Dynamic economics
An online textbook with dynamic graphics for the introduction to economics

Prof. Dr. Christian Bauer

9. Januar 2021
Lehrstuhl für monetäre Ökonomik (FB IV), Universität Trier, 54296 Trier
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.


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


(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