This document summarizes key concepts from Lecture 2 of a macroeconomics course. It defines theory as a framework for understanding relationships between cause and effect. Economic models are then introduced as simplified representations of how parts of the economy function, relying on assumptions and economic variables that can take different values. Rational behavior and marginal concepts are explained, showing how rational actors make decisions by weighing marginal costs against marginal benefits. Finally, principles of economics are outlined regarding how individuals make decisions, interact in markets, and how the overall economy works.

1. Lecture 2
Macroeconomics
abdul-Ghaffar
Institute of Management Sciences, HayatAbad
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2. Lecture 2
Theory: Theory is a framework that helps you
understand relationships between cause and
effect
Theory is a simplification of an actual relationship
A theory explains the causes of a phenomenon.
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3. Lecture 2
Economic Variables: Quantities that can have more
than one values e.g; Price, interest rate, income etc
Economic 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
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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
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5. Lecture 2
Rational Behaviour: Ways of acting for which the
extra benefit exceeds (greater than) the
associated extra cost
When your actions are such that the extra benefits
are exceeding (more than) additional
expenditures it means you are showing a rational
behaviour
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6. Lecture 2
Marginal 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 item
Marginal Cost: The sacrifice made to obtain an
additional unit of an item
A Rational Person continues purchasing
(marginal cost) an item to the point at which
there is no additional net gain (marginal
benefit)
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7. Lecture 2
Graphs
Origin: On a set of axes, the point designated by
zero (0) at which variables X and Y both take
on zero values
Coordinates: A pair pf numbers that sorresponds
to values for X and Y when plotted on a set of
axes e.g; (X,Y)
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8. Lecture 2
Curve: A straight or curved line drawn to
connect points plotted on a set of axes
Positive Relationship: Indicates that variable Y
increases whenever X variable increases. It is
represented by an upward sloping curve
Negative Relationship: Indicates that Y
decreases whenever X increases. Downward
sloping curves
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9. Lecture 2
Slope: measures the rate at which Y
changes with every change in X variable
= change in Y/Change in X
Intersection: The point at which two (2)
curves cross each other
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10. Lecture 2
Ten (10) Principles of Economics:
How People make Decisions?
1) - People face Tradeoffs
2) - The cost of something is what you give up to
get it
3) - Rational People Think at the Margin
4) - People Respond to Incentives
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11. Lecture 2
How People Interact?
5) – Trade can make everyone betteroff
6) – Markets are usually good way to organise
Economic Activity
7) – Governments can sometimes improve
market Outcomes
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12. Lecture 2
How The Economy as a Whole Works?
8) – A country’s standard of living Depends on
its ability to produce goods and services
9) – Prices rise when governments print too
much money
10) – Spcoeity faces a short run tradeoff
between Inflation and Unemployment
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13. Questions?
End of Lecture 2
Thank you all (for not sleeping!!!)
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