Welcome to ECON 2301 Principles of Macroeconomics

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Oct 28, 2013 (3 years and 8 months ago)

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Welcome to ECON 2301

Principles of
Macroeconomics

Dr. Frank Jacobson

Mr. Stuckey

Week 2 Class 1

Today


What is $1 Trillion


Chapter 1


Chapter 2

Economics is Divided
into Two Branches:


Microeconomics


and Macroeconomics

Microeconomics
-


Is the Study of How
Households and firms
Make Decisions and
How They Interact With
One Another in
Markets.

Macroeconomics
-


Is the Study of the
Economy as a Whole. This
Includes the Factors of
Inflation, Unemployment,
and Economic Growth.

The Goal of
Macroeconomics is to
Explain the Economic
Changes That Affect
Many Households,
Firms and Markets
Simultaneously
.

Macroeconomists Address Such
Questions as:


Why Do Prices Rise and Fall?


Why is the Average Income High or Low
in Countries?


Why Does Employment Vary?


What Can the Government Do In Terms
of Income, Inflation and
Unemployment?


The Downside of the World’s Largest
Economy & One of the Highest Standards of
Living


The federal budget is at a record
high


The US trade deficit is at a record
high


The federal government is borrowing
$2 billion dollars a day from
foreigners to finance the budget &
trade deficits


Social Security & Medicare trust
funds will run out of money well
before most of you reach retirement
age

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

1
-
4

The Downside of the World’s Largest
Economy & One of the Highest
Standards of Living


When you graduate, you may
not be able to get a decent job


The savings rate in the United
States is close to zero


The real hourly wage (adjusted
for inflation) of the average
worker is lower today than it
was in 1973

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

1
-
5

Economics Defined


Economics is the efficient
allocation of the
scarce

means of production toward
the satisfaction of human
wants


The means of production are limited


Human wants are unlimited

2
-
3

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

People Make Choices
Because Resources are
Scare.

Resources Include:

Land, Labor, Capital
(Entrepreneurship)

That Can be Used to
Produce Something Else

Four Economic
Resources


Land


Labor


Capital


Entrepreneurial
ability

2
-
5

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

Land


Land (a broader meaning than our
normal understanding of the word)


Includes natural resources such as
timber, oil, coal, iron ore, soil,
water, as well as the ground in
which these resources are found


Is used for the extraction of
minerals and farming


Provides the site for factories, office
buildings, shopping centers, homes,
etc.


2ZQHUV?RI?ODQG?UHFHLYH?´UHQWµ

2
-
6

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

Labor


Labor


The work and time for which
one is paid is what economists
call “labor”


Money received for one’s labor
is called wages and/or salaries


About two
-
thirds of the total
resource cost is the cost of
labor

2
-
7

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

Capital


Capital


Man
-
made goods used to produce other
goods or services is what economists
FDOO?´FDSLWDOµ


Examples are office buildings, stores, and
factories


Consists of mainly plant and equipment


The money owners of “capital” receive
is called “interest”


Capital is the
MOST

important of the
four economic resources

2
-
8

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

Entrepreneurial

Ability


The entrepreneur


Sets up a business


Assembles the needed resources


Risks his/her own (or borrowed)
money


Makes a “profit” or incurs a “loss”


Is central to the American
economy


25 million businesses are virtually all
entrepreneurs


The vast majority work for themselves or have
one or two employees

2
-
9

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

The Central Fact of
Economics: SCARCITY


Scarcity


Resources are the things society
uses to produce goods and
services


These resources are scarce (limited)


The economic problem


There are never enough resources
to produce all of the goods and
services that people want

2
-
4

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

Test For Scarcity


A Good is Scarce if More
of it Would make
Someone Better Off.


If the Good were Free,
People Would Want More
than is Available

A Good or Service is
Considered Scarce
When There is Not
Enough To Satisfy
Everyone’s Demand
For The Resource.

When Resources or
Specific Items Become
Scarce
-----

Allocation
Becomes the Problem.



How To Satisfy
Everyone Who Wants
An Item or Service.

One Way is By Pricing the
Item So That People Will
Pay More For the Item
They Want


By Doing This People
Are Forced To
Prioritize What Items or
Resources They Want
Most.

This Takes Us to The Real
Cost of Any Item or
Resource
-

Opportunity
Cost.


Opportunity Cost
-

is
What You Must Give
Up In Order to Get
That Item or
Resource.

For Any Economy as a
Whole, Income Must Equal
Expenditure. Therefore,
They Are the Same as For
Every Buyer There is a
Seller and What is an
Expenditure For One is
Income For the Other.


Our Economic Problem

Revisited


Limited resources versus
unlimited wants


There are NOT enough resources
to produce everything that
everyone wants


Therefore, CHOICES
must

BE
MADE!


Every
choice

KDV?DQ?´RSSRUWXQLW\?
FRVWµ?DVVRFLDWHG?ZLWK?LW?

2
-
10

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

Opportunity Cost: An Important,
Fundamental Concept in Economics


Because we cannot have
everything we want, we must
make choices


The thing we give up (our second
-
best choice) is called the
opportunity cost

of our choice


This is the foregone value of the next
best alternative


In the economic world, “
both
µ?LV?
not an admissible answer to a
FKRLFH?RI?´
which one
µ

2
-
11

Copyright

2008 by The McGraw
-
Hill Companies, Inc. All rights reserved.

Our Book


Introduces The Concept
of Marginal Decision
Where it is Not All or
Nothing. The Decision
Becomes How Much or
Little To Allocate
Between Your Choices.

Incentives


Incentives
-

Are
Anything Offered as a
Reward To Make
People Change Their
Behavior or Choices.

Trade


There Are Always
Advantages to Trade As
It Allows People or
Nations To Do What They
Do Best and Benefit From
More Goods and Services.

Specialization


Specialization
-

is
Each Person or
Economy Doing What
They Are Best At
Doing.

Equilibrium


Equilibrium
-

is When
No Individual Would
Be Better Off Doing
Something Different.

Efficient


An Economy is
Efficient if it Takes All
Opportunities to Make
People Better Off
Without Making Other
People Worse Off.

Circular
-
Flow Diagram

Firms

Households

Markets For Factors


of Production

Markets For Goods


and Services

Factors of
Production

Goods and

Services Sold

Land, Labor

And Capital

Goods and

Services Bought

Wages, Rent and
Profit (=GDP)

Revenue (=GDP)

Spending

(= GDP)

Income (=GDP)

= Flow of Inputs and Outputs

= Flow of Dollars