Macroeconomics: Introduction to Economics

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Week 1: Introduction to Economics

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Macroeconomics: Introduction to Economics

  1. 1. Macroeconomics<br />Week 1<br />
  2. 2. “ECONOMICS IS LIFE IN GRAPHS”<br />Economics relates to your everyday lives.<br />Economics is the study of our choices.<br />POP QUESTION<br />How Economics can help you as a person or student?<br />1 www.investopedia.com <br />
  3. 3. FOUR (4) REASONS<br />Learn a Way of Thinking<br /> - opportunity cost<br /> - marginalism and sunk costs<br /> - efficient markets <br />To understand the society<br /> - Industrial and dot.com revolutions<br /> - Front page analysis<br />To understand global affairs<br />To be an informed citizen<br />1 www.investopedia.com <br />
  4. 4. ECONOMICS<br />is social science that studies how individuals, governments, firms, and nations make optimal choices on allocating scarce resources to satisfy their unlimited wants1<br />1 www.investopedia.com <br />
  5. 5. Limits, Alternatives, and Choices<br />SCARCITY<br />is the limitation of economic resources to fulfill infinite human needs and wants. Why is there scarcity? The main explanation lies in the fact that man’s wants and needs are unlimited, while the actual goods and services that can satisfy those needs are limited. <br />
  6. 6. Limits, Alternatives, and Choices<br />MARGINALISM<br />In economics, “marginal” means “extra,” “additional,”, or a “change in.”<br />Additional units of a good should be produced as long as MB > MC<br />MARGINAL BENEFIT (MB)<br />refers to what people are willing to give up in order to obtain one more unit of a good.<br />Efficient level is where:<br />MB = MC<br />MARGINAL COST (MC)<br />refers to the value of what is given up in order to produce the additional unit. <br />
  7. 7. Scientific Method<br />
  8. 8. Economic Principles<br />ECONOMIC LAW OR PRINCIPLE<br />is a well-tested and widely accepted theory. It is a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.<br />Other-Things-Equal Assumption is an assumption that factors other than those being considered do not change. It is also called in Latin ceteris paribus. <br />
  9. 9. Microeconomics and Macroeconomics (from Economics by Case and Fair, 9th Ed.)<br />
  10. 10. MICROECONOMICS<br />Branch of economics concerned with individual units of such as a person, a household, a firm, or an industry.<br />
  11. 11. MACROECONOMICS<br />Branch of economics that examines either the economy as a whole or its basic subdivisions or aggregates, such as government, household, and business sectors.<br />
  12. 12. Minimum wage laws cause unemployment.<br />POSITIVE ECONOMICS<br />focuses on facts and cause-and-effect relationships. It concerns the description and explanation of economic phenomena and includes description, and theory testing. <br />NORMATIVE ECONOMICS<br />incorporates value judgments about what economy should be like or what particular policy actions should be recommended to achieve a desirable goal. It is that which makes a resolution about what should or ought to be. <br />The government should raise the minimum wage.<br />
  13. 13. LIMITED INCOME<br />We all have finite amount of income, even the wealthiest among us.<br />UNLIMITED NEEDS AND WANTS<br />Man has infinite needs and wants that keep on evolving over time. We desire various goods and services that provide utility. <br />
  14. 14. TRADE OFFS and OPPORTUNITY COSTS<br />It is the value of the next best alternative forgone as the result of making a decision. To obtain more of one thing, one should forgo the opportunity of getting the next best thing. That sacrifice is the opportunity cost of the choice.<br />Consumption Possibilities: The Case of Pizza and Pasta<br />
  15. 15. TRADE OFFS and OPPORTUNITY COSTS<br />It is the value of the next best alternative forgone as the result of making a decision. To obtain more of one thing, one should forgo the opportunity of getting the next best thing. That sacrifice is the opportunity cost of the choice.<br />BUDGET LINE<br />
  16. 16. FACTORS OF PRODUCTION<br />LAND consists of all natural resources (or gifts of nature) and all other forms of these raw materials used in production of resources.<br />LABOR comprises all human beings (physical and mental talents) who extract raw materials, process these materials into finished consumption or investment goods, transport and sell raw materials or finished products, or are engaged in services.<br />CAPITAL materials such as tools, machinery, and equipment which man uses to extract and process raw materials into finished goods. <br />ENTREPRENEUR is a person who puts together or organizes the other factors of production to make a needed goods and services. <br />
  17. 17. PRODUCTION POSSIBILITY MODEL<br />is a macroeconomic model of production possibilities. It begins with the following assumptions:<br /><ul><li> Full employment or use of all available resources.
  18. 18. Fixed resources.
  19. 19. Fixed technology or constant technology.
  20. 20. Two goods are only produced in the economy. </li></li></ul><li>PRODUCTION POSSIBILITY TABLE AND CURVE<br />show the different combinations of two products that can be produced by an economy with specific resources, assuming full employment. At any point in time, a fully employed economy must sacrifice some of one good to obtain more of another good. <br />
  21. 21. PRODUCTION POSSIBILITY CURVE<br />represents “constraint” or limitation of attainable outputs. Points along the curve are attainable as long as the economy uses all its available resources.<br /><ul><li> Points lying inside the curve are also attainable but they reflect less total output and could have produced more goods if it achieved full employment of resources.
