in AQD but it is not caused by a change in price level.]

ConsumptionConsumptionMariah Carey Mariah Carey ConcertConcert

GG

IIgg

Chevy Chevy FerarriFerarriXXNN[[Exports-Imports]Exports-Imports]

CC

PLPL

AQDAQD11

ADAD22ADAD33

ADAD11

RDORDO

LLetet t therehere be m be moreore military weaponsmilitary weapons

AQDAQD22AQDAQD33

AS Shifters(REPAS Shifters(REP))1. 1. RResource costesource cost2. 2. EEnvironment nvironment [legal-institutional [legal-institutional environment for businesses change,environment for businesses change, affecting production costsaffecting production costs

[subsidies, bus. taxes, regulations][subsidies, bus. taxes, regulations]3. 3. PProductivityroductivity

Change in ASChange in AS

EEnvironmentnvironment[Legal-institutional][Legal-institutional]

1. “Non price level change”. Either R, E, or P2. “Whole AS curve” shifts.3. AQS changes but is not caused by a change in PL

PLPL

AQSAQS11

ASAS33 ASAS11 ASAS22

Increase in the availability of RResources

1. Lower business taxes 2. Decrease in regulations 3. Increase in subsidies

Increase in PProductivity

You save money. We don’t You save money. We don’t require dental or medical require dental or medical insurance. You don’t have to pay insurance. You don’t have to pay us a pension and we don’t take us a pension and we don’t take sick days. And – we can dance. sick days. And – we can dance.

AQSAQS22AQSAQS33

Anything that lowersthe cost of productionwill shift AS right.

So – AS Shifters areSo – AS Shifters are

REPREP

.

QSQS22

DirectDirect

Reasons For Upsloping “S” CurveReasons For Upsloping “S” Curve1. There is increasing opportunity cost if you don’t produce.2. Current producers produce more [overtime/more shifts]3. New producers are attracted to the market.

““S”S” refers to the refers to the “whole supply curve”“whole supply curve” and refers to what and refers to what producers will supply at producers will supply at “different prices”“different prices”““QS”QS” refers to a refers to a “point on the curve”“point on the curve” and refers to what and refers to what

producers will supply at a producers will supply at a “particular price”“particular price”

Change in “QS”Change in “QS”1. Price change2. Movement (up/down “S” curve)

3. Point to point (along “S” curve)

SS

QSQS11

PP22

PP11

Price increasesincreases; QS increasesincreasesPrice decreasesdecreases; QS decreasesdecreases

Producers want theProducers want thehighest price possible.highest price possible.

Ben Stein [from “Ferris Bueler’s Day Off”] graduated from Ben Stein [from “Ferris Bueler’s Day Off”] graduated from Columbia University in 1966 with a degree in economicsColumbia University in 1966 with a degree in economics and from Yale Law School in 1970and from Yale Law School in 1970 as as valedictorian. He was valedictorian. He was a speech writera speech writer for for Nixon. HeNixon. He has has written 16written 16 books, books, including including

his latest humor book, “How To Ruin Your Life”.his latest humor book, “How To Ruin Your Life”.

Ben Stein’s part in this Ben Stein’s part in this movie as a boring econ movie as a boring econ prof was voted one of the prof was voted one of the 50 most famous scenes 50 most famous scenes in American film.in American film.

Tax $Tax $

TTaxax R Rateate00%% 100%100%

10%10%

3%3%

1%1%

PLPL

1010%%

““OOlldd P Phhiilllliippss C Cuurrvve”e”SRPCSRPC

5%5%

55% is % is YY**(F)(F) with with 33% anticipated PL.% anticipated PL.

Menu of ChoicesMenu of Choices

““More inflation”More inflation” or““more unemloyment”more unemloyment”

3%3%

UnemploymentUnemployment

Inflat.Inflat.GapGap

RRecess.ecess.

GapGap

SRASSRAS11

LRASLRAS

Y*Y*5%5%

ADAD11

ADAD22PLPL

3%3%

10%10%

YYII

3%3%

Inflat.Inflat.GapGap

ADAD33

1%1%

YYRR

1010%%

Recess.Recess.GapGap

LRPCLRPC

Alban William Housego PhillipsAlban William Housego Phillips1914-19751914-1975

1515%%

SSRRPPCC33

SSRRPPCC11

SSRRPPCC22

There is aThere is a SSRRPPCC [output prices are changing] and a[output prices are changing] and a LRPCLRPC[output [output & & input prices input prices chg afterchg after unanticipated unanticipated inflationinflation oror disinflationdisinflation]]

LRPCLRPC - when unemployment = the natural rate and there is no tendency for PL to be incr/decr. PL is stable & contracts reflect it.

Let’s say that inflationinflation

has averaged averaged 99%% forthe past few years.

99% is anticipated% is anticipated.

0 20 2%% 44%% 66%% 88%% 1010%%

My salary just My salary just isn’t keeping up.isn’t keeping up.

1212%%

99%%

66%%

33%%aa11

aa22

aa33

bb11

bb22

bb33

CC11

cc22

cc33

LRPCLRPC

Inflat.Inflat.GapGap

Recess.Recess.GapGap

Wow, my raise exceeds inflation.

Let’s say that inflationinflation has averagedaveraged 33%% for three years. 33% is anticipated% is anticipated..

But my salary went up by only 3%.

It can’t get any better.My raises exceed inflation.

But when it comes time to sign But when it comes time to sign a new contract, his boss says …a new contract, his boss says …

But my raise was only 6%.

The EndThe End