Economics

CLASS 1) The scope & method of economics

1) Definition + 3 key reasons to study it

Economics = the study of how individuals & societies choose to use the scarce resources that
nature & previous generations have provided.
(“Human wants are unlimited, but resources are not”)

3 fundamental concepts for better everyday choices: (see videos slide 7 for examples)

- Opportunity cost = the full cost of a decision includes what we give up by not making
the best alternative choice.
- Marginalism = only weigh the costs & benefits that arise from the decision itself.
(e.g.: you can buy a basic ice cream with one scoop for €2, but you can also choose
an ice cream with 2 scoops for €2,50, the marginal cost of the extra scoop is €0,50)
- Efficient markets (no free lunch) = profit opportunities are always eliminated almost
instantaneously in efficient markets.
- (understand society + be an informed citizen)

2) Difference between micro- and macro-economics

Micro-economics Macro-economics
Individual industries, firms, households… The economy as a whole
->individual decision-making units ->behavior of aggregates
(national output/income, overall price level,
general rate of inflation…)
“Microeconomic decisions focus on individual consumers, firms, and households, while
macroeconomic decisions involve government policies and central bank actions that affect
an entire economy.”

Examples of micro-economic decisions:

- A paper company decides to close one of its factories.
- A kid decides to buy an iPhone instead of an Android phone because he has some money
saved up and prefers quality over cheap sh*t.
- A young household starts buying Golden Power instead of Redbull because they want to
save money for a new family car.

Examples of macro-economic decisions:

- The Swiss National Bank decides to increase their interest rates to tackle inflation.
- The Belgian government increases tax on cigarettes attempting to get people to stop
smoking, and so they can use the money to finance other investments.
- Brexit -> UK leaving the EU.
CLASS 2) Scarcity & choice

Intro: 2-person economy

2 strategies:
- minimize opportunity cost (horizontal)
- maximize comparative advantage (vertical)

Opportunity cost:

For coconuts:

>you can collect 10 coconuts or 6 woods logs in 1 hour= 6/10 = 0,6

>your friend can collect 20 coconuts or 8 wood logs in 1 hour = 8/20 = 0,4

For wood:

>you can collect 6 wood logs or 10 coconuts in 1 hour = 10/6 = 1,67

> your friend can collect 8 wood logs or 20 coconuts in 1 hour = 20/8 = 2,5

 Your friend should collect coconuts, as his opportunity cost for collecting coconuts is
lower than yours.
 You should collect wood logs, as your opportunity cost for collecting wood is lower
than your friend’s.

Comparative advantage:

Your friend is better at everything in absolute terms. However, he is double as good as you in
collecting coconuts, but only 1/3 better than you in collecting wood logs.
-> your friend is “more better” in collecting coconuts than in collecting wood.

You are worse at everything, in absolute terms. However, you are only half as good in
collecting coconuts, but 3/4 as good at collecting wood logs.
-> you are “less worse” in collecting wood logs than in collecting coconuts.

 Your friend should collect coconuts, he has a comparative advantage compared to

wood.
 You should collect wood logs, you have a comparative advantage compared to
coconuts.

“No-one can have a comparative advantage in both, so it is always beneficial to trade, even if
other player is worse at everything = basic argument for free trade.”
 1) The economic problem: scarcity & choice

The economic problem: every society has some system or process that transforms its scarce
resources into useful goods & services. In doing so, it must decide what gets produced, how
it is produced and to whom it is distributed.

- Inputs = factors of production (scarce resources, primary resources to allocate)

-land (nature)
-labor
-capital
- Production = process that transforms scarce resources (input) into useful goods &
services (output)
- Outputs:
-capital goods: used for producing other goods (e.g.: production lines, airplanes…)
-consumer goods: for consumption process but can be durable (clothes) or non-
durable (bread).

Example of all 3: an airline uses land (runways), labor (pilots) and capital (airplanes) to
produce transportation services.

2 (economic) problems:
Allocation problem Distribution problem
How to allocate available resources, what How should labor be distributed? How to
to produce, how & when to produce? divide produced output?

Scarcity & choice in a 1-person economy (allocation problem):

> imagine being stranded on a deserted island

Basic decisions:
- What that person wants to produce (outputs)
- Possibilities (given the limited resources -> scarcity)
- How to (best) use resources (or inputs)

 You will have to decide how to allocate your resources, based on opportunity cost.
(e.g. the hour you spend hunting, isn’t “free”, it costs you that hour which you could
have used to do other things, like gathering fruit)

Scarcity & choice in an economy of 2 or more (allocation + distribution problem):

Basic decisions:
- What they want to produce (output)
- Possibilities (given the limited resources -> scarcity)
- How to (best) use resources (or inputs)

 You will have to distribute labor. How?

 What is comparative advantage?
Definitions:

Opportunity cost = the best alternative someone gives up when a choice is made

Comparative advantage = a producer has a comparative advantage over another in the

production of a good or service if that producer can produce it at a lower opportunity cost.

Absolute advantage = a producer has an absolute advantage over another in the production
of a good or service if that producer can produce it using fewer resources.

Production possibility frontier (=curve) (PPF)

-> visualizes the relation between scarcity, opportunity cost & comparative advantage.

- 2 axes show how much can be produced of an item. (e.g.: woods logs & food bushels)
- Curve shows how much of one (e.g. logs) can be had, given amount of the other
(e.g. food bushels)

Example:
Wood logs Food bushels
Colleen 10 10
Bill 4 8

- Scarcity: negative slope (constrained by available resources)

- Opportunity cost: trade-off between 2 goods
- Comparative advantage: who was the flattest (cheapest) slope?

(E.g. for Colleen giving up 1 log only costs 1 food, for Bill 2 food) A slope shows the price of
one item in terms of the other (opportunity cost) -> food Is “cheaper” for Bill (0,5 logs) than
for Colleen (1 log) . Bill can trade 8 food for 8 wood logs with Colleen instead of spending
(timewise) 8 food on collecting 4 wood logs himself. Also Colleen can trade 10 wood logs for
20 food with Bill instead of spending (timewise) 10 wood logs on collecting 10 food herself.)

Trade is beneficial from the moment there is a difference in opportunity cost. What matters
is comparative advantage, not absolute advantage.

Specialization -> society benefits by specializing in what they do best.

PPF of society as a whole
= all combinations of goods & services that can be produced if all of society’s resources are
used efficiently.

