An online textbook with dynamic graphics for the introduction to economics

9. Januar 2021

Tel. 0651-2012744, bauer@uni-trier.de

Despite the ongoing development of the project, errors cannot be completely avoided. For legal reasons I have to point out that no guarantee or warranty whatsoever is given for the content and use.

The following internet pages are the beginning of a long-term project. In this sense, they represent a publication. The use in teaching and instruction is explicitly permitted. I only ask for the adherence to the usual methods of citation.

The graphics are constructed as follows: All points marked by a cross can be moved with the mouse. Not filled circles on a line can be controlled via sliders. The graphic adapts automatically to the change of a point. Points represented by filled circles cannot be moved directly, but adapt to the changing graphic.

The names of variables and designations are not always consistent in the typically used literature. We therefore adapted common nomenclature from the standard literature.

Should you notice any mistakes (e.g. dead or incorrect links, spelling mistakes or inaccuracies in content), I would be very grateful for a remark. I also welcome constructive criticism regarding the presentation and practicability of the pages and the comprehensibility of the explanations. Finally, I am also grateful for suggestions to expand the project.

I would like to thank Horst Fröber and the company Macher Solutions for the creation of the web presence. The dynamic graphics are based on the free geometry software jsxgraph, which was developed at the Department of Mathematics and its Didactics by Prof. Baptist at the University of Bayreuth. I would like to thank especially the developers Apl. Prof. Dr. Alfred Wassermann, Dr. Matthias Ehmann and Dr. Carsten Miller for their support. I would also like to thank Michal Hoftich for help with the technical implementation with Latex and Mr. Janes Sass for numerous helpful comments and found mistakes. Special thanks go to Lexi Walter (LIRSWrite Publishing Services; editing and translation; Contact: lirs@disroot.org) for translating all the contents into English.

There are still some chapters and elements not translated, but we are working on it.

Start

I Markets

1 The demand curve

2 The consumer surplus

3 The supply

4 The producer surplus

5 Stability

5.1 Deviation of the price from equilibrium

5.2 The Cobweb theorem

5.3 Supply and demand shocks

6 Interventions in the domestic market

6.1 Taxes

6.1.1 Tax collection

6.1.2 Tax revenue

6.1.3 The level of tax revenue: Laffer curve

6.2 Price fixing

6.2.1 Festlegung eines Höchstpreises

6.2.2 Welfare effects of a maximum price

6.2.3 Fixing a minimum price

6.2.4 Welfare effects of a minimum price

7 Types of markets

7.1 Polypoly or perfect competition

7.2 Monopolies

7.2.1 Monopolies

7.2.2 Price discrimination in Monopolies

II Household Theory

8 Optimum choice of consumption: graphical solution

8.1 The options of the consumer

8.2 The budget line

8.3 Indifference curve

8.4 Budget optimum

8.5 Change of income

8.6 Inferiore Güter

8.7 Engel curves: normal vs. inferior goods

8.8 Price changes

8.9 Income- and substitution- effects

8.10 Giffen good

9 Optimal consumption choice: calculative solution: optimization with constraints

9.1 Lagrange

9.2 The Lagrange formalism

9.3 The Lagrange formalism for the example of the consumption problem

9.4 The Lagrange formalism for the example of a Cobb-Douglas utility function

9.5 The Lagrange formalism for the example of another utility function

9.6 Optimization under constraints with a function to be chosen freely

9.7 The dual problem

9.8 Boundary solutions

9.9 The derived demand: Engel curves and demand curve

III Production and Utility Functions

10 Basics: Homogeneous and homothetic functions

10.1 General information on the notation of functions

10.2 Homogeneous functions

10.3 Homogeneous functions of two variables

10.4 Important properties of homogeneous functions: The Euler theorem and the absence of profit for companies with linear economies of scale

