Macroeconomics 1

Topic 1: The Principles of Macroeconomics

 What is economics?
• Economics is the study of how society manages its scarce
resources

• In most societies, resources are allocated through the

combined choices of millions of households and firms

• Economics is divided into: Microeconomics vs.

Macroeconomics

2
 Microeconomics vs.
Macroeconomics
• Microeconomics
The study of how households
and firms make decisions and
how they interact in markets.
For e.g.: Microeconomics
focuses on individual markets,
examining how incentives and
trade-offs influence buyer and
seller behaviour
• Macroeconomics
The study of economy-wide
phenomena, including inflation,
unemployment, and economic
growth.
For e.g.: The setting of monetary
policy depends primarily on
macroeconomic factors
3
What economists do?
• Economists influence most economic policies concerning
taxes, interest rate, carbon tax, etc.

• Economists study how people make decisions: how much

households and firms work, what they buy, how much they
save and how they invest their savings.

• Economists also study how people interact with one

another and how the government interacts with each other.

4
What economists do? 2
• Economists may be asked to explain the causes of
economic events, or to recommend policies to improve
economic outcomes.

• Economists are experts:

o In government, the advice of economists can have a

significant impact on the development of public policy.

o In business, the advice of economists is important for

formulating corporate strategy.
5
 Importance of studying
economics
• Economics can be used in
everyday life, because we
study about decisions (of
individual, firm, and
government, etc.)

• Knowing how the economic

policy works will give you
extra competitive edges

6
 Why studying macroeconomics?
• Explain why some countries are rich and others are poor?

• Explain why prices change quickly in some period, but

more stable in other?

• Explain why do jobs grow in some years, but stagnate in

other years?

7
Core concepts
1. Scarcity/ Opportunity cost

2. Assumptions in economics

3. Positive vs. Normative statements

4. Circular flow diagram

5. Production Possibilities Frontier

8
 Opportunity cost
• Opportunity cost is the
best alternative that must
be given up to obtain some
item.

• For e.g.: What is the

opportunity cost of
choosing studying?

9
 Scarcity
• Scarcity refers to the limit
nature of society’s resources.
We encounter scarcity in
every decision we make

• For e.g.: Time is limit, but you

want to do many things.

• Can you guess the scare

resources in the picture?
10
 Scarcity 2
• A household must decide who does the chores and how to
allocate its scare resources

• Society must decide what jobs will be done and who will do
them. It must also allocate the goods and services that are
produced

• Management of society’s resources is important because

we cannot produce all the goods and services people wish
to have
11
There is no such thing as a
free lunch!

12
Economists as a scientist
• Economists try to approach problems with a scientist’s
objectivity.

• Observations inspire economic theory. In turn, economic

theory is tested by comparing theoretical predictions
against data gathered in the real world.

• While it is difficult to conduct economic experiments,

events in the real world give rise to natural experiments
that can be studied by economists.
13
 Role of assumption in
economics
• Many economic models involve unrealistic
assumptions.

• Assumptions help us to simplify complex situations,

focusing our attention on the details that are most relevant
to the problem at hand.

14
Role of assumption in
economics 2
• Using assumptions we can construct economic models to
learn about the world. Our models typically consist of
diagrams and equations.

• We might assume that there are only two goods in the

world, or that the firms and consumers in a market are
only concerned with what they buy and sell today.

15
All other things being the same

Read about Ceteris paribus

16
Question 1
On a graph showing the relationship between x and y, the
ceteris paribus condition implies that:

1. no other variables are related to x and y.

2. the value of x is held constant.

3. the value of y is held constant.

4. other variables not shown are held constant

17
Positive vs. Normative
statements
Positive statements are
claims that attempt to
describe the world as it is
Positive statements are
statements about facts
For e.g.: minimum wage
laws create
unemployment’.
Normative statements are
claims that attempt to
prescribe how the world should
be.
Normative statements depend
on both facts and values.
For e.g.: the minimum wage
should be raised’.
18
Why economists disagree?
• Economist do disagree about facts from time to time.

• These are disagreements about scientific judgement.

• A disagreement about public policy can come about when

economists hold different values, such as the appropriate
trade-off between equity and efficiency.

19
Circular flow diagram

Revenue (GDP) Spending (GDP)

Markets for
Goods & Services (G&S)
G&S sold G&S bought

Firms Households
Labour, land, capital
Input for production

Wage, rent & profits (GDP) Income (GDP)

Markets for Resources

20
Question 2
In the product market of the circular flow model,

1. Firms buy finished products from households

2. Consumers buy factors of production from firms

3. Firms sell factors of production to the government

4. Consumers buy finished products from firms

5. Firms buy factors of production from consumers

21
Production Possibilities Frontier
• How to achieve the greatest possible satisfaction of
society’s material wants given scarce resources?

• Represents the maximum possible combinations of

goods & services that can be produced with a given
quantity of factors of production and given
technology.

22
Production Possibilities Frontier
2

butter

10 A W
Unattainable

U
Attainable but not desirable
E
guns
4
23
Production Possibilities Frontier
3
butter

A
10 The opportunity cost of
B any activity is the
9 highest-valued
C alternative that must
7
be given up to engage
in the activity under
4 D consideration.

E
1 4 guns
2 3 24
Production Possibilities Frontier
4
• Any movement along the PPF involves the concept of
opportunity cost.

• Can only obtain more of one good by having less of the

other.

25
Economic Growth
• Over time PPF can move outwards.

• Achieved through economic growth.

• The following will push the PPF out:

o Capital accumulation.

o Technological progress.

o Increased resources

26
The PPF model has closed
your first week!!!

27