Macroeconomics

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Macroeconomics

• Chapter 01 Scarcity and Choices

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Basic Economic Problem

• Scarcity
• Human wants exceed the production possible with
  the resources available
• Human wants are unlimited.
• Resources are limited.

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Scarcity and Economics

• Economics is studying how to allocate limited
  resources to try to satisfy unlimited wants.
• In dealing with scarcity, produce as much
  consumer satisfaction as possible with limited
  resources available.

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Resources

• Inputs that make production possible.
• Labor
• Land
• Capital
• Entrepreneurship

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Entrepreneurs

• Motivated by profit-maximization.
• Bear the risk of loss.
• Directed by profits (and losses) to allocate the
  resources they control into (and out of)
  different types of production.

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Resources and Self-interest

• In allocating limited resources, resource owners
  are motivated by self-interest.
• Per Adam Smith, resource owners pursuit of
  self-interest will generally serve the best
  interest of society.

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Rational Self-interest

• It is not from the benevolence of the butcher,
  the brewer, or the baker that we expect our
  dinner, but from the regard to their own
  interest.
• Adam Smith, An Inquiry into the Nature and
  Causes of the Wealth of Nations, 1776

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Resource Allocation

• In a competitive market, profit-maximization
  benefits society because it causes resource
  owners to

• direct their resources to the use that is most
  highly valued by consumers.
• use their resources as efficiently as possible.

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Choice and Opportunity Cost

• Scarcity forces people to make choices.
• Opportunity cost
• the value of the best alternative foregone (or
  surrendered) when a choice is made.

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Scarcity and Rationing

• Primary rationing device is dollar price.
• Dollar price rations resources to the use most
  highly valued by consumers
• Dollar price rations goods to consumers willing
  and able to pay the most.

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Marginal Benefits and Costs

• Economic decisions are made by comparing the
  marginal benefits of a choice with its marginal
  costs.
• Optimal level of activity occurs where

MB MC
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Scientific Thinking

• Realizing that association does not necessarily
  indicate causation.
• Avoiding the fallacy of composition.
• Distinguishing between positive and normative
  statements.
• Assuming ceteris paribus when examining the
  relationship between variables.

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Macro vs. Micro

• Macroeconomics
• focuses on overall economic behavior.
• big picture of national and global economies
• Microeconomics
• focuses on components of the economy.
• individual person, family, company, industry,
  etc.

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Graphs

• Illustrate relationship between two variables, X
  and Y.
• X axis and Y axis represent values of X variable
  and Y variable.

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Graph Example
Point X Y A 1 2 B 2
4 C 3 6 D 4 8 E
5 10
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Slope of a Curve

• Change in Y Change in X
• (Y2 Y1) (X2 X1)
• (4 2) (2 1) 2 1 2
• Positive slope (upward sloping curve) indicates a
  direct relationship between the variables.
• Negative slope (downward sloping curve) indicates
  an inverse relationship between the variables.