Welcome to ECON 2301Principles of

Macroeconomics

Dr. Frank JacobsonMr. 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

2-3Copyright 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

2-5Copyright 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.

• Owners of land receive “rent”2-6Copyright 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

2-7Copyright 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 call “capital”

• 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

2-8Copyright 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

2-9Copyright 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

2-4Copyright 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 has an “opportunity cost” associated with it!

2-10Copyright 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” is

not an admissible answer to a choice of “which one”

2-11Copyright 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