Economic growth? PPF shifts to the right (more resources, more production with existing
resources)

Why is PPF bowed

out?
- see video PPC
review by Jacob
Clifford! 
constant/ increasing
All points below and to the
left of the curve (the shaded area) represent combinations of
capital and consumer goods that are possible for the society given the resources available
and existing technology.

 Points above and to the right of the curve, such as point G, represent combinations that
cannot be reached.

 Points on the PPF represent full resource employment and production efficiency.

 Although an economy may be operating with full employment of its land, labor, and capital
resources, it may still be operating inside its PPF, at a point such as D. The economy could be
using those resources inefficiently.

 Periods of unemployment also correspond to points inside the PPF, such as point D

 Moving onto the frontier from a point such as D means achieving full employment of
resources

(Exercises following slide 47, could be exam questions)

(PPC video by Jacob Clifford)
 CLASS 3) Demand, Supply & Market Equilibrium

“The economy is always a balance, and the objective of the market is to keep it
balanced.”

1) Firms & households: the basic decision-making units

Households – input market – firms – output market

Basis decision-making units:

 Firm = transforms inputs to outputs
 Household = consuming unit

2) Input markets and output markets: the circular flow

Basic markets:
 Input/ Factor market = labor, capital, land
 Output/ Product market

INPUT -> production-> OUTPUT

3) Demand in product/output markets (you are the consumer/ buyer here)

The choice of what you buy and how much depends on:
- Price of the product (think about the laptop example)
- Available income
- Amount of accumulated wealth
- Prices of other products (substitutes & complementary goods e.g.: golden power/redbull)
- Tastes and preferences
- Expectations about future income, wealth, and prices

 quantity demanded = the amount of a product that a household would buy in a given
period if it could buy all it wanted at the current market price (<> availability)

The law of demand:

Example with gasoline

- Relationship between price (P) and quantity (q) presented

graphically is called a demand curve.
- Demand curves have a negative slope, indicating that lower
prices cause quantity demanded to increase.

Law of demand = negative relationship between price and quantity demanded

= negative slope => law of diminishing marginal utility

(Utility: the more you have of it, the more the value of it to you diminished, the more you
have of it, the more the next one will be les enjoyable (will have less utility). E.g.: if you buy
one ice cream, you will enjoy it a lot so it will have a lot of utility. But by the time you’re at
your 3d ice cream, you won’t be hungry anymore and you won’t really enjoy the ice cream
anymore, so it has a lot less utility.)

- Intersection Y axis (price)

-> there is a price above which no demand is left (limited income & wealth)
- Intersection X axis (quantity)
-> there is a limit in demand (time limitation & diminishing marginal utility)

Changes in quantity demanded vs changes in demand.

 Movement along a demand curve Shift of a demand curve
Change in quantity demanded brought Change that takes place in a demand curve
about by a change in price. corresponding to a new relationship
(affects quantity demanded) between quantity demanded and price of a
good. The shift is brought about by a
change in the original conditions.
Change in income, prices of other options,
preferences (affects demand)

Example:

When price changes, the quantity demanded (q) changes

=> we move along the demand curve for that good

When any other factor changes (income, tastes, ..)

=> a shift of the demand curve as a whole (D)

Exercise about rubber, move along or shift of the demand curve?

- recession decreases available income = movement along

- overproduction in Singapore sinks the rubber price = movement along
- invention of the modern bicycle = shift of

Example of:

Shift of the demand curve: a significant increase in consumer preference for electric cars
leads to a shift of the demand curve to the right.

Movement along the demand curve: a price drop for smartphones will cause consumers to
buy more new smartphones, leading to a movement along the demand curve.

Normal vs inferior goods (income effect)

 Normal goods Inferior goods
Goods for which demand goes up when Goods for which demand tends to fall when
income is higher. income is higher
e.g.: a hamburger is an inferior good to a steak, margarine is an inferior good to butter…

Substitutes & complements

The price of one item can change demand for other items.

Substitutes (+) Complements (-)

-> goods that can replace another -> goods that “go” together
(hamburger -> chicken) (hamburger -> ketchup)
-> when the price of one increases, the -> when the price of one increases, the
demand for the other increases demand for the other decreases

(if hamburgers become more expensive, the demand for chicken increases)
(if hamburgers become more expensive, the demand for ketchup will decrease, because
ketchup is most often asked on hamburgers)

From household to market demand

Market demand = sum of all quantities of a good or service demanded per period by all the
households buying in the market for that good of service. (e.g. on powerpoint)

(exercises on slide 18)

 4) Supply in product/output markets (you are the company/ producer/ seller here)

Output supply decision of a firm depends on:

- production cost of the product (input & technology)
- prices of the product
- prices of related products
- Time/ capacity (short run vs long run)

 Quantity supplied = amount of a product that firms would be willing and able to offer
for sale at a particular price during a given period of time.

The law of supply

- A producer will supply more when the price of output is higher

“the higher the price, the more supply, but the less demand”
“ the lower the price, the less supply, but the more demand”

-> these balance in the market equilibrium: where the amount

a company wants to supply at a certain price =
amount of demand at a certain price

- slope of a supply curve is positive

Law of supply = positive relationship between price and quantity supplied (= positive slope)

- Intersection Y axis (price): there is a price below which nobody wants to supply the
market anymore.
- Intersection X axis (quantity supplied): limited supply

Illustration: oil supply

If price increases, more kinds of

oil production become profitable,
more oil is supplied to the
market.
Changes in quantity supplied vs changes in supply.

Movement along a supply curve Shift of a supply curve

The change in quantity supplied brough Change that takes place in a supply curve
about by a change in price corresponding to a new relationship
(affect quantity supplied) between quantity supplied and price of a
good. The shift is brought about by a
change in the original conditions.
Change in price of required input (labor,
capital land), technologies, prices of related
products (affects supply)

Example:

- When the price of a product changes, we move along the

supply curve for that product.
- When any other factor affecting supply changes, the
supply curve shifts.

From individual to market supply

Market supply = sum of all quantities of a good or service supplied per period by all the
producers of a single product. (e.g. on powerpoint)
 5) Market equilibrium

= the condition that exists when quantity supplied, and quantity demanded are equal. There
is no tendency for price change. (supply & demand meet each other)

Excess demand

 When quantity demanded > quantity supplied,

price tends to rise.

“When the price in a market rises, quantity demanded falls and

quantity supplied rises until an equilibrium is reached at which
quantity demanded and quantity supplied are equal.”

