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# Principles of macroeconomics

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### Principles of macroeconomics

1. 1. Lecture 2 Macroeconomics abdul-GhaffarInstitute of Management Sciences, HayatAbad 1
2. 2. Lecture 2Theory: Theory is a framework that helps youunderstand relationships between cause andeffectTheory is a simplification of an actual relationshipA theory explains the causes of a phenomenon. 2
3. 3. Lecture 2Economic Variables: Quantities that can have more than one values e.g; Price, interest rate, income etcEconomic models: Simplified way of expressing how some sectors of the economy functions- Economic models are abstracts (caprture important and not ALL details relevant to the phenomenon)- Economic models rely on assumptions- It is in the form of logic, graphs or mathematics 3
4. 4. Lecture 2- A good economic model is like a schematic diagram. It accurately sets the relationship or cause and effect among variables- An economic model is a tool that helps you understand the consequences of a theory- A good model not only explains phenomena better but, also, has the ability to predict changes in the economic variables 4
5. 5. Lecture 2Rational Behaviour: Ways of acting for which the extra benefit exceeds (greater than) the associated extra costWhen your actions are such that the extra benefits are exceeding (more than) additional expenditures it means you are showing a rational behaviour 5
6. 6. Lecture 2Marginal Benefit: The monetary value (rupees or dollars or any other currency you are dealing in) placed on the satisfaction obtained from another unit of an itemMarginal Cost: The sacrifice made to obtain an additional unit of an itemA Rational Person continues purchasing (marginal cost) an item to the point at which there is no additional net gain (marginal benefit) 6
7. 7. Lecture 2 GraphsOrigin: On a set of axes, the point designated by zero (0) at which variables X and Y both take on zero valuesCoordinates: A pair pf numbers that sorresponds to values for X and Y when plotted on a set of axes e.g; (X,Y) 7
8. 8. Lecture 2Curve: A straight or curved line drawn to connect points plotted on a set of axesPositive Relationship: Indicates that variable Y increases whenever X variable increases. It is represented by an upward sloping curveNegative Relationship: Indicates that Y decreases whenever X increases. Downward sloping curves 8
9. 9. Lecture 2Slope: measures the rate at which Y changes with every change in X variable = change in Y/Change in XIntersection: The point at which two (2) curves cross each other 9
10. 10. Lecture 2 Ten (10) Principles of Economics:How People make Decisions?1) - People face Tradeoffs2) - The cost of something is what you give up to get it3) - Rational People Think at the Margin4) - People Respond to Incentives 10
11. 11. Lecture 2How People Interact?5) – Trade can make everyone betteroff6) – Markets are usually good way to organise Economic Activity7) – Governments can sometimes improve market Outcomes 11
12. 12. Lecture 2How The Economy as a Whole Works?8) – A country’s standard of living Depends on its ability to produce goods and services9) – Prices rise when governments print too much money10) – Spcoeity faces a short run tradeoff between Inflation and Unemployment 12
13. 13. Questions? End of Lecture 2Thank you all (for not sleeping!!!) 13