View
4.350
Download
4
Embed Size (px)
DESCRIPTION
Week 1: Introduction to Economics
Citation preview
MacroeconomicsWeek 1
Everyday Economics
1 www.investopedia.com
“ECONOMICS IS LIFE IN GRAPHS”Economics relates to your everyday lives.
Economics is the study of our choices.POP QUESTION
How Economics can help you as a person or student?
Why study and understand Economics?
1 www.investopedia.com
FOUR (4) REASONS
1. Learn a Way of Thinking- opportunity cost- marginalism and sunk costs- efficient markets
2. To understand the society- Industrial and dot.com revolutions- Front page analysis
3. To understand global affairs4. To be an informed citizen
What is ECONOMICS?
ECONOMICSis social science that studies how individuals, governments, firms, and nations make optimal choices on allocating scarce resources to satisfy their unlimited wants1
1 www.investopedia.com
Economic Way of Thinking
Limits, Alternatives, and Choices
SCARCITYis the limitation of economic resources to fulfill infinite human needs and wants. Why is there scarcity? The main explanation lies in the fact that man’s wants and needs are unlimited, while the actual goods and services that can satisfy those needs are limited.
Economic Way of Thinking
Limits, Alternatives, and ChoicesMARGINALISMIn economics, “marginal” means “extra,” “additional,”, or a “change in.”MARGINAL BENEFIT (MB)refers to what people are willing to give up in order to obtain one more unit of a good.MARGINAL COST (MC)refers to the value of what is given up in order to produce the additional unit.
Additional units of a good should be produced as long
as MB > MC
Efficient level is where:
MB = MC
Theories, Principles, and ModelsScientific Method
Observation of real-
world behavior
and outcomes
Formulation of
hypothesis or possible explanation
of cause and effect
Testing of hypothesis
The acceptance, rejection,
or modificatio
n of the hypothesis
The continued testing of
the hypothesis against the
facts
Economic Way of Thinking
Economic PrinciplesECONOMIC LAW OR PRINCIPLEis a well-tested and widely accepted theory. It is a statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.Other-Things-Equal Assumption is an assumption that factors other than those being considered do not change. It is also called in Latin ceteris paribus.
FIELDS OF ECONOMICS
TABLE 1.1 Examples of Microeconomic and Macroeconomic Concerns
Divisionsof Economics Production Prices Income Employment
Microeconomics Production/output in individual industries and businesses How much steelHow much office spaceHow many cars
Price of individual goods and services
Price of medical carePrice of gasolineFood pricesApartment rents
Distribution of income and wealth
Wages in the auto industryMinimum wageExecutive salariesPoverty
Employment by individual businesses and industries
Jobs in the steel industryNumber of employees in a firmNumber of accountants
Macroeconomics National production/output
Total industrial outputGross domestic productGrowth of output
Aggregate price level
Consumer pricesProducer pricesRate of inflation
National income
Total wages and salaries Total corporate profits
Employment and unemployment in the economy
Total number of jobsUnemployment rate
Microeconomics and Macroeconomics (from Economics by Case and Fair, 9th Ed.)
FIELDS OF ECONOMICS
MICROECONOMICSBranch of economics concerned with individual units of such as a person, a household, a firm, or an industry.
FIELDS OF ECONOMICS
MACROECONOMICSBranch of economics that examines either the economy as a whole or its basic subdivisions or aggregates, such as government, household, and business sectors.
Positive and Normative Economics
POSITIVE ECONOMICSfocuses on facts and cause-and-effect relationships. It concerns the description and explanation of economic phenomena and includes description, and theory testing.
NORMATIVE ECONOMICSincorporates value judgments about what economy should be like or what particular policy actions should be recommended to achieve a desirable goal. It is that which makes a resolution about what should or ought to be.
Minimum wage laws
cause unemployme
nt.
The government should raise the minimum
wage.
INDIVIDUAL’s ECONOMIZING PROBLEM
LIMITED INCOMEWe all have finite amount of income, even the wealthiest among us.
UNLIMITED NEEDS AND WANTSMan has infinite needs and wants that keep on evolving over time. We desire various goods and services that provide utility.
BASIC NEEDS
ESSENTIAL NEEDS
LUXURY NEEDS
CREATED WANTS
INDIVIDUAL’s ECONOMIZING PROBLEM
TRADE OFFS and OPPORTUNITY COSTSIt is the value of the next best alternative forgone as the result of making a decision. To obtain more of one thing, one should forgo the opportunity of getting the next best thing. That sacrifice is the opportunity cost of the choice.