Excess supply

 When the quantity demanded < quantity supplied,

price tends to fall.

“When price falls, quantity supplied is likely to decrease and

quantity demanded is likely to increase until an equilibrium price
is reached where quantity supplied, and quantity demanded are
equal.”

Changes in equilibrium

(example from powerpoint)

(exercises on slide 42)

CLASS 4) Elasticity

“If you can choose between a career in something with an elastic demand and a career in
something with an inelastic demand, choose inelastic (e.g. pharmacy). If you lose track of
competition or external factors in an elastic demand situation, you’re out of business, just
like that.”

1) Price elasticity of demand

% change in quantity demanded

price elasticity of demand 
% change in price
- Measures the responsiveness of quality demanded to changes in price.
- Law of demand implies that price elasticity of demand is nearly always a negative number.

Elastic demand -A demand relationship in which the percentage change in quantity

demanded is larger (in absolute value) than the percentage change in price.
-When elasticity is > 1 (in absolute value)
Inelastic demand -Demand that responds somewhat, but not a great deal, to changes in price.
-When elasticity is < 1 (in absolute value) = between zero and 1
Unitary elasticity -A demand relationship in which the percentage change in quantity of a
product demanded is the same as the percentage change in price in absolute
value.
-When elasticity = 1 (in absolute value)

Examples:
 Perfectly elastic Perfectly inelastic
Demand in which quantity demanded drops Demand in which quantity demanded does
to zero at the slightest increase in price. not respond to a change in price at all.

Examples:

Insulin -> perfectly inelastic

Perfume -> elastic
Water -> inelastic
Milk -> inelastic
Cola -> elastic
Weekend trips -> elastic

2) Calculating elasticities (example makes it clear)

Step 1 – Calculate the difference in % between quantity and price from situation 1 to 2
Step 2 – Divide % of change in quantity by % of change in price
Step 3 – Determine the type of elasticity.

Example of calculation ->

Total revenue (TR) = Price (P) * Quantity Demanded (Qd) (formula can be reversed)

(exercises on slide 21)

3) The determinants of demand elasticity

 Availability of substitutes
> more substitutes = easier to switch to them = more elastic demand
  Time dimension
> when it takes time to find another product/supplier = more inelastic on the short
term
 Impact on the budget
> smaller impact on the budget = more inelastic
 Type of need (luxury vs primary)
> Luxury = more substitutes = more elastic

4) Other important elasticities

Cross-price elasticity of demand = ratio of the percentage of change in quantity demanded

to the percentage of change in price of another good.
->A measure of the response of the quantity demanded of one good to a change in the price
of another good

If this is positive -> substitutes / if this is negative -> complements.

Income elasticity of demand = ratio of the percentage of change in quantity demanded to

the percentage of change in income.
->A measure of responsiveness of quantity demanded to changes in income

If this is positive -> normal goods / if this is negative -> inferior goods.

Price elasticity of supply = ratio of the percentage of change in quantity supplied to the
percentage of change in price.
->A measure of the response of the quantity of a good supplied to a change in price of that
good.

Likely to be positive in output markets. (exercises slide 33)

CLASS 5) Consumers

1) Household choice in output market

Determinants of household demand:

- Product price
- Available income
- Accumulated wealth
- Price of other products
(determine available options & budget constraint/limit)
- Tastes & preferences
- Expectations about future income, wealth & prices
(determine best choice within limits)

Budget constraint Opportunity set

Limits imposed on household choices by Set of options that is defined & limited by a
income, wealth & product prices. budget constraint/limit.

A budget constraint separates those

combinations of goods & services that are
available, given a limited income, from those
that are not.

Opportunity set: available combinations

Assume: I = $200 , Pjazz = $10, Pthai =$20

Budget equation:

10 x Qjazz + 20 x Qthai = 200

Assume: I = $200 , Pjazz = $10,

Pthai = $20  Pthai = $10

Budget equation 1: 10 x Qjazz + 20 x Qthai = 200

Budget equation 2: 10 x Qjazz + 10 x Qthai = 200

When the price of a good decreases, the budget

constraint swivels to the right, increasing the
opportunities available and expanding choice.

(exercises slide 11)

2) The basis of choice: utility
“Households will allocate income to maximize utility.”

important terms:

Utility = the satisfaction a product yields relative to its alternatives

Marginal utility = additional satisfaction gained by consumption of one more unit (last unit)
(if you’re hungry & you eat an ice cream, the first scoop of ice will be very enjoyable, the
second as well, but possibly a little less because the initial “hype” is over, the third one will
be less enjoyable because you’re already almost full, and when you eat a 4 th, 5th, 6th scoop,
you’ll start to feel bad) -> law of diminishing utility
Total utility = total amount of satisfaction obtained from consumption (all units)

Example of the total & marginal utility of going to the club each week:

“The first time is always the

most fun, but after a while
it starts to become less
enjoyable every time, and
eventually you will get tired
of it.”

(exercises slide 20)

3) Income & substitution effect

 Just read this chapter once in the book (teacher said)

4) Household choice in input market

Labor supply decisions (households supply labor to the market based on):

- Availability of jobs
- Market wage rates
- Skills they posses
- Time limitation

 Involves a set of trade-offs.

The price of leisure:

Labor supply curve:

- Relation between quantity of labor supplied & wage rates.
- Shape depends on how households react to wage changes.
 Impact of an increase in wages
Income effect of a wage increase Substitution effect of a wage increase
Higher wage rate -> higher income -> more Higher wage rate -> leisure is more
leisure time (normal good) -> less working expensive -> less demand for leisure ->
more working
(basically a difference in mindset)

 Effects work in opposite direction when leisure is a normal good.

income effect: when you become richer, you can buy more of a good. If leisure is a normal
good, then a wage increase will mean you buy more leisure. The income effect will actually
decrease the supply of labor you are willing to provide. (if leisure is a normal good)

substitution effect: wage increase makes leisure more expensive with respect to its
alternative (opportunity cost of leisure instead of working if you can earn a lot with your
increased wage). If leisure is a normal good, consumers will choose to replace leisure with
the best alternative opportunity, which is working more.

 Which effect takes place depends on the situation.

