EC202- Macroeconomics. Aaron Jenkins Business Management Linn-Benton Community College Winter 2018

Transcription

1 EC202- Macroeconomics Aaron Jenkins Business Management Linn-Benton Community College Winter 2018

2 If not here, where would you be?

3 What s your opportunity cost?

4 Opportunity cost = highest valued alternative that you give up to do something

5 Why are you here? A potentially better future! As a college grad!

6 Scope & Purpose of Class Build an understanding of Economics Only an introduction to macroeconomic topics National income (GDP?!?!?) Employment Prices Banking system Role of govt and its policy Much more

7 A Which one is the top Economist in the U.S.? B

8 A Which one is the top Economist in the U.S.? B Ben Bernanke Federal Reserve Chair Janet Yellen Federal Reserve Chair present

9 Why study Economics? Understand better the world you live in, and the forces that shape it Make you a savvier participant in the economy More informed citizen/voter Potential & limits of economic policy

10 Did you know that Economic Sciences is a Nobel Prize category!

11 Paul Krugman 2008 Nobel Prize Winner

12 What is Economics? ECONOMICS: The science of how people, groups, and societies deal with scarcity. GOAL (of economic actors): Achieve happiness in a world of full of constraints.

13 Key Distinction Positive Analysis What is Vs. Normative Analysis What ought to be Economics positive analysis where costs and benefits of different policy options or life decisions are measured

14 Basic Motivation An economist assumes that a person s basic motivation is to be happy! Individuals act to make themselves as well off as possible (being rational ) HOW? cost-benefit analyses of their decisions What trade-offs do I face? What is my best option given my constraints?

15 Types of Constraints Resources (e.g., money) Time Technology Opportunity Cost

16 My Background Lived in Oregon for ~6 years 7 different U.S. states 16 different countries B.A. Literary Studies & Spanish Investment Firm Masters in Applied Econ (UWisc-Madison) Environmental Policy Think Tank OR Dept of Fish & Wildlife

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18 What about you? Name Where you re from Major Survey do at home

19 Review Syllabus in Moodle

20 Remember to check your LBCC and/or Announcements in Moodle

21 How to study the textbook?!?! Chapter Outline & Learning Objectives Section Titles Terms defined in the margins Chapter Summary & Problems 21

22 Economics 6 th edition 22 Chapter 1 Economics: Foundations and Models

23 23 Chapter Outline 1.1 Three Key Economic Ideas 1.2 The Economic Problem That Every Society Must Solve 1.3 Economic Models 1.4 Microeconomics and Macroeconomics 1.5 A Preview of Important Economic Terms Appendix Using Graphs and Formulas

24 24 What is this class about? People make choices as they try to attain their goals. Choices are necessary because we live in a world of scarcity. Scarcity: A situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics is the study of the choices people make to attain their goals, given their scarce resources. Economists study these choices using economic models, simplified versions of reality used to analyze real-world economic applications.

25 25 Some typical economics questions We will learn how to answer questions like these: How are the prices of goods and services determined? Why do countries trade with one another? How do we measure the strength of the economy? What is unemployment? Why is there unemployment when the economy is strong? What s the government s role in the economy?

26 1.1 Three Key Economic Ideas 26 We interact with one another in markets. Market: A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. In analyzing markets, we generally assume: 1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin

27 27 Examples of Markets? Smartphones Automobiles Textbooks Water Rentals Stock Labor

28 28 1. People are rational Rational: Using all available information to achieve your goals. Rational consumers and firms weigh the benefits and costs of each action, and try to make the best decision possible. Example: Apple doesn t randomly choose the price of its iphones; it chooses the price(s) that it thinks will be most profitable.

29 2. People respond to economic incentives 29 As incentives change, so do the actions that people will take. Example: When products go on sale--whether TVs or cars or cereal--people tend to buy more of them. Example: If I say that every student who attends the next class will automatically get an A, attendance will probably be 100%. however, once students know that they re guaranteed an A, then attendance for the remaining classes will drop, perhaps to 0%.

30 3. Optimal decisions are made at the margin 30 While some decisions are all-or-nothing e.g., do I open a business or not? -- most decisions involve doing a little more or a little less of something. Example: Should you watch an additional hour of TV, or study instead? Economists think about decisions like this in terms of the marginal cost and benefit (MC and MB): the additional cost or benefit associated with a small amount extra of some action. Comparing MC and MB is known as marginal analysis.

31 Which sort of thinking goes on in the mind of a hungry economist who has decided to satisfy his hunger by eating potato chips? 31 a. The economist will buy the largest bag of potato chips he can afford, and eat the whole thing, without wasting anything. b. The economist will stop after each additional chip is consumed and examine the benefit and cost of that potato chip before continuing on to the next one. c. The economist would eat as many potato chips as are available in a world of scarcity. d. The economist will eat potato chips only after determining that all alternative munchies are less preferred to potato chips.

32 1.2 The Economic Problem That Every Society Must Solve 32 In a world of scarcity, we have limited economic resources to satisfy our desires. Therefore we always face trade-offs. Trade-off: The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

33 1. What goods and services will be produced? 33 Individuals, firms, and governments must decide on the goods and services that should be produced. An increase in the production of one good requires the reduction in the production of some other good. This is a trade-off, resulting from the reality that productive resources are finite. The highest-valued alternative given up in order to engage in some activity is known as the opportunity cost. Example (Govt): the opportunity cost of increased funding for space exploration might be decreased funding for cancer research.