Consumption Possibilities: The Case of Pizza and Pasta
SCHEDULE OF CONSUMPTION POSSIBILITIESAlternative Pizza
(Price=Php20.00/slice)
Pasta(Price=Php10.00/
plate)
Total Expenditure (in
Php)
A 6 0 120B 5 2 120C 4 4 120D 3 6 120E 2 8 120F 1 10 120G 0 12 120
INDIVIDUAL’s ECONOMIZING PROBLEM
TRADE OFFS and OPPORTUNITY COSTSIt is the value of the next best alternative forgone as the result of making a decision. To obtain more of one thing, one should forgo the opportunity of getting the next best thing. That sacrifice is the opportunity cost of the choice.
BUDGET LINE
SOCIETY’s ECONOMIZING PROBLEM
FACTORS OF PRODUCTION
LAND LABOR
CAPITAL ENTREPRENUR
LAND consists of all natural resources (or gifts of nature) and all other forms of these raw materials used in production of resources.
LABOR comprises all human beings (physical and mental talents) who extract raw materials, process these materials into finished consumption or investment goods, transport and sell raw materials or finished products, or are engaged in services.
CAPITAL materials such as tools, machinery, and equipment which man uses to extract and process raw materials into finished goods.
ENTREPRENEUR is a person who puts together or organizes the other factors of production to make a needed goods and services.
SOCIETY’s ECONOMIZING PROBLEM
PRODUCTION POSSIBILITY MODELis a macroeconomic model of production possibilities. It begins with the following assumptions:
Full employment or use of all available resources. Fixed resources. Fixed technology or constant technology. Two goods are only produced in the economy.
SOCIETY’s ECONOMIZING PROBLEM
PRODUCTION POSSIBILITY TABLE AND CURVEshow the different combinations of two products that can be produced by an economy with specific resources, assuming full employment. At any point in time, a fully employed economy must sacrifice some of one good to obtain more of another good.
Production Possibilities Table
Production Alternatives
Type of Good A B C D E
Butter (in hundred '000) 0 1 2 3 4
Guns (in '000) 10 9 7 4 0
SOCIETY’s ECONOMIZING PROBLEM
PRODUCTION POSSIBILITY CURVErepresents “constraint” or limitation of attainable outputs. Points along the curve are attainable as long as the economy uses all its available resources. Points lying inside the curve are also attainable but they reflect less total output and could have produced more goods if it achieved full employment of resources.
Points outside the curve represent greater output that the current output but it is not attainable given the availability of resources.
SOCIETY’s ECONOMIZING PROBLEM
LAW OF INCREASING OPPORTUNITY COSTillustrates as the production of a particular good increases, the opportunity cost of producing an additional unit rises. OPTIMAL ALLOCATIONadditional benefit is equal to additional cost
OPTIMAL ALLOCATION:
MB = MC
GRAPHS AND THEIR MEANINGCONSTRUCTION OF A GRAPHGRAPH is a visual representation of the relationship between two variables.
Independent Variableis the presumed to affect or determine the dependent variable or the source.
Dependent Variableis one that changes accordingly to any change in the independent variable or the effect or outcome.
GRAPHS AND THEIR MEANINGRELATIONSHIPS
Direct Relationshipor Positive Relationship means that two variables move in the same direction. This has an upward sloping line.
Inverse Relationship or Negative Relationship means the two variables move in opposite direction. This has a downward sloping line.
GRAPHS AND THEIR MEANINGSLOPES of GRAPHSis the ratio of the vertical change (rise) to the horizontal change (run) (or rise over run)
Slope = vertical change horizontal change
b = y2 – y1
x2 – x1
Positive Slopevariables change in the same directionNegative Slopevariables change in different direction
GRAPHS AND THEIR MEANING
SLOPES of GRAPHSis the ratio of the vertical change (rise) to the horizontal change (run) (or rise over run)
Infinite SlopeNegative Slope
VERTICAL INTERCEPTof a line is where the line meets the vertical axis.
GRAPHS AND THEIR MEANING
EQUATION OF A LINEAR RELATIONSHIP
y=a + bx
where:y =dependent variablea =vertical interceptb = slope of linex = independent variable
GRAPHS AND THEIR MEANING
SLOPE AND MARGINAL ANALYSIS
To measure the slope at a specific point, we draw a straight line tangent to the curve at one point. A line is tangent at a point if it touches, but does not intersect, the curve at that point.