Saving Borrowing
Using current income to finance future Using future income to finance current
consumption. spending. (interest)

Impact of an increase in interest rates

Income effect of an increase in interest Substitution effect of an increase in interest
Higher interest rate -> it takes less saving Higher interest rate -> “price” of spending
today to reach a specific target tomorrow -> today is higher (opportunity cost) ->
save less save more
(basically a different in mindset)
CLASS 6) Producers
 1) The behavior of profit maximizing firms

All firms make several decision to achieve their primary target: maximum proftits

Three important decisions:

1. How much output to supply
2. Which production technology to use
3. How much of each input to demand

Profit = total revenue – total cost

- Total revenue = units sold * price per unit

- Total cost = out of pocket cost + opportunity cost

Price of output in perfect competition = price taker

Optimal method of production = minimizes costs for a given level of output
(labor intensive vs. capital intensive)
Input prices = raw material, labor,…
Short run Long run
-fixed scale (fixed factor of production) -no fixed factors of production
-no entry or exit from the industry -entry or exit from the industry

2) The production process

Important terms:

Product function = mathematical relationship between inputs & outputs.

Total product (TP) = total output with a certain amount of input.
Marginal product (MP) = additional output that can be produced by hiring one more unit of a
specific input, holding all other inputs constant.
Average product (AVP) = average amount produced by each unit of a variable factor of
production.

Law of diminishing returns -> after a certain point, when additional units of a variable input
are added to fixed inputs, the marginal product of the variable input declines.
(e.g.: the cost of another employee to control a machine isn’t worth it, because he only adds
a very little amount of output, that doesn’t make up for the cost.)

- MP = 0 => max total product

- MP>AVP => AVP increases!
- MP<AVP => AVP decreases!

 Marginal & average product curves

can be derived from total product curves.

3) Choice of technology -> just read this chapter once in book

CLASS 7) Costs & output decisions
 1) Costs in the short run

Total cost = Total Fixed Cost + Total Variable Cost

Fixed cost = overhead, does not vary with output
Variable cost = varies with output

Average cost = cost per unit of output

- AFC = TFC/q
- AVC = TVC/q
- ATC = TC/q

Marginal cost = increase in total cost that results from the production of 1 more unit
- ΔTC or ΔTVC
- MC/Unit = ΔTC / Δq or ΔTVC/ Δq

Total fixed cost vs Average fixed cost (AFC = TFC/q)

Total variable cost vs marginal cost

Total variable cost: always positive, always increases with output.

Marginal cost: first drops (efficiency) but then rises with output
because of the maximum scale
(assumption of a fixed factor of production) in the short run.

 MC ↘ => TVC ↗️ at decreasing rate

 MC ↗️ => TVC ↗️ at increasing rate
 Total Average variable cost vs Marginal cost

If marginal cost is BELOW average cost,

average cost is DECLINING

If marginal cost is ABOVE average cost,

average cost is INCREASING

 Rising MC curve intersects AVC curve

at the minimum point of AVC

“Think of your bike computer: if you cycle faster than average, your average speed will
increase.”

Total cost

Adding TFC to TVC means adding the same amount

of total fixed cost to every level of total variable cost.

Thus, the total cost curve has the same shape as

the total variable cost curve; it is simply higher
by an amount equal to TFC.

Average total cost (ATC = AFC + AVC)

Because average fixed cost falls with output, an

ever-declining amount is added to AVC

-> AVC and ATC get closer together as output increases, but the two lines never meet
 Average total costs vs Marginal cost

Marginal cost intersects average costs at their

minimum (both AVC and ATC)

- If marginal cost is below average total cost, average

total cost will decline toward marginal cost.

- If marginal cost is above average total cost, average

total cost will increase.

“Think of your bike computer: if you cycle faster than average, your average speed will
increase.”

Example of a cost table:

(exercises slide 14)

 2) Output decisions: revenues, costs & profit maximization

What is a perfect competition:

- A lot of parties supplying & a lot of parties demanding (suppliers -> price takers)
- Transparent market
- Market is easily accessible in the long run
- Homogeneous products

Profit maximizing output:

If a representative firm in a
perfectly competitive market raises
the price of its output above $5,00,
the quantity demanded of that
firm’s output will drop to zero.
= perfectly elastic

(supplier = price taker)

“There is a difference between demand in the market as a whole (D) and demand from the
perspective of an individual firm (d). Very important to understand the difference if you
want to solve the exercises!”

• If q < 300, profits increase

when raising output; each
additional unit increases
revenues by more than its
production costs because
P > MC.
• If q > 300, however, added
output will reduce profits.

Profit-maximizing output is thus = q* (the point at which P* = MC)

(how much profit? -> revenue – costs)

Example of a profit analysis table:

If fractional units can be produced, optimal production is between 4 and 5 units

(where MC = P)

The short run supply curve

- Supply curve = relation between price & quantity supplied

- How much to supply when prices change? At any market price the marginal cost
curve shows the output level that maximizes profit. (assuming a perfect competition)

 MC curve of a perfectly competitive profit-maximizing firm is its short-run supply

curve.
CLASS 8) Market organizations (perfect competition, monopoly, oligopoly)

“In the beginning of production, you will have scaling advantage (more = better), but after a
while, in order to produce more, you will have to open new factories, harbors… and the
scaling advantage will decrease, the cost will increase.”

How economists explain the behavior of a firm:

to maximize profits (where MR curve meets MC curve), you produce as long as your next
product earns more money than it costs (consumers: maximize utility). To find out how
much a certain quantity of production costs, you check where the ATC curve passes the
production quantity, then multiply the ATC by the production quantity (q) to know the total
cost.

1) Perfect vs. imperfect markets

Arbitrage = switching between markets to exploit price differences

(e.g.: buying carpets cheap from India to maximize profits instead of going to an expensive
hand-woven carpet producer.)

Perfect competition: profit maximizing output

Perfect competition: market mechanism

(because firms are free
to enter & exit markets
(in the long run), short
run losses & profits are
balanced out (shifting
supply curves) -> why
perfect competition is
efficient)
Perfect competition:

• Demand & supply curves will lead to an efficient equilibrium.

• Efficiency (Pareto optimal)
- Efficient allocation of resources among firms
• Factor markets are open, competitive, and all firms pay the same price
and are profit maximizing.
- Efficient distribution of outputs among households
• Output markets are free and open, competitive, and all households
pay the same price and are utility maximizing.
- Efficient mix of output
• Produce as long as P > MC
(P = price = value society gives, MC = opportunity cost of the resources
needed to produce)

 Price = Average return = Marginal return = Marginal cost

Sources of market failure:

• Imperfect competition => single firms have some control over price and competition
(market power) => efficient mix of output is no longer guaranteed

• Public goods => would not be produced at all in a completely unregulated market
since not profitable for firms
=collective goods & services, where nobody can be excluded from enjoying
their benefits

• Externalities => if social costs are overlooked, it will lead to inefficient results
=cost or benefit imposed on an individual or a group that is outside, or
external to, the transaction

• Imperfect information => absence of full knowledge concerning product

characteristics, available prices,....