  22. 22. Points outside the curve represent greater output that the current output but it is not attainable given the availability of resources. </li></li></ul><li>LAW OF INCREASING OPPORTUNITY COST<br />illustrates as the production of a particular good increases, the opportunity cost of producing an additional unit rises. <br />OPTIMAL ALLOCATION<br />additional benefit is equal to additional cost<br />OPTIMAL ALLOCATION:<br />MB = MC<br />
  23. 23. CONSTRUCTION OF A GRAPH<br />GRAPH is a visual representation of the relationship between two variables.<br />Independent Variable<br />is the presumed to affect or determine the dependent variable or the source.<br />Dependent Variable<br />is one that changes accordingly to any change in the independent variable or the effect or outcome. <br />
  24. 24. RELATIONSHIPS<br />Direct Relationship<br />or Positive Relationship means that two variables move in the same direction. This has an upward sloping line.<br />Inverse Relationship <br />or Negative Relationship means the two variables move in opposite direction. This has a downward sloping line. <br />
  25. 25. SLOPES of GRAPHS<br />is the ratio of the vertical change (rise) to the horizontal change (run) (or rise over run)<br />Slope = vertical change<br /> horizontal change<br /> b = y2 – y1<br />x2 – x1<br />Positive Slope<br />variables change in the same direction<br />Negative Slope<br />variables change in different direction<br />
  26. 26. SLOPES of GRAPHS<br />is the ratio of the vertical change (rise) to the horizontal change (run) (or rise over run)<br />Infinite Slope<br />Negative Slope<br />VERTICAL INTERCEPT<br />of a line is where the line meets the vertical axis.<br />
  27. 27. EQUATION OF A LINEAR RELATIONSHIP<br />where:<br />y =dependent variable<br />a =vertical intercept<br />b = slope of line<br />x = independent variable<br />y=a + bx<br />
  28. 28. SLOPE AND MARGINAL ANALYSIS<br />To measure the slope at a specific point, we draw a straight line tangent to the curve at one point. A line is tangent at a point if it touches, but does not intersect, the curve at that point. <br />
  29. 29. 27 of 50<br />A P P E N D I X<br />HOW TO READAND UNDERSTAND GRAPHS<br />TIME SERIES GRAPHS<br /> FIGURE 1A.1 Total Disposable Personal Income in the United States: 1975–2006 (in billions of dollars)<br />
  30. 30. 28 of 50<br />Appendix<br />A P P E N D I X<br />HOW TO READ AND UNDERSTAND GRAPHS<br />GRAPHING TWO VARIABLES ON A CARTESIAN<br />COORDINATE SYSTEM<br /> FIGURE 1A.2 A Cartesian Coordinate System<br />A Cartesian coordinate system is constructed by drawing two perpendicular lines: a vertical axis (the Y-axis) and a horizontal axis (the X-axis). Each axis is a measuring scale.<br />
  31. 31. 29 of 50<br />A P P E N D I X<br />HOW TO READ AND UNDERSTAND GRAPHS<br />PLOTTING INCOME AND CONSUMPTION DATA<br />FOR HOUSEHOLDS<br /> FIGURE 1A.3 Household Consumption and Income<br />A graph is a simple two-dimensional geometric representation of data. This graph displays the data from Table 1A.2. Along the horizontal scale (X-axis), we measure household income. Along the vertical scale (Y-axis), we measure household consumption.<br />Note: At point A, consumption equals $19,120 and income equals $9,676. <br />At point B, consumption equals $28,921 and income equals $25,546.<br />
  32. 32. 30 of 50<br />A P P E N D I X<br />HOW TO READ AND UNDERSTAND GRAPHS<br />SLOPE<br /> FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope<br />A positive slope indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y.<br />A negative slope indicates the opposite—when X increases, Y decreases and when X decreases, Y increases.<br />
  33. 33. 31 of 50<br />Refer to the figure below. The expression of the slope of the line between points A and B equals:<br />a. <br />b. <br />c. <br />d. <br />e. <br />
  34. 34. 32 of 50<br />Refer to the figure below. The expression of the slope of the line between points A and B equals:<br />a.<br />b. <br />c. <br />d. <br />e. <br />
  35. 35. 33 of 50<br />A P P E N D I X<br />HOW TO READ AND UNDERSTAND GRAPHS<br /> FIGURE 1A.5 Changing Slopes Along Curves<br />
  36. 36. 34 of 50<br />Refer to the figure below. According to this graph, the relationship between hours of study time and points on the exam is as follows: <br />a. The relationship is first positive and then it turns negative.<br />b. Positive but diminishing.<br />c. Positive and increasing.<br />Negative. <br />Nonexistent.<br />
  37. 37. 35 of 50<br />Refer to the figure below. According to this graph, the relationship between hours of study time and points on the exam is as follows: <br />a. The relationship is first positive and then it turns negative.<br />b. Positive but diminishing.<br />c. Positive and increasing.<br />Negative. <br />Nonexistent.<br />
  38. 38. 36 of 50<br />A P P E N D I X<br />SOME PRECAUTIONS<br /> FIGURE 1A.6 National Income and<br />Consumption<br />It is important to think carefully about what is represented by points in the space defined by the axes of a graph. In this graph, we have graphed income with consumption, as in Figure 1A.3, but here each observation point is national income and aggregate consumption in different years, measured in billions of dollars.<br />
  39. 39. 37 of 50<br />REVIEW TERMS AND CONCEPTS<br />Cartesian coordinate system<br />graph<br />negative relationship<br />origin<br />positive relationship<br />slope<br />time series graph<br />X-axis<br />X-intercept<br />Y-intercept<br />

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