Welcome to Principles of Macroeconomics Economics is the study of how individuals and societies...
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Transcript of Welcome to Principles of Macroeconomics Economics is the study of how individuals and societies...
Welcome to Principlesof Macroeconomics
Economics is the studyof how individuals and
societies allocatescarce resources amongcompeting alternative
ends
Hall and Lieberman definition
Economics is the study of choice
under conditions of scarcity
Available resources are insufficient to satisfy wants.
We cannot produce enough goods and services to satisfy
everyone—we don’t have the resources!
Economics Webster’s Ninth New Collegiate Dictionary. eco•nom • ic 1. archaic: of or relating to a household or its management. eco = oikos, meaning “house” or “household” nom = nemein, meaning “to manage” ic = ic, mean “of” or “relating to”
The genealogy of economics
Economics is the social science that studies the choices we make as we cope with scarcity and the incentives that influence and reconcile our choices.
A reward or penalty—a “carrot” or a “stick”—that encourages or discourages an action.
The risk of a getting a ticket for speeding gives you an incentive to obey they speed limit—or at least slow down.
Time-of-day variability of phone rates give you an incentive to phone at night.
Economic Resources
Resources are the tangible things that make
the production and distribution of goods and
services possible.
Economic Resources by Category
• Land
• Labor
• Capital
• Entrepreneurship
“Free gifts of nature”
Land or natural resources
Labor or “Human Resources”
Capital
“Manmade instruments of production.”
Types of capital
•Private, tangible capitalExamples: Aircraft and trucks used by Federal Express; Nuclear Plants “owned” by Entergy; Plants “owned” by Case Equipment Co.
•Public, tangible capital or “infrastructure”Examples: Bridges and viaducts; Water collection and filtration systems; navigable waterways; Mass transit systems; Airports.
•Human capital, defined as “the skills and training of the labor force.”Examples: Network engineers and webmasters; Plumbers; Accountants; Chemists; Machinists; Nurses; Pilots.
Entrepreneurship Entrepreneurship is the willingness and ability to combine land, labor and capital into productive enterprises.
•Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage.
•Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.
The World of Economics
•Microeconomics
•Macroeconomics
•Positive economics
•Normative economics
Microeconomics
The study of the choices that individuals and businesses make and the way these choices respond to incentives, interact, and are influenced by government
Examples of microeconomic questions?
•What determines the price of gasoline?
•Why is housing so much more expensive in San Francisco compared to Dallas?
•Will more students enroll in nursing schools in response to rising incomes of nurses?
•Will the “free” availability of Linux affect sales of Windows?
Macroeconomics
The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.
Macroeconomic Questions
•What determines the value of total spending and output?
•What are the determinants of total employment?
•What are the determinants of personal income?
•What are the determinants of the cost of living
•What causes economic fluctuations—recessions and expansions
The Business Cycle
The term business cycle is used to describe observed fluctuations in key macroeconomic measures such as real GDP, personal income, profits, or employment.
A full cycle consists of an expansion and a contraction (or recession).
Business cycles are recurring phenomena; however, they are irregularly recurring.
Time
Real G
DP
Tot
al P
rod
uct
ion
Year
Business Cycle Phases and Turning Points
Expansion
ExpansionPeak
Peak
Recession
Recession
Trough
2 4 8
Economics deals with questions of “what is”
and “what ought to be.” The former set of
questions belong to positive economics; the
latter to normative economics
Positive and Normative Economics
Positive economics attempts set forth scientific statements--that is, statements subject to verification or falsification
For instance:
“ If they raise tuition again at ASU, enrollment will decline.”
•The recent increase in interest rates should depress housing construction.
•Total employment in the U.S. fell in 2002.
The Bush tax plan
is tilted excessivelyto the rich
Now wait a minute! The rich pay
higher taxes to begin with. Shouldn’t
they receive a bigger tax cut?
Who is right? It is a normative issue.
A model is a simplified version of economicreality. Models “abstract” from key
features of the real world. A model should be as simple as possible to accomplish its
purpose.
This map of Latvia is a good example of a model
Assumptions and Assumptions and Other ConclusionsOther Conclusions
Simplifying assumption:Simplifying assumption: makes a model makes a model simpler without affecting its important simpler without affecting its important conclusionsconclusions
Critical assumption:Critical assumption: affects the affects the conclusions of a model in a critical wayconclusions of a model in a critical way
Ceteris Paribus “All other things being equal” or “All other factors held constant.”
Simplification in model building is achieved by the ceteris paribus assumption. It allows us to reason about
the relationship between two variables without the
intrusion of other variables.
Correlation versus Causation
Correlation is the tendency for the values of two variables to move in a
predictable and related way. For example, beer consumption tends to rise when unemployment rises—that
is, these variables are correlated. Does it follow that beer consumption causes
unemployment?
Other examples
• Researchers at the Aabo Akademi found that Finns who speak the language of their Nordic neighbors were up to 25 percent less likely to fall ill than those who do not.
• My rooster died—the sun won’t come up tomorrow.
• Crimes rates tend to be higher in cities with more police per capita.
I washed myspaceship today, and that’s why
it rained
You’ve committedthe post hoc
fallacy!
“After this, therefore because of this.”
Post hoc, ergo propter hoc
Meaning:
To commit the fallacy of composition is to suppose that what is true in the individual case also holds true for the group.
•Example: “The best way to leave a burning theater is to run for the exit.”
The fallacy of composition