(exercises slide 14)

2) Characteristics by different market organization

 3) Monopoly

= An industry with a single firm in which the entry of a new firm is blocked.
There are no close substitutes for the product. (you are the market) (e.g.: NMBS)

Remember:

(Profit = revenue – cost)

(MR = additional revenue of producing one more unit)
(MC = the additional cost of producing one more unit)

 As long as MR > MC, producing one more unit provides more revenue than it costs.
 As soon as MR < MC, producing one more unit will cost more than its revenue.
 Therefore, profit is maximal when MR = MC.

Profit maximization:

• The monopolist serves the market BUT the monopolist will sell a higher output if the
price decreases.
• This means that MR decreases with increasing Q (in contrast to perfect competition)
• It also means that MR will be lower than the price of the previously sold item.

(perfect competition (right hand table): price = MR, in a monopoly it is not)

(MC = MR is used to determine how much to produce (Q), but monopolists can charge more.
How much more? Constrained only by demand curve.)

MR curve is below demand curve (= P curve)

• If MR > 0 => P↓ -> TR↑ (elastic part of the demand curve)

• If MR = 0 => Max TR
• If MR < 0 => P↓ -> TR ↓ (inelastic part of the demand curve)
Profit maximization, MR = MC

But profit ≠ revenue!

Maximum profit ≠ maximum revenue

Profit maximizing output Qm if MR=MC

Profit is grey zone in the chart

• Profit = revenue – cost
• Profit = PxQ – TC (and TC = ATC x Q)
• Profit = (P – ATC) x Q

Monopoly compared to perfect competition:

The monopolist serves the market but, the monopolist will sell a higher output if the price
decreases. VS a representative firm in a perfect competition sells against market price.

- Monopolist P > perfect competition P

- Monopolist Q > perfect competition Q

• In the newly organized monopoly, the MC curve is the same as the supply curve of all
the independent firms when the industry was organized competitively
=> quantity supplied is determined by MR=MC => for each price P
(=MR, in competitive market), supply is thus MC
• Under monopoly, P = Pm = $4 and Q = Qm = 2,500.
• Under perfect competition, P = Pc = $3 and Q = Qc = 4,000

Perfect competition: P and Q at the intersection of market wide supply and demand
Monopoly: P and Q and the intersection of MC and MR
 in perfect competition, the market equilibrium optimizes both consumer and
producer surplus. In monopoly, the market equilibrium optimizes only producer
surplus
Message: a monopoly causes producers to produce less than market wants, at higher price.
How can a monopolist preserve profits (if it’s making them) :

->barriers to entry:
- Patents
- Economies of scale
- Government rules
- Ownership scarce factor of production
- Network effects

Social costs of monopolies:

• P > MC => inefficient mix of output

- Products are more expensive compared to perfect competition (Pm >Pc)
- Firm is underproducing from society’s point of view (Qm < Qc)
- Assumption = non-price discriminating

• Rent-seeking behavior
- = Actions (e.g. lobbying) to preserve economic profits

• Society may benefit from scale economies (natural monopoly) or innovation gains
(e.g. patents)

Role of the government:

- Antitrust policy = rule against monopolization or attempted monopolization

- Federal trade commission investigates structure & behavior of firms &

determine unlawful or unfair behavior

(Some key takeaways):

“profits are maximized where MR = MR”

(same in all markets, monopoly or perfect competition or anything else)

“In monopoly’s they charge as much as they can because they are the only provider.”

“To calculate profits, first find out the price per unit, then look at the ATC curve, subtract the
ATC (cost per unit) from the price per unit, then multiply result by the quantity sold.”

(exercises slide 30)

 4) Oligopoly

= An industry with a small number of firms, each large enough so that its presence affects
prices.

(e.g.: music industry (90% in US: Universal, Sony, Warner), smartphones (Apple, Samsung),
Airlines, automobile industry)

Characteristics:

• Compete not only in price but also in developing new products, marketing &
advertising those products. (a lot of motivation to innovate)
• Complex interdependency among oligopolists.
• In combination with wide range of strategies (different types of oligopolies).
Oligopoly models have a common thought = the behaviour of any given oligopolistic
firm depends on the behaviour of the other firms in the industry composing the
oligopoly.
• Difficult to analyse!

Oligopoly models
Collusion model Price-leadership model
->Charge an agreed-to price or by setting ->The dominant firm sets a price and allows
output limits to jointly maximize profits and competing firms to supply all they want at
splitting profits that price
->Explicit price- and quantity-fixing
agreements (as in a cartel)
->Same result as if one firm monopolized
the industry

Social costs of oligopolies:

• Price setting => between perfect competition & monopoly

• Price > MC , output < efficient level

• Difficult entry (barriers)
• In a collusion model, the results are identical to a monopoly.
• Society gains from economies of scale > efficiency (even if competition is reduced)
• Society gains from innovation (many oligopolies do considerable research)

Role of the government:

 Regulation of mergers, since one way that oligopolies increase market concentration
is through mergers.
 5) Monopolistic competition

= Firms that differentiate their products in industries with many producers and free entry.
(e.g.: restaurants, cleaning products, toilet paper…)

- A lot of good substitutes available

- Try to achieve (a degree of) market power by differentiating the products
(new, different, unique identity…)

Product differentiation -> achieve market power:

Vertical differentiation Horizontal differentiation
->makes the product better than rival ->Creates variety to reflect differences in
products consumers’ tastes in the market
->Differentiation across a product
->Makes the product better for some
people and worse for other people

Advertising: Inform + Create/contribute to product differentiation

Social costs of monopolistic competition:

• Price > MC (short run) => inefficient (output)

• Not all economies of scale are realized
- Equilibrium is not in the lowest point of ATC
• Society gains from increased variety

(exercises slide 52)

CLASS 9) National output & income

Micro-economic concern Macro-economic concern

-output individual firm -national output
-income individual household -national income
-household consumption -aggregate consumption
-firm investment -aggregate price level
-aggregate investments

Macro-economic concerns:

“birds’ eye view on the

economy as a whole”

growth is seen as good for the economy, but there are downsides: traffic jams, pollution..

