2. Section objectives
Describe branches of economics
Identify economic questions
Recognize economic forces as a policy
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3. Branches of Economics
1. Macro versus Micro Economics
2. Positive versus Normative Economics
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4. Macro Economics
Macro = ‘big’
Macroeconomics is the study of aggregate
economic behavior of national and global
economy as a whole,
Studies: National outputs, income, overall
price level, unemployment, foreign trade,
effect of taxes, etc.
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5. Macroeconomic Questions
Three big issues that macroeconomics tries to
understand are:
–Standard of living
–Cost of living
–Economic fluctuations
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6. Macroeconomic Questions…
Standard of Living:
Level of consumption of goods and services
people enjoy on average;
Goods: a tangible item used to satisfy
human wants
Services: an activity used to satisfy
human wants
It is measured [not perfectly] by average
income per person.
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7. Macroeconomic Questions…
Cost of living:
The number of birr /dollars it takes to buy goods
and services that provide a given standard of living.
A situation in which the cost of living is rising and
the value of money is shrinking is called inflation.
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8. Macroeconomic Questions…
Economic Fluctuations:
Recessions and expansions of markets.
The periodic but irregular up-and-down
movement in production and jobs.
The worst recession ever world economy
experienced was the great depression during the
1930s.
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10. Macroeconomic Questions…
Objectives …
Output: Ultimate yardstick of economic
success is its ability to generate a high level
of production of economic goods and
services.
Employment: Providing acceptable jobs
with reasonable payment for those who are
willing to work is another objective of
macroeconomic policy.
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11. Macroeconomic Questions…
Objectives …
Foreign trade: Involvement of foreign
sector and good trade balance with foreign
trade exchanges.
Stable Price: denotes that the overall price
level does not rise or fall rapidly, considering
that price is a common yardstick whereby
economic values are measured.
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12. Uses of Macro Economics
We can use macroeconomic analysis to:
– Understand why economies grow.
– Describe economic fluctuations.
– Make informed business decisions
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13. Microeconomics
Micro = ‘small’
Micro economics: deals with the behavior of
individual prices and quantities in the
components of the larger economy,
Studies:
• Prices and Quantities
• Effects of government regulation and
taxes
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14. Big Microeconomic Questions
The choices made by individuals, firms, and
governments answer three questions
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15. Big Microeconomic Questions…
What goods and services should be produced ?
Do we produce houses or camping vehicles?
Categories of goods: construction, electronic
equipment, food, industrial equipment and
chemicals.
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16. Big Microeconomic Questions…
How can goods and services produced?
Do we use humans or machines to produce
goods we want?
Categories of factors of production:
– Land- “gift of nature”
– Labor- work time and work efforts
– Capital- tools, instruments, machines, etc.
– Entrepreneurship-work creation by organizing
other factors of production.
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17. Big Microeconomic Questions…
For whom are goods and services produced?
It depends on the incomes that people earn.
–Land earns rent.
–Labor earns wages.
–Capital earns interest.
–Entrepreneurship earns profit.
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18. Micro economic Agent
Firms:
–Produce and sell goods and services
–Buy inputs (labor, capital & raw materials)
Consumers:
–Buy goods and services
–Sell inputs (labor services, loan able funds)
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19. Uses of Microeconomics
We can use microeconomic analysis to:
– Understand how markets work and predict
changes.
– Make personal and managerial decisions.
– Evaluate public policies.
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20. Positive Economics
The goal of economists is to discover how the
economic world works,
They distinguish between:
– Positive statements: What is?
–Normative statements: What ought to be?
The task of economic science: is to discover
and catalog positive statements that are
consistent with what we observe in the world
and that enable us to understand how the
economic world works.
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22. Pit Falls in Economics
Unscrambling Cause and Effect: needs
intelligibility or readability state.
Ceteris Paribus: A logical tool used by all
scientists to identify cause and effect, its key
point is to change one factor at a time holding
all the other relevant factors constant.
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23. Marginal Cost Versus Marginal Benefit
Comparing MC and MB will tell you how you
should adjust your activity to be well as much
as possible
if MB > MC, do it.
if MB < MC, do not do it.
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24. Economic Policy
An action(or inaction) taken by government to
influence economic events such as recessions
or deficits
Economic forces
Invisible hand- price changes guide our actions
in the market.
Invisible handshake- social and historical
forces
The invisible foot- political and legal forces
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25. Positive Economics
Positive statements are about what is? and
describes facts and behavior in the economy,
resolved only by referring to facts.
–Can be proven right or wrong.
–Can be tested by comparing it to facts.
Example: “Universal health care will cut the
amount of work time lost to illness”
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26. Normative Economics
Normative statements: are about what ought to
be and involves ethics, moral and value
judgments,
There simply is no right or wrong answer,
They can be argued about but they can never
be tested/ settled by science or facts, rather
best resolved by political decision,
Example: Every Ethiopians should have equal
access to health care.
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