Popular in Macroeconomic Principles
Popular in Macro Economics
This 4 page Class Notes was uploaded by Tori Busa on Thursday September 15, 2016. The Class Notes belongs to ECON 1101 at Temple University taught by SWANN in Fall 2016. Since its upload, it has received 2 views. For similar materials see Macroeconomic Principles in Macro Economics at Temple University.
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Date Created: 09/15/16
Macroeconomics Chapter 1- What is Economics? Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Economics divides in two main parts: 1. Microeconomics 2. Macroeconomics All economic questions arise because we want more than we can get. Our inability to satisfy all our wants is called scarcity. Because we face scarcity, we must make choices. The choices we make depend on the incentives we face. An incentive is a reward that encourages an action or a penalty. Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. Example: Why are people buying more e-books and fewer hard copy books? Macroeconomics is the study of the performance of the national and global economies. Example: Why is the unemployment rate in the United States so high? 2 BIG QUESTIONS 1. How do choices end up determining what, how, and for whom goods and services get produced? 2. When do choices made in the pursuit of self-interest also promote the social interest? What? How? and for Whom? What goods and services are the objects that people value and produce to satisfy human wants How goods and services are produced by using productive resources that economists call factors of production Factors of Production 1. Land- “gifts of nature” that we use to produce goods and services 2. Labor- quantity= labor force and quality= human capital and skills and knowledge 3. Capital- physical= stock of equipment, buildings and financial= important but not in production function 4. Entrepreneurship - human resource that organizes creation, innovation, risk- taking, intellectual capital Macroeconomics For whom? Who gets the goods and services depends on incomes people earn? Land earns rent Labor earns wages Capital earns interest Entrepreneurship earns profit Self-Interest: You make choices that are in your self-interest—choices that you think are best for you. Social Interest: Choices that are best for society as a whole are said to be in the social interest. Social interest has two dimensions: 1. Efficiency 2. Equity Efficiency: Resource use is efficient if it is not possible to make someone better off without making someone else worse off. 1. Product efficiency- cost minimizing choices 2. Allocate efficiency- maximizing choices my consumers and firms Equity: is fairness, but economists have a variety of views about what is fair. Issue of how even an efficient market allocates income/wealth Fair Shares and Social Interest The idea that the social interest requires “fair shares” is a deeply held one. But what is fair? tension between self-interest and social interest are: Globalization-Globalization means the expansion of international trade, borrowing and lending, and investment. Globalization is in the self-interest of consumers who buy low-cost imported goods and services. Globalization is also in the self-interest of the multinational firms that produce in low-cost regions and sell in high-price regions. But is globalization in the self-interest of low-wage workers in other countries and U.S. firms that can’t compete with low-cost imports? The information-age monopolies- The technological change of the past forty years has been called the Information Revolution. The information revolution has clearly served your self-interest: It has provided your cell-phone, laptop, loads of handy applications, and the Internet. It has also served the self-interest of Bill Gates of Microsoft and Gordon Moore of Intel, both of whom have seen their wealth soar. Macroeconomics Climate Change-Climate change is a huge political issue today. Every serious political leader is acutely aware of the problem and of the popularity of having proposals that might lower carbon emissions Economic instability- In 2008, banks were in trouble. They had made loans that borrowers couldn’t repay and they were holding securities the values of which had crashed. Banks’ choices to take deposits and make loans are made in self- interest, but does this lending and borrowing serve the social interest? The economic way of thinking places scarcity and its implication, choice, at center stage. Making a Rational Choice A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice. Only the wants of the person making a choice are relevant to determine its rationality. Benefit: What you Gain The benefit of something is the gain or pleasure that it brings and is determined by preferences are what a person likes and dislikes and the intensity of those feelings. Cost: What you Must Give Up The opportunity cost of something is the highest-valued alternative that must be given up to get it. What is your opportunity cost of going to a live concert? Opportunity cost has two components: Opportunity cost= what you give up/ what you get 1. The things you can’t afford to buy if you purchase the concert ticket. 2. The things you can’t do with your time if you attend the concert. How Much? Choosing at the Margin You can allocate the next hour between studying and instant messaging your friends. The choice is not all or nothing, but you must decide how many minutes to allocate to each activity. To make this decision, you compare the benefit of a little bit more study time with its cost—you make your choice at the margin. Marginalism- individuals behave such that the additional (marginal) benefit of the choice just exceeds the additional (marginal) cost. rule of optimizing behavior: Marginal Benefit = Marginal Cost Macroeconomics The benefit from pursuing an incremental increase in an activity is its marginal benefit. The opportunity cost of pursuing an incremental increase in an activity is its marginal cost. If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity. Economists distinguish between two types of statement: 1. Positive statements- tested by checking it against facts. “what is” conclusion 2. Normative statements- expresses an opinion and cannot be tested. “what should be” Economists create and test economic models. An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. 1. Natural experiments 2. Statistical investigations 3. Economic experiments
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