1) Gross domestic product (GDP)

GDP = the total market value of a country’s output. It is the market value of all final goods &
services produced within a given period by factors of production located within a country.

(“the output produced by factors of production located within a country)

(Even if it’s for example a company owned by US shareholders on Belgian soil, it counts as
Belgian GPD.)
Measurement: sum of value added at each stage of production OR sum of value final sales

(->why not value of total sales: it would result in double counting; it would count the price of
all the intermediate products, not just their added value.)
What counts for the GDP:
- Only “final” goods/services > the value of “intermediate” goods is not
counted!
(Intermediate = produced by one firm for further processing or resale by another firm)
(Only added value counts = value goods at end of production stage – value cost of goods as
they enter the production stage)
- No “used goods” > old output is not counted.
- No “paper transactions” > transactions in which money or goods change
hands and no new goods/services are produced are not counted!
- No output produced abroad by domestically owned factors of production.
GDP examples:
 - Firm A produces potatoes for k€ 1,000 and sells them to Firm B who produces
deep-frozen French fries with a value of k€ 1,800. What is the total value of
this 2-firm economy? -> €1.800
- Sales of stocks and bonds. Is this counted in GDP? -> No
- Growing your own vegetables in your garden. Is this counted in GDP?
-> No (no market value)
- Buying insurance for your car. Is this counted in GDP? -> Yes (it’s a service)
- Your father produces / sells French fries in the USA. Is this counted in GDP BE?
-> No (not in BE)

important terms (output growth)

• Business cycle = economies have short term

ups/downs
• Main measure = aggregate output = total quantity
of goods/services produced during a given period
• Positive trend = economy grows over time
• Recession = aggregate output declines (2 quarters
in a row)
• Depression = prolonged recession
• Peak = highest point of a business cycle
• Trough = lowest point of a business cycle
• Peak -> Trough = contraction, recession, slump
• Trough -> Peak = expansion, boom

(to have a better idea of the welfare of a country, you use the GDP per capita = per person)

2) Calculating GDP

Total calculation expenditure approach = total calculation income approach

(“one’s spending is another one’s income”)
 • Expenditure = Add up the total amount spent on all final goods & services during a
given period
• Income = Add up income received by all factors of production producing final goods
and services: wages, rent, interest & profits

The expenditure approach:

Personal consumption expenditures (C): durable goods, non-durable goods, services

Gross private domestic investment (I): nonresidential investments (machines, tools, plants),
residential investment: new houses, apartment building, change in business inventories.

Government consumption and gross investment (G):

• Expenditures by federal, state and local government (consumption & investments)
• Services (military, politics, education: value = salaries paid)
• Transfer payments (social benefits) are NOT included (no good or service in return)
• Interest payments on government debt are NOT included (no good or service in
return)

Net exports (EX − IM)

• C+I+G understates domestic production because some of what a nation produces is
sold abroad.
• C+I+G overstates domestic production because it contains expenditures on foreign-
produces goods.

(check example of this calculation on slide 21)

The income approach:

• Compensation of employees (income of households)

• Rental income (income of property owners)
• Proprietor’s income (income of unincorporated businesses)
 • Corporate profits (income of corporations)
• Net interest payments by businesses (money from production of goods and
services)
• Net transfer payments by businesses! (money from production of goods and services)
• Indirect taxes - subsidies (income of government)
• Income of government enterprises (income of government enterprises)

 National income = NNP (net national product)

(check example slide 23)

Why is depreciation subtracted?

Assume: Total output for 1 firm economy is 1 Mio $. Assume that after payment of wages,
interest, and rent, 0.1 Mio $ remains. Assume deprecations of 0.04 Mio $ so corporate profit
is 0.06 Mio $
• GDP expenditure approach = 1 Mio $
• GDP income approach = 0.9 Mio $ + 0.06 Mio $ + 0.04 Mio $ = 1 Mio $
Definition:
• NET investment = measures how much the capital stock changes
• GROSS investment = all new investments, does not take into account that
investments wear out

Real vs. nominal GDP:

 Real GDP is more relevant, because it is adjusted to price changes (inflation),

it stayed the same 100 from Y1 to Y2
 Nominal GDP is a country’s production at market prices,
it jumped from 100 to 200 from Y1 to Y2

Calculation:

1. Select a “base year”, e.g. Y1, the prices of this year will serve as a reference point.
2. To calculate the real GDP in Y2, take the production of Y2 at prices of Y1.

3) Limitations of the GDP concept

GDP measures growth only from an economical point of view:

 • Some increases in social welfare are associated with a decrease in GDP (e.g. leisure
time)
• Some decreases in social welfare are associated with an increase in GDP (e.g. broken
windows)
• Domestic activities are not included (e.g. housework, childcare)

-> Informal/hidden economy: the part that should be counted in GDP but is not

Economic growth also has disadvantages:

• Pollution
• Distribution of output among individuals in a society

-> Sustainable growth (for example: Club of Rome)

A good measure for overall welfare/wellbeing:

(exercises on canvas)
CLASS 10) Unemployment, inflation & long-term growth

1) Employment
 Unemployed Employed
any person (15) 16 years old or older who is any person (15) 16 years or older who
not working, is available for work, and has either:
made specific efforts to find work during (1) works for pay, either for someone else
the previous 4 weeks or in his/her own business for 1 or more
hours per week,
(2) works without pay for 15 or more hours
per week in a family or enterprise, or
(3) has a job but has been temporarily
absent with or without pay
(different definitions per country: more detail in pp slides 6-7)

Measurements:

(if yk this by heart, you can solve all exercises on this chapter)

Specifics for Europe

2020 strategy (priorities):

• Smart growth – developing an economy based on knowledge and innovation.

• Sustainable growth – promoting a more resource efficient, greener and more
competitive economy.
• Inclusive growth – fostering a high-employment economy delivering social and
territorial cohesion.
• Check pp slide 21 for specifics

Unemployment

Demographic groups States/regions/countries Discouraged worker effect

 -man vs. women -because of presence -people who stop looking ->
-race industries dropped out of the labor
-age -mobility workforce force instead of being
unemployed

What can be done to improve employment:

• Reduce (occupational) immobility

• Implement apprenticeship schemes (skills + incentive to find jobs)
• Implement workplace training
• Increase incentives to work
• Subsidies for businesses that hire LT unemployed people
• Improve skills, human capital (educational policies)
• Lower employment taxes
• Active labor market policies

Types of unemployment:

- Frictional = normal turnover labor market, short-term

- Structural = resulting from changes in the economy (long term)

- Cyclical = above frictional & structural

-> there are social consequences to unemployment

(exercises on slide 33)

2) Inflation:

• Inflation = increase in overall price level

 • Hyperinflation = very rapid increase overall price level
• Deflation = decrease in overall price level (extended, consistent)

Measurements:

• Consumer price index (CPI) = price index that is meant to represent “market basket”
purchased monthly by a typical urban customer (base year is usually 100).

