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