10.5 Homothetic functions

11 Substitutionality of production factors

12 CES- production function

12.1 Kosten

13 Producer surplus and profit

14 Economies of scale

15 Elasticities

15.1 Elasticity of any function

15.2 Elasticities: Characteristics of the graphic illustration of price elasticity

15.3 Elasticities: short and long term

15.4 Elasticities of substitution

15.4.1 CES- substitution elasticities

15.4.2 Elasticities of substitution: Cobb-Douglas

15.5 Network Externalities: Band wagon- and snob- effect

IV ISLM Modell

16 Money supply

17 The goods market: The IS equation

17.1 Derivation of the IS curve

17.2 The shift of the IS curve in a closed economy

18 The financial market: the LM curve

18.1 Derivation of the LM curve

18.2 The shift of the LM curve in a closed economy

19 The effect of political decisions in equilibrium

19.1 Fiscal policy

19.2 Monetary policy

19.3 The combined use of monetary and fiscal policy

20 The ISLM model with expectations

20.1 The IS curve with expectations

20.2 Fiscal policy, monetary policy and the role of expectations and backloading

21 The ISLM model in the open economy

21.1 Demand for domestic goods vs. domestic demand: DD and ZZ curve

21.2 Trade balance: net exports

21.3 The IS curve in the open economy: real depreciation and trade balance

22 Atypical monetary policy: liquidity trap and quantitative easing

22.1 Liquidity trap

22.2 Monetary policy in the crisis

V ASAD Modell

23 GA-GN-Model (AS-AD-Model): Introduction

24 Gesamtwirtschaftliches Angebot GA (Aggregate Supply: AS)

25 Gesamtwirtschaftliche Nachfrage GN: (Aggregate Demand: AD)

26 The AS-AD model: shocks and economic policy reactions

VI Real Exchange Rates

27 Theory of Purchasing Power Parity

27.1 Basic principles and preliminary remarks

27.1.1 Foreign exchange market and nominal exchange rate

27.1.2 Exchange rate policy

27.1.3 Real exchange rate

27.2 Purchasing Power Parity

27.2.1 The Harrod-Balassa-Samuelson model

VII Monetary Modell

28 Basic Principles and Assumptions

29 Equilibrium

30 Graphical presentation of the equilibrium

31 Relation of two countries

32 Monetary policy measures within the Monetary Model

33 Inflation abroad

34 Exogenous economic growth shock

35 Fixed exchange rates in the Monetary Model

35.1 Monetary policy with fixed exchange rates

35.2 Recession with fixed exchange rates

35.3 Monetary policy of the anchor country: Imported inflation and "harmful" monetary policy

VIII Mundell-Fleming Modell

36 The Mundell-Fleming model

36.1 Basic principles and assumptions

36.1.1 The Mundell-Fleming model

36.2 The equilibrium and its graphical presentation

36.2.1 The four-field-graphic

36.3 Flexible exchange rates in the Mundell-Fleming model

36.3.1 Monetary policy measures in the Mundell-Fleming model

36.3.2 Fiscal policy

36.4 Fixed exchange rates in the Mundell-Fleming model

36.4.1 Monetary policy at fixed exchange rates

36.4.2 Fiscal policy with fixed exchange rates

IX Cold Progression

37 Cold Progression: Introduction

38 The development of the nominal tax rates

38.1 Overview of the historical development

38.2 The effect of cold progression without tariff adjustment

38.3 The effect of cold progression with tariff adjustment

38.4 The effect of cold progression without a change in tariff with adjustable inflation rate

39 Tax revenues and alternative tariffs

39.1 Distribution of income and income tax development

39.2 Selecting a linear tax rate

40 Austria

40.1 Cold Progression: Austria

40.2 The development of nominal tax rates: Austria

40.2.1 Overview of the historical development: Austria

40.2.2 The effect of cold progression without tariff adjustment: Austria

40.2.3 The effect of cold progression with tariff adjustment: Austria

40.2.4 The effect of cold progression without a change in tariff with adjustable inflation rate: Austria

41 Switzerland

41.1 Cold Progression: Switzerland

41.2 The development of nominal tax rates: Switzerland

41.2.1 Overview of historical development: Switzerland

41.2.2 The effect of cold progression without tariff adjustment: Switzerland

41.2.3 The effect of cold progression with tariff adjustment: Switzerland

41.2.4 The effect of cold progression without tariff change with adjustable inflation rate: Switzerland

X Linear Regression for Dummies

42 Basic principles

42.1 Introduction

42.2 Estimations by yourself

43 Details

43.1 Least squares, residuals and the estimation criterion

43.2 Outliers, robustness and the influence of single points

43.3 Misspecification of the model

I Markets

1 The demand curve

2 The consumer surplus

3 The supply

4 The producer surplus

5 Stability

5.1 Deviation of the price from equilibrium

5.2 The Cobweb theorem

5.3 Supply and demand shocks

6 Interventions in the domestic market

6.1 Taxes

6.1.1 Tax collection

6.1.2 Tax revenue

6.1.3 The level of tax revenue: Laffer curve

6.2 Price fixing

6.2.1 Festlegung eines Höchstpreises

6.2.2 Welfare effects of a maximum price

6.2.3 Fixing a minimum price

6.2.4 Welfare effects of a minimum price

7 Types of markets

7.1 Polypoly or perfect competition

7.2 Monopolies

7.2.1 Monopolies

7.2.2 Price discrimination in Monopolies

II Household Theory

8 Optimum choice of consumption: graphical solution

8.1 The options of the consumer

8.2 The budget line

8.3 Indifference curve

8.4 Budget optimum

8.5 Change of income

8.6 Inferiore Güter

8.7 Engel curves: normal vs. inferior goods

8.8 Price changes

8.9 Income- and substitution- effects

8.10 Giffen good

9 Optimal consumption choice: calculative solution: optimization with constraints

9.1 Lagrange

9.2 The Lagrange formalism

9.3 The Lagrange formalism for the example of the consumption problem

9.4 The Lagrange formalism for the example of a Cobb-Douglas utility function

9.5 The Lagrange formalism for the example of another utility function

9.6 Optimization under constraints with a function to be chosen freely

9.7 The dual problem

9.8 Boundary solutions

9.9 The derived demand: Engel curves and demand curve

III Production and Utility Functions

10 Basics: Homogeneous and homothetic functions

10.1 General information on the notation of functions

10.2 Homogeneous functions

10.3 Homogeneous functions of two variables

10.4 Important properties of homogeneous functions: The Euler theorem and the absence of profit for companies with linear economies of scale