27 of 50
HOW TO READAND UNDERSTAND GRAPHS
A P P E N D I X
TIME SERIES GRAPHS
TABLE 1A.1 Total Disposable Personal Income in the United States, 1975–2006 (in billions of dollars)
Year
Total DisposablePersonal Income Year
Total DisposablePersonal Income
1975197619771978197919801981198219831984198519861987198819891990
1,181.41,299.9 1,436.01,614.8 1,808.2 2,019.8 2,247.9 2,406.82,586.02,887.63,086.53,262.53,459.53,752.44,016.34,293.6
1991199219931994199519961997199819992000200120022003200420052006
4,474.84,754.64,935.35,165.45,422.65,677.75,968.26,355.66,627.47,120.27,393.27,827.78,159.98,646.98,945.69,501.5 FIGURE 1A.1 Total Disposable
Personal Income in the United States: 1975–2006 (in billions of dollars)
28 of 50
GRAPHING TWO VARIABLES ON A CARTESIANCOORDINATE SYSTEM
Appendix
FIGURE 1A.2 A Cartesian Coordinate System
HOW TO READ AND UNDERSTAND GRAPHS
A P P E N D I X
A Cartesian coordinate system is constructed by drawing two perpendicular lines: a vertical axis (the Y-axis) and a horizontal axis (the X-axis). Each axis is a measuring scale.
29 of 50
A graph is a simple two-dimensional geometric representation of data. This graph displays the data from Table 1A.2. Along the horizontal scale (X-axis), we measure household income. Along the vertical scale (Y-axis), we measure household consumption.Note: At point A, consumption equals $19,120 and income equals $9,676. At point B, consumption equals $28,921 and income equals $25,546.
TABLE 1A.2 Consumption Expendituresand Income, 2005
Average IncomeBefore Taxes
Average ConsumptionExpenditures
Bottom fifth2nd fifth3rd fifth4th fifthTop fifth
$ 9,67625,54642,62267,813
147,737
$ 19,12028,92139,09854,35490,469
FIGURE 1A.3 Household Consumption and Income
PLOTTING INCOME AND CONSUMPTION DATAFOR HOUSEHOLDS
HOW TO READ AND UNDERSTAND GRAPHS
A P P E N D I X
30 of 50
SLOPE
HOW TO READ AND UNDERSTAND GRAPHS
A P P E N D I X
A positive slope indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y.
FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope
2 1
2 1
Y YY
X X X
A negative slope indicates the opposite—when X increases, Y decreases and when X decreases, Y increases.
31 of 50
Refer to the figure below. The expression of the slope of the line between points A and B equals:
a.
b.
c.
d.
e.
Y Y
X X2 1
2 1
Y X
Y X2 2
1 1
X X
Y Y2 1
2 1
X Y
Y X2 1
2 1
X X
Y Y2 1
1 2
32 of 50
Refer to the figure below. The expression of the slope of the line between points A and B equals:
a.
b.
c.
d.
e.
Y YX X
2 1
2 1
Y X
Y X2 2
1 1
X X
Y Y2 1
2 1
X Y
Y X2 1
2 1
X X
Y Y2 1
1 2
33 of 50 FIGURE 1A.5 Changing Slopes Along Curves
HOW TO READ AND UNDERSTAND GRAPHS
A P P E N D I X
34 of 50
Refer to the figure below. According to this graph, the relationship between hours of study time and points on the exam is as follows:
a. The relationship is first positive and then it turns negative.b. Positive but diminishing.c. Positive and increasing.d. Negative. e. Nonexistent.
35 of 50
Refer to the figure below. According to this graph, the relationship between hours of study time and points on the exam is as follows:
a. The relationship is first positive and then it turns negative.b. Positive but diminishing.c. Positive and increasing.d. Negative. e. Nonexistent.
36 of 50
It is important to think carefully about what is represented by points in the space defined by the axes of a graph. In this graph, we have graphed income with consumption, as in Figure 1A.3, but here each observation point is national income and aggregate consumption in different years, measured in billions of dollars.
TABLE 1A.3 Aggregate National Income and Consumption for the United States, 1930–2006 (in billions of dollars)
Aggregate National Income Aggregate Consumption
19301940195019601970198019902000200420052006
$ 75.681.1
241.0427.5837.5
2,243.04,642.17,984.4
10,306.810,887.611,655.6
$ 70.271.2
192.7332.3648.9
1,762.93,831.56,683.78,195.98,707.89,224.5
FIGURE 1A.6 National Income andConsumption
SOME PRECAUTIONS
A P P E N D I X
37 of 50
Cartesian coordinate system
graph
negative relationship
origin
positive relationship
slope
time series graph
X-axis
X-intercept
Y-intercept
REVIEW TERMS AND CONCEPTS