- Example: Basket costs 40€ in base year, 50€ in next year

= 100 + inflation percentage
= 100 + ((50-40)/40) = 125

- Example: CPI 125 (Y3) and CPI 160 (Y4) => Inflation % (Y4) = (160-125)/125 = 28%

• Producer price index (PPI) = measures of prices that producers receive for products at
various stages in the production process

 For measuring the inflation in the EU, we use the:

Harmonized Index of Consumer prices (HCIP)
(also used to check if country is ready to join the euro currency area)
 Main task of ECB: maintain price stability, close to 2% annually

Inflation/deflation formula:

Approximation formula:

Types of inflation/deflation:

• Demand pull inflation

 - In general: when Demand > Supply
- .. because government expenses/investments increase faster than GDP
- .. because export > import
- .. because major investments
• Cost push inflation
- In general: increased cost base
- .. because wages increase faster than productivity
- .. because of wage drift
- .. because increase of imported raw material prices (oil)
• Monetary inflation
- M x V = P x T (Fisher -> see also chapter 24-25-26)
- Money x Velocity = Price x Transactions
- If M ↑ or V ↑, in combination with full capacity  P ↑

Costs of inflation/deflation:

• Anticipated inflation
-> does not influence income distribution.
- But still involve high administrative costs and inefficiencies
-
 Unanticipated inflation
-> does influence income distribution.
- Debtors benefit at expense of creditors (pay back less in the future, in real
terms)
- Can hurt the competitiveness of a country.
- Can hurt the purchasing power of consumers (if wages are not adjusted)
- Can lead to unpredictable results for firm’s -> shareholders will ask for higher
return!
• Deflation
-> will lead to postponing consumption, which is not good for the economy.

Long term growth (refers to PPF)

- Increasing output by increasing input: quality of workers, add new workers,

add capital… (refers to PPFs)
- Increasing output by increasing productivity (refers to PPFs)

(exercises slide 62)

CLASS 11) Governments

 1) What is monetary policy?

Supply & demand in the money market:

 Demand for money Md (Why do you need money?)

- To do transactions (money is liquid, as opposed to
bonds)
- Inflation (more money needed for transactions)
- To speculate (interest rate may rise in the future)

= reasons why money demand curve might shift left/right

 Supply of money
• Driven only by ECB (inelastic)
• To change the equilibrium interest rate
• Equilibrium interest rate
• Supply of money = demand for money
(demand for bonds = supply of bonds)

Money supply & interest rates:

E.g.: ECB increases money supply from MS0 to MS1

• lower interest rate from 7% to 4%
• excess supply of bonds
• higher quantity demanded for money.
• Individual saving, borrowing, spending?
- Save less (hold more money vs. bonds)
- Borrow more (borrowing is cheaper)
- Spend more (future consumption is less valuable)

“Think of money supply as the ‘gas pedal’ of the economy, which can be pushed if the
economy stalls, or pulled as it overheats.”

2) Why manage money supply?

How to manage money supply

Fisher’s law: M*V = P*T

M = amount of money
V = velocity of money (#times used for payments)
M*V = amount of all payments in one year (the “paper” economy)

P = general price level

T = real output
P*T = amount of all value transactions (the “real” economy)

(each expenditure is someone’s income, all the money transactions should equal all the
value transactions)

 There is a link between paper & real economy. Policymakers can exploit this link to
conduct policies. They can influence the real economy, by changing the paper
economy (changing money supply).

Three reasons why central banks change the money supply:

1. To create economic growth: M x V ↑  T ↑

2. To control inflation: M x V ↑ if full capacity  P ↑

3. To enable more economic transactions: M x V ↑  P x T ↑

3) How to influence money supply:

Short answer:

- By creating/destroying money.

Long answer:

- Central banks only create a fraction of all money.

- Most money is created by central banks. (money creation)
- Central banks change money supply by making changes in how commercial
banks create money.

How do commercial banks create money -> the “money creation” process:

- Individuals deposit money with the bank.

- Only a fraction of those deposits is taken up at any time and must be held in
reserve.
- The bank can create the rest to make long-term loans.

 The amount of money created by banks decreases with required reserve ratio, and
increases with size of reserves (discount rate, open market transactions)
 These are the real levers of monetary policy, so remember: central banks don’t print
money themselves, they influence how commercial banks create it.

The money supply can be influenced by intervening the money creation mechanism:

1. Required reserve ratio

2. Discount rates
3. Open market operations

Required reserve ratio = required % that banks need to keep in “reserve”

Banks can create more money than they have in reserve (= money multiplier)
Required reserve ratio determines how much is available to lend (lending = money creation)

Bank A has €1000,00 in deposits, required reserve ratio is 10% What is the money multiplier?
-> Money multiplier = 1 / 0,1 = 10

With reserve ratio of 10%, a commercial bank can create 10x the money that it has reserved
Discount rates:

= the interest rate that a bank pays to the ECB to borrow reserves
(Banks can hold some of their deposits in reserve, but they can also borrow reserves directly
from the central bank. So more deposits can be used for money creation.)
-> The interest rates on these reserves = the discount rate

Open market operations:

Another way to increase reserves, is to trade bank assets that don’t count as reserves
(government securities), for assets that do count as reserves.

- Banks own government securities, but these don’t count as reserves

- ECB/FED can buy them from banks in exchange for reserves (“print” money)
- The purchase and sale by the ECB/FED of government securities in the open
market -> influences reserves and thus the money supply

“Especially after the 2008 financial crisis, central banks have started to massively buy
government bonds from banks to increase money supply. This approach reached new
heights during the pandemic.”

(exercises slide 24)

4) What is fiscal policy?

Key aspects & impact:

 1. Government spending multiplier

Def: Ratio of the change in the equilibrium level of output to a change in government
spending

e.g.: increase government spending.

