Principles of Macroeconomics

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Copyright 2002, Pearson Education Canada

1

Principles of Macroeconomics

2nd Canadian Edition

by Case, Fair, Strain, and Veall





PowerPoint Presentation Slides to Accompany the Text


By Mark Karscig, Central Missouri State University


Peter Ibbott, Kings College
-

University of Western Ontario


Richard E. Mueller, University of Lethbridge


Copyright 2002, Pearson Education Canada

2

The Scope and Methods of
Economics

Chapter 1

Copyright 2002, Pearson Education Canada

3

A Definition of
Economics


Economics is the study of how individuals and
societies choose to use the scarce resources
that nature and previous generations have
provided.

Copyright 2002, Pearson Education Canada

4

Another Definition of Economics



Economics is the study of how scarce resources
are allocated among conflicting demands.

Copyright 2002, Pearson Education Canada

5

Four Main Reasons to Study
Economics...


To learn a way of thinking


To understand society


To understand global affairs


To be an informed voter

Copyright 2002, Pearson Education Canada

6

1. To Learn a Way of Thinking...


Three Fundamental Concepts of Economic
Thinking



Opportunity Cost


Marginalism


Information, Incentives, and Market
Coordinations

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7

Opportunity Costs


The opportunity cost of something is that which
we give up when we make that choice or
decision.


The implication is that all decisions involve
trade
-
offs.



“There’s no such thing as a free lunch!!”

Copyright 2002, Pearson Education Canada

8

Question to Consider



What is the opportunity cost of your attending
university?



Include all forgone options in your
consideration.

Copyright 2002, Pearson Education Canada

9

Marginalism


In weighing the costs and benefits of a decision,
it is important to weigh only the costs that are
contingent upon the decision.



Do not include sunk costs


Sunk costs are the costs that cannot be avoided,
regardless of what is done in the future, because
they have already been incurred.

Copyright 2002, Pearson Education Canada

10

Information, Incentives, and Market
Coordination


Prices, wages, and profits in market economies
have the capacity to provide the information
and incentives to coordinate the decisions of
individual decision
-
makers.



Are these market solutions always desirable?


Perhaps not if they interfere with the public good,
and lead, for example, to poverty or environmental
degradation.

Copyright 2002, Pearson Education Canada

11

2. Understanding Society


Present and past economic decisions have an
enormous influence on the character of life in a
society.


The state of our physical environment, the level
of material well
-
being, and the nature and
number of jobs are all products of the economic
system.

Copyright 2002, Pearson Education Canada

12

3. To Understand Global Affairs


Impact of globalization, trade negotiations


End of apartheid


Gulf War


Poverty and Starvation in Africa and Asia


The Asian Tigers


The European Union


Collapse of the Soviet Union

Copyright 2002, Pearson Education Canada

13

4. To be an informed voter…


Canadian politics is dominated by the debates
over economic policy.


To critically assess the platform of each political
party requires a basic understanding of
economics.

Copyright 2002, Pearson Education Canada

14

The Scope of Economics


Microeconomics



The branch of economics that examines the
functioning of individual industries and the behaviour
of individual decision
-
making units
--

business firms
and households and the effects of government
economic policy on these units.


Copyright 2002, Pearson Education Canada

15

The Scope of Economics


Macroeconomics



The branch of economics that examines the
economic behaviour of aggregates
--

income,
employment, output and so on...

Copyright 2002, Pearson Education Canada

16

The Scope of Economics
(Table 1.1)

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17

The Method of Economics


Positive Economics


An approach to economics that seeks to understand
behaviour and the operation of systems without
making judgements. It describes what exists and
how it works.


Normative Economics


An approach to economics that evaluates economic
outcomes as good or bad, and may prescribe courses
of action. Also called policy economics.



Copyright 2002, Pearson Education Canada

18

Theories and Models


Economic Theory


An economic theory is a statement or set of related
statements about cause and effect, action and
reaction.


Economic Model


An economic model is a formal statement of an
economic theory. Usually a mathematical
representation of a presumed relationship between
two or more variables.

Copyright 2002, Pearson Education Canada

19

Theories and Models


Ockham’s Razor


Principle that irrelevant detail should be cut away.


Ceteris Paribus


Literally, “other things being equal”. Used to analyze
the relationship between two variables while the
values of other variables are held constant.


Inductive Reasoning


The process of observing regular patterns from raw
data and drawing generalizations from them.

Copyright 2002, Pearson Education Canada

20

Theories and Models
-

Pitfalls


Post Hoc Fallacy


A common error made when thinking about causation: if A
happened before B then A did
not

necessarily cause B.


Correlation vs. Causation


Two variables are correlated if one variable changes when
the other changes. This does
not

imply that one caused the
other.


Fallacy of Composition


The fallacy of composition implies that what is true for a
part is necessarily true for the whole.



Copyright 2002, Pearson Education Canada

21

Theories and Models



Empirical Economics


The collection and use of data to test economic
theories.

Copyright 2002, Pearson Education Canada

22

Economic Policy and Five Criteria for
Judging Economic Outcomes

1. Efficiency


In economics, allocative efficiency. An efficient
economy is one that produces what people want and
does so at the least possible cost.

2. Equity


Equity means fairness, but what this means is open
to debate. Social programs and many policy debates
are centred on the issue of fairness.

Copyright 2002, Pearson Education Canada

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Economic Policy and Five Criteria for
Judging Economic Outcomes

3. Growth


Economic growth is an increase in the total output of
an economy. Often measured against population
growth to find growth per capita.

4. Full employment


Full employment is a condition in which all resources
available for use are being used.

5. Price Stability


A condition in which there is little inflation in prices.

Copyright 2002, Pearson Education Canada

24

Review Terms and Concepts


ceteris paribus


economic growth


descriptive economics


economic theory


economics


efficiency


empirical economics


equity


fallacy of composition


full employment


inductive reasoning


Industrial Revolution



macroeconomics


microeconomics


model


normative economics


Ockham’s razor


opportunity cost


positive economics


post hoc fallacy


stability


sunk costs


variable