10.5 Homothetic functions

11 Substitutionality of production factors

12 CES- production function

12.1 Kosten

13 Producer surplus and profit

14 Economies of scale

15 Elasticities

15.1 Elasticity of any function

15.2 Elasticities: Characteristics of the graphic illustration of price elasticity

15.3 Elasticities: short and long term

15.4 Elasticities of substitution

15.4.1 CES- substitution elasticities

15.4.2 Elasticities of substitution: Cobb-Douglas

15.5 Network Externalities: Band wagon- and snob- effect

IV ISLM Modell

16 Money supply

17 The goods market: The IS equation

17.1 Derivation of the IS curve

17.2 The shift of the IS curve in a closed economy

18 The financial market: the LM curve

18.1 Derivation of the LM curve

18.2 The shift of the LM curve in a closed economy

19 The effect of political decisions in equilibrium

19.1 Fiscal policy

19.2 Monetary policy

19.3 The combined use of monetary and fiscal policy

20 The ISLM model with expectations

20.1 The IS curve with expectations

20.2 Fiscal policy, monetary policy and the role of expectations and backloading

21 The ISLM model in the open economy

21.1 Demand for domestic goods vs. domestic demand: DD and ZZ curve

21.2 Trade balance: net exports

21.3 The IS curve in the open economy: real depreciation and trade balance

22 Atypical monetary policy: liquidity trap and quantitative easing

22.1 Liquidity trap

22.2 Monetary policy in the crisis

V ASAD Modell

23 GA-GN-Model (AS-AD-Model): Introduction

24 Gesamtwirtschaftliches Angebot GA (Aggregate Supply: AS)

25 Gesamtwirtschaftliche Nachfrage GN: (Aggregate Demand: AD)

26 The AS-AD model: shocks and economic policy reactions

VI Real Exchange Rates

27 Theory of Purchasing Power Parity

27.1 Basic principles and preliminary remarks

27.1.1 Foreign exchange market and nominal exchange rate

27.1.2 Exchange rate policy

27.1.3 Real exchange rate

27.2 Purchasing Power Parity

27.2.1 The Harrod-Balassa-Samuelson model

VII Monetary Modell

28 Basic Principles and Assumptions

29 Equilibrium

30 Graphical presentation of the equilibrium

31 Relation of two countries

32 Monetary policy measures within the Monetary Model

33 Inflation abroad

34 Exogenous economic growth shock

35 Fixed exchange rates in the Monetary Model

35.1 Monetary policy with fixed exchange rates

35.2 Recession with fixed exchange rates

35.3 Monetary policy of the anchor country: Imported inflation and "harmful" monetary policy

VIII Mundell-Fleming Modell

36 The Mundell-Fleming model

36.1 Basic principles and assumptions

36.1.1 The Mundell-Fleming model

36.2 The equilibrium and its graphical presentation

36.2.1 The four-field-graphic

36.3 Flexible exchange rates in the Mundell-Fleming model

36.3.1 Monetary policy measures in the Mundell-Fleming model

36.3.2 Fiscal policy

36.4 Fixed exchange rates in the Mundell-Fleming model

36.4.1 Monetary policy at fixed exchange rates

36.4.2 Fiscal policy with fixed exchange rates

IX Cold Progression

37 Cold Progression: Introduction

38 The development of the nominal tax rates

38.1 Overview of the historical development

38.2 The effect of cold progression without tariff adjustment

38.3 The effect of cold progression with tariff adjustment

38.4 The effect of cold progression without a change in tariff with adjustable inflation rate

39 Tax revenues and alternative tariffs

39.1 Distribution of income and income tax development

39.2 Selecting a linear tax rate

40 Austria

40.1 Cold Progression: Austria

40.2 The development of nominal tax rates: Austria

40.2.1 Overview of the historical development: Austria

40.2.2 The effect of cold progression without tariff adjustment: Austria

40.2.3 The effect of cold progression with tariff adjustment: Austria

40.2.4 The effect of cold progression without a change in tariff with adjustable inflation rate: Austria

41 Switzerland

41.1 Cold Progression: Switzerland

41.2 The development of nominal tax rates: Switzerland

41.2.1 Overview of historical development: Switzerland

41.2.2 The effect of cold progression without tariff adjustment: Switzerland

41.2.3 The effect of cold progression with tariff adjustment: Switzerland

41.2.4 The effect of cold progression without tariff change with adjustable inflation rate: Switzerland

X Linear Regression for Dummies

42 Basic principles

42.1 Introduction

42.2 Estimations by yourself

43 Details

43.1 Least squares, residuals and the estimation criterion

43.2 Outliers, robustness and the influence of single points

43.3 Misspecification of the model

[Weiter]

(c) by Christian Bauer

Prof. Dr. Christian Bauer

Lehrstuhl für monetäre Ökonomik

Universität Trier

D-54296 Trier

Tel.: +49 (0)651/201-2743

E-mail: Bauer@uni-trier.de

URL: https://www.cbauer.de