=> Planned government spending
=> Inventories lower than planned => Firms will have an incentive to increase output
=> Output rises => more employment => more consumer spending => output rises even
more
=> more employment => less employment benefits => more tax income

2. Government tax multiplier

Def: ratio of the change in the equilibrium level of output to a change in taxes.

e.g.:
=> Planned decreasing taxes
=> Increase disposable income expected
=> Increase consumption spending expected
=> Firms will have an incentive to increase output
=> Output rises => more income => more employment

3. The federal budget

Def: Ratio of change in equilibrium level of output to a change in government spending,

where the change in government spending is balanced by a change in taxes.

Federal budget:
- All sources of revenue <-> All sources of spending
- Budget deficit = spending > revenue -> federal debt
- Cyclical deficit = occurs at downturn in the business cycle
- Structural deficit = deficit that remains at full employment
5) Who manages the fiscal policy?

Who manages the budget:

 • Nation
• Institutional arrangements at European level

- Excessive deficit procedure

§ Goal: avoid excessive government deficit
§ Goal: define steps to take if a state is in a situation of excessive deficit
§ Reference values: general government deficit (3%) and gross
debt/GDP (60%)
§ Role of ECOFIN (Economic & financial affairs council)

- Stability & growth pack

§ Operational clarification of the treaty’s budget procedures
§ Goal: macro-economic stability
§ Goal: secure low inflation, low interest
§ Goal: sustainable economic growth
§ Goal: employment

CLASS 12) Balance of payment

1) The balance of payments (theory + be able to read & interpret)

BOP = record of a country’s transactions in goods, services & assets with the rest of the
world, also the record of a county’s sources (supply) & uses (demand) of foreign exchange.

(check video slide 11)

BOP – current account

Net export & import of goods & services:

- Inflow & outflow of money because of transactions with goods & services
- Depicted on balance of trade (BOT): deficit or surplus
- E.g.: trade of manufactured goods (good), tourism (service), service fees
(service),…

Primary income Secondary income

Compensation of resources for economic Unilateral transfers, nothing received in
production return
-Compensation of employees and -Transfers : good/service/capital supplied
investment income between resident and non-resident without
-E.g.: wage, rent, profit, dividend, … any return of an item of economic value
-E.g.: foreign aid for a region in crisis,
transfer of money, …

Current account deficit = country is a net-debtor

BOP – capital account

= record of all international capital transfers

Acquisition/disposal of non-financial, non-produced assets
(e.g.: goodwill, patents, licenses, natural resources…)

Capital transfers:
- Foreign aid to help build developing countries’ infrastructure
- E.g.: roads, clean water…

Capital account surplus indicates that a country is attractive for foreign investors

BOP – financial account

= offsets transactions in current & capital account

= transactions concerning financial assets/liabilities

->Direct investment
- E.g.: purchase or sale of assets, takeover of companies (more than 10% of
share acquisition), …
->Portfolio investment
- E.g.: purchase and sale of shares, securities, … (specific: trade)
->Financial derivatives
- E.g.: futures contracts, forward contracts , …
->Other investments
- E.g.: non-tradable loans, deposits with banks, …
->Reserve assets
- E.g.: Reserve Bank holdings of foreign currencies, gold and special drawing
rights (SDRs), …

examples of financial assets:

 Special drawing right (SDR) = international reserve asset, created by the IMF to
supplement its member countries’ official reserve
 Derivative = contract that derives its value from the performance of an underlying
entity. (can be: asset/index/interest rate)
 Forward contract = non-standardized contract between 2 parties to buy or sell an
asset at a specified future time at a price agreed upon today. (type of derivative)
 Futures contract = standardized forward contract which can easily be traded
between parties other than the 2 initial parties to the contract.
 Option = contract which gives the buyer (option owner) the right, but not the
obligation, to buy or sell an underlying asset or instrument at a specified strike price
on a specified date, depending on the form of the option.
 Swap = derivative in which 2 counterparties exchange cash flows of one’s party
financial instrument for those of the other party’s financial instrument.
Exercises/examples to clarify:
 Debtor nation Creditor nation
-current & capital account deficit -current & capital account surplus
-decreases the net international asset -increases the net international asset
position position
-they “borrow” from others -they give “loans” to others
-e.g.: Greece, Spain… -e.g.: Switzerland, Norway…

Root causes of deficit/surplus:

• Slow-down of economic growth/income

• Relative cost/price level compared to abroad
• Impact exchange rate movements
• Labor costs around the world
• New production techniques
• International raw material price evolution

(exercises slide 27)

2) Equilibrium output in an open economy (read)
 open economy – impact on BOP
Trade feedback effect Price feedback effect
= tendency for an increase in the economic = an increase in the price level of one
activity of one country to lead to a country can drive up prices in other
worldwide increase in economic activity countries and this further increases the
price level in the first country

Assume export US increases: Assume domestic prices US increase:

 output US increases  export prices increase
 income US increases  import prices from other
 extra import demand from countries increase
US  their domestic prices
 extra export for other increase
countries
 output & income of other
countries increases
 extra import demand from
other countries (part coming
from US)

3) The open economy with flexible exchange rates (theory + exercises)

Exchange rates -> important impact on BOP

Fixed vs. Flexible (floating) exchange rates
Market for foreign exchange:
- Supply of currencies
- Demand of currencies
- Equilibrium

Demand for foreign currency because of: Supply of foreign currency because of:
-import of goods/services -export of goods/services
-transfers to abroad -transfers to abroad
-payments of net income to abroad -payment of net income from abroad
-investments abroad -local investment from investors abroad
e.g.:

e.g.: the supply & demand of

pounds
The equilibrium exchange rate:

When exchange rates are allowed to float, they are determined by

the forces of supply & demand.

Excess demand for pounds Excess supply of pounds

Will cause the pound to Will cause the pound to
appreciate against the dollar. depreciate against the dollar.
(gain value) (lose value)

Factors that affect exchange rates:

1.

2.
 3.

4.

5.

Effect of exchange rates:

If currency depreciates (falls in value)
 export increases
 import decreases
 output will increase (increase GDP)

If ECB lowers interest rate

 stimulates investment spending/consumption (cheaper loans, less profit on saving)
 and lowers demand for euro securities (lower rate = lower return)
 pushes down the value of the euro (lower demand = decrease of market price)
 more export (cheaper products for non-residents)
 helps to stimulate economy (more domestic and foreign spending/consumption)

(exercises slide 53)

4) An interdependent world economy -> just read this chapter in book