Macroeconomics ch1

Intro: What is economics?

What Is Economics?

the science of choice, exploring the choices made by individuals and organizations, study of choices when there is scarcity (meaning: under limited resources)

Scarcity

The resources we use to produce goods and services are limited

examples of scarcity and the trade-offs associated

You have a limited amount of time. Each hour on the job means one less hour for study or play.

A city has a limited amount of land. If the city uses an acre of land for a park, it has one less acre for housing, retailers, or industry.

You have limited income this year. If you spend $17 on a music CD, that’s $17 less you have to spend on other products or to save.

Factors of Production

Resources used to produce goods and services; also known as production inputs, or resources

Natural Resources

provided by nature and used to produce goods and services

Labor

Human effort, including both physical and mental effort, used to produce goods and services

Physical Capital

stock of equipment, machines, structures, and infrastructure that is used to produce goods and services

Human Capital

knowledge and skills acquired by a worker through education and experience and used to produce goods and services

Entrepreneurship

effort used to coordinate the factors of production (natural resources, labor, physical capital, and human capital) to produce and sell products.

Positive Analysis

what economists do

Positive Analysis answers

“What is?” or “What will be?”

Normative Analysis

what individuals/governments do with input from economists

Normative Analysis answers

“What should be?”

The Three Key Economic Questions

“What?”, “How?”, and “Who?”

choices made by individuals, firms, and governments answer three questions:

1. What products do we produce?

2. How do we produce the products?

3. Who consumes the products?

Economic model

simplified representation of an economic environment, often employing a graph

Economic models are needed to…

…explore consequences of choices (“positive analysis”)

Over the last several decades, the U.S. economy has performed well and has raised our standard of living. Although the economy faltered at times, policymakers seemed to know how to restore growth and prosperity.

That is why the financial crisis and the recession that began in late 2007 have so shaken the confidence of people in the United States and around the world.

• The problems started innocently enough, with a booming market for homes that was fueled by easy credit from financial institutions.

• But we later discovered that many purchasers of homes and properties could not really afford them, and the trouble spread to banks and other financial institutions.

• As a result, businesses found it increasingly difficult to borrow money for everyday use and investment, and economic activity around the world began to contract.

The major countries of the world have implemented aggressive policies to try to halt this downturn.

Economists use assumptions to…

…make things simpler and focus attention on what

really matters.

Isolate Variables-Ceteris Paribus

Economic analysis often involves variables and how they affect one another.

Variable

A measure of something that can take on different values.

Ceteris Paribus

A Latin expression meaning that other variables are held fixed

Think at the Margin

How will a small change in one variable affect another variable and what impact that has on people’s decision making.

Marginal change

A small, one-unit change in value

Decision making often boils down to comparing marginal benefit to _________ of an action

A key assumption of most economic analysis is that people…

…act rationally, meaning that they act in their own self-interest

Macroeconomics

The study of the nation’s economy as a whole; focuses on the issues of inflation, unemployment, and economic growth.

2 Macroeconomics explains

2 why resources increase over time and the consequences for our standard of living.

All economies, including ones that experience a general trend of rising per capita income…

are subject to economic fluctuations, including periods when the economy shrinks.

A manager who studies macroeconomics will be better equipped to…

understand the complexities of interest rates and inflation and how they affect the firm (borrowing and spending, respectively).

Microeconomics

The study of the choices made by households, firms, and government and how these choices affect the markets for goods and services.

1 Macroeconomics explains

1 why economies grow and change and why economic growth is sometimes interrupted.

3 Macroeconomics explains

3 why resources increase over time and the consequences for our standard of living

Using Macroeconomics to Understand Economic Fluctuations

All economies, including ones that experience a general trend of rising per capita income, are subject to economic fluctuations, including periods when the economy shrinks.

Using Macroeconomics to Make Informed Business Decisions

A manager who studies macroeconomics will be better equipped to understand the complexities of interest rates and inflation and how they affect the firm (borrowing and spending, respectively).

Using Microeconomics to Understand Markets and Predict Changes

One reason for studying microeconomics is to better understand how markets work and to predict how various events affect the prices and quantities of products in markets.

Using Microeconomics to Make Personal and Managerial Decisions

On the personal level, we use economic analysis to decide how to spend our time, what career to pursue, and how to spend and save the money we earn. Managers use economic analysis to decide how to produce goods and services, how much to produce, and how much to charge for them.

Using Microeconomics to Evaluate Public Policies

We can use economic analysis to determine how well the government performs its roles in the market economy.

USING GRAPHS

One variable is measured along the horizontal, or x, axis, while the other variable is measured on the…

…vertical, or y, axis.

USING GRAPHS

The origin is defined as the…

… the intersection of the two axes, where the values of both variables are zero

USING GRAPHS

There is a positive relationship between work hours and income, so…

…the income curve is positively sloped.

Graphing Two Variables

Positive relationship

A relationship in which two variables move in the same direction.

Graphing Two Variables

Negative relationship

A relationship in which two variables move in opposite directions.

USING GRAPHS

Slope of a curve

The vertical difference between two points (the rise) divided by the horizontal difference (the run).