34 34 2. How will the goods be produced? A firm might have several different methods for producing its goods and services. Example #1: A music producer can make a song sound good by Hiring a great singer, and using standard production techniques; Hiring a mediocre singer, and using Auto-Tune to correct the inaccuracies.

35 35 2. How will the goods be produced? A firm might have several different methods for producing its goods and services. Example #2: If the cost of workers increases, a firm might respond by Changing its production technique to one that employs more machines and fewer workers Moving its factory to a location with cheaper labor (e.g., China)

36 3. Who will receive the goods and services produced? 36 The way we are most familiar with in the United States is that people with higher incomes obtain more goods and services. Changes in tax and welfare policies change the distribution of income; though people often disagree about the extent to which this redistribution is desirable.

37 37 Types of economies Centrally planned economy: An economy in which the government decides how economic resources will be allocated. Market economy: An economy in which the decisions of households and firms interacting in markets allocate economic resources. Mixed economy: An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources. Example countries for each?

38 38 Efficiency of economies Market economies tend to be more efficient than centrally-planned economies. Market economies promote: Productive efficiency, where goods or services are produced at the lowest possible cost; and Allocative efficiency, where production is in accordance with consumer preferences; E.g., jeans & Soviet Union

39 39 Source of economic efficiency Productive efficiency comes about because of competition. Allocative efficiency arises due to voluntary exchange Voluntary exchange: A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction. Each transaction that takes place improves the well-being of the buyer and seller; transactions continue until no further improvement can take place. Examples?

40 40 Caveats about market economies Markets may not result in fully efficient outcomes. For example: People or firms might not immediately do things in the most efficient way Ex: Blu-Ray players high cost at first Market outcomes might ignore the well-being of people who are not involved in transactions Ex: Pollution from coal plant

41 41 Market economies and equity Economically efficient outcomes are not necessarily the most desirable. Less efficient outcomes may be more fair or equitable. Equity: The fair distribution of economic benefits. Harder to define than efficiency. Can mean different things to different folks. An important trade-off for a government is that between efficiency and equity. Example: If we tax income, in theory people might work less or open fewer businesses; however, those tax receipts can fund programs that aid the poor.

42 1.3 Economic Models 42 Describe the role of models in economic analysis Economists develop economic models to analyze real-world issues. Building an economic model often follows these steps: 1. Decide on the assumptions to use in developing the model. 2. Formulate a testable hypothesis. 3. Use economic data to test the hypothesis. 4. Revise the model if it fails to explain the economic data well. 5. Retain the revised model to help answer similar economic questions in the future.

43 43 Important features of economic models Models are simplifications of reality that include only essential elements and exclude less relevant details. Assumptions and simplifications: every model needs them in order to be useful. Testability: good models generate testable predictions, which can be verified or disproven using data. Economic variables: something measurable that can have different values, such as the incomes of doctors or revenues of tech companies.

44 44 Positive and normative analysis Economists try to mimic natural scientists by using the scientific method. But economics is a social science; studying the behavior of people is often tricky. When analyzing human behavior, we can perform: Positive analysis: analysis concerned with what is Normative analysis: analysis concerned with what ought to be Economists mostly perform positive analysis.

45 Making the Connection: Should medical school be free? 45 Forecasts indicate a significant shortage of doctors, especially primary care physicians, by Why? High costs of medical school may: Prevent some people from becoming doctors Lead people to pursue lucrative specialties instead of primary care (student debt) Would more people become primary care physicians if medical school were free? And if so, would it be worth the cost? Economic models can find answers to the positive aspects of this debate.

46 1.4 Microeconomics & Macroeconomics 46 Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

47 Table 1.1 Issues in Microeconomics and Macroeconomics 47

48 1.5 A Preview of Important Economic Terms (p.17-18) 48 Like all fields of study, economics uses terms or jargon with specific, precise meanings. Sometimes these terms will be familiar but used in a different way in economics. Examples: Technology: the processes a firm uses to produce goods and services Firm = company = business Capital: physical, not financial capital. Manufactured goods that are used to produce other goods and services. E.g., computers, factory buildings, machine tools

49 Appendix: Using Graphs and Formulas 49 Use graphs and formulas to analyze economic situations A map is a simplified model of reality, showing essential details only. Economic models, with features like graphs and formulas, can help us understand economic situations just like a map helps us to understand the geographic layout of a city.

50 Figure 1A.1 Bar Graphs and Pie Charts 50 Panel (a) shows a bar graph of market share data for the U.S. automobile industry; market share is represented by the height of the bar. Panel (b) shows a pie chart of the same data; market share is represented by the size of the slice of the pie.

51 Figure 1A.2 Time-Series Graphs 51 Both panels present time-series graphs of Ford Motor Company s worldwide sales during each year from 2001 to Panel (b) has a truncated scale on the vertical axis, and panel (a) does not. As a result, the fluctuations in Ford s sales appear smaller in panel (a) than in panel (b).

52 52 Formula for a percentage change One important formula is the percentage change, which is the change in some economic variable, usually from one period to the next, expressed as a percentage. Percentage change Value in the second period Value in the first period Value in the first period 100

53 Figure 1A.6 Graphing the Positive Relationship between Income and Consumption 53 Positive relationship between two economic variables--as one variable increases, the other variable also increases. In a negative relationship, as one variable increases, the other decreases.

54 Curved Exam Score Scatterplot - Midterm Score X Quiz Score 100% n = 26 80% 60% 40% 20% 0% y = x R² = Quiz Score Avg (%)