Lecture note 1a_unit1

(1)

Eco 1001-

Introduction to

Macroeconomics

(2)

2 of

36

(3)

THE SCOPE AND METHOD OF

ECONOMICS

(4)

WHY STUDY ECONOMICS?

There are four main reasons to study economics:

• _{to learn a way of thinking,}

• _{to understand society,}

• _{to understand global affairs, and}

• _{to be an informed voter.}

(5)

WHY STUDY ECONOMICS?

Three fundamental concepts:

Opportunity cost

Marginalism

, and

(6)

WHY STUDY ECONOMICS?

opportunity cost

The best alternative

that we forgo, or give up, when we

make a choice or a decision.

6 of

36 scarce

Limited.

(7)

WHY STUDY ECONOMICS?

Marginalism

The process of analyzing

the additional or incremental costs or

benefits arising from a choice or

decision.

Sunk costs

Costs that cannot

be avoided, regardless of what is

done in the future, because they

have already been incurred.

(8)

WHY STUDY ECONOMICS?

Efficient market

A market

in which profit opportunities are

eliminated almost instantaneously.

8 of

36

(9)

WHY STUDY ECONOMICS?

Industrial Revolution

The

period in England during the late

eighteenth and early nineteenth

centuries in which new manufacturing

technologies and improved

transportation gave rise to the modern

factory system and a massive

movement of the population from the

countryside to the cities.

(10)

WHY STUDY ECONOMICS?

10 of

36 TO UNDERSTAND GLOBAL AFFAIRS

The events of September

11, 2001, dealt a blow to the

tourism industry and left

(11)

WHY STUDY ECONOMICS?

TO BE AN INFORMED VOTER

A knowledge of economics is

(12)

THE SCOPE OF ECONOMICS

microeconomics

The branch of economics that

examines the functioning of individual industries and the

behavior of individual decision-making units—that is,

business firms and households.

12 of

36 MICROECONOMICS AND MACROECONOMICS

macroeconomics

The branch of economics

that examines the economic behavior of

(13)

THE SCOPE OF ECONOMICS

TABLE 1.1

Examples of Microeconomic and Macroeconomic Concerns

DIVISION OF

ECONOMICS

PRODUCTION

PRICES

INCOME

EMPLOYMENT

Microeconomics Production/output in individual industries and businesses

How much steel How much office space

How many cars

Price of individual goods and services

Price of medical care Price of gasoline Food prices Apartment rents

Distribution of income and wealth

Wages in the auto industry Minimum wage Executive salaries Poverty Employment by individual businesses and industries

Jobs in the steel industry

Number of employees in a firm

Number of accountants

Macroeconomics National

production/output

Aggregate price level

National income Employment and unemployment in the economy

(14)

THE METHOD OF

ECONOMICS

Positive economics

An approach to economics

that seeks to understand behavior and the

operation of systems without making

judgments. It describes what exists and how it

works.

14 of

36

(15)

Consider the following

statements

• _{The rate of inflation is greater this year than last year}

• _{Jamaica’s rate of growth is greater than Barbados’}

• _{Manchester united deserve to win the league this year}

• _{Old age pensions ought to be increased}

• _{Jamaica has a deficit on the balance of payments}

• Raising the minimum wage will lower employment of high

school age workers.

• _{Raising the minimum wage is the best way to get families out}

of poverty.

(16)

THE METHOD OF

ECONOMICS

16 of

36 descriptive economics

The

compilation of data that describe

phenomena and facts.

Descriptive Economics and Economic Theory

economic theory

A statement or set of

related statements about cause and

(17)

THE METHOD OF

ECONOMICS

model

A formal statement of a theory,

usually a mathematical statement of a

presumed relationship between two or

more variables.

variable

A measure that can change

from time to time or from observation to

observation.

(18)

THE METHOD OF

ECONOMICS

18 of

36 Ockham’s razor

The principle that

irrelevant detail should be cut away.

(19)

THE METHOD OF

ECONOMICS

ceteris paribus

,

or

all else equal

A

device used to analyze the relationship

between two variables while the values

of other variables are held unchanged.

(20)

THE METHOD OF

ECONOMICS

20 of

36 The most common method of expressing

the quantitative relationship between two

variables is graphing that relationship on

a two-dimensional plane.

(21)

THE METHOD OF

ECONOMICS

Cautions and Pitfalls

The

Post Hoc

Fallacy

The post hoc fallacy

is the incorrect

belief that because event B occurs after

event A then A caused B.

A common error made in thinking

about causation: If Event A happens

(22)

THE METHOD OF

ECONOMICS

22 of

36 The Fallacy of Composition

fallacy of composition

The erroneous

belief that what is true for a part is

(23)

THE METHOD OF

ECONOMICS

empirical economics

The

collection and use of data to test

economic theories.

(24)

THE METHOD OF

ECONOMICS

24 of

36 ECONOMIC POLICY

Criteria for judging economic outcomes:

1. Efficiency

(25)

THE METHOD OF

ECONOMICS

efficiency

In economics,

allocative efficiency. An efficient

economy is one that produces

what people want at the least

possible cost.

Efficiency

equity

Fairness.

(26)

THE METHOD OF

ECONOMICS

26 of

36 economic growth

An increase in

the total output of an economy.

Growth

stability

A condition in which

national output is growing steadily,

with low inflation and full

employment of resources.

(27)

Appendix

A

time series graph

shows how a single

variable changes over

time.

TIME SERIES GRAPH