Modules 1 3 Introduction to Economics Macroeconomics Production

Modules 1 -3 Introduction to Economics & Macroeconomics Production Possibilities Curve

Key Assumptions in Economics • People are rationally self-interested • They seek to maximize their utility • People generally make decisions “at the margin” • They weigh the marginal benefit against the marginal cost of a decision • Ex) Should I buy 1 taco or 2? 5 donuts or 6? 10 gallons of gas or 11? • Ceteris Paribus • Economists hold factors constant, except for what’s being considered

Ceteris Paribus

Ceteris Paribus

Basic Vocabulary • Economics: the study of choices people make to satisfy their needs & wants • Microeconomics: the study of how individuals & firms deal with scarcity • Macroeconomics: the study of how a society deals with scarcity • Needs: necessities for survival • Wants: goods & services consumed beyond what is necessary for survival

Basic Vocabulary • Goods: physical objects that can be purchased • Services: actions or activities performed for a fee • Consumers: people who purchase goods & services • Producers: people who supply goods & services

Resources (Factors of Production) Resource: anything that can be used to produce something else; classified resources into 4 categories Resource Type Definition Payment Land Natural resources Rent Labor Human resources Wages Capital (a product of Investment) Tools, machines, factories… all manufactured goods used to make other goods/services Interest Entrepreneurship The special ability of risk-takers to combine land, labor & capital in new ways to make profit Profit

Types of Economies • 2 types of economies • Market: there is no central authority making production & consumption decisions; they are made by firms & individuals • Ex) US • Command: there is a central (government) authority making production & consumption decisions; industry is publicly (government) owned • ex) USSR

Types of Economic Analysis • 2 types of economic analysis • Positive: describes the way the economy actually works; has right & wrong answers • Normative: makes prescriptions (recommendations) about the way the economy should work • Ex) NTTA is considering ↑ the toll on PGBT by $0. 50 • How much revenue would tolls bring next year without an ↑? • How much revenue would tolls bring next year with an ↑? • Should the toll be raised, knowing that it would likely reduce traffic but bring financial hardship to some drivers?

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Fundamental Problem of Economics: Scarcity • People have unlimited wants, but the resources to satisfy those wants are scarce • Thus, we must make choices about how to use our scarce resources • We face trade-offs when it comes to using available resources

Fundamental Problem of Economics: Scarcity Ex) Assume flour is a scarce resource; 3 cups of flour can be used to make a loaf of bread or a cake, but 3 cups cannot be used to make both OR

Opportunity Cost • Once a resource (a factor of production) has been used, an opportunity cost is incurred • Opportunity cost: the next best alternative use for a resource • Ex) If the 3 cups of flour are used to bake bread, the opportunity cost is the cake that could have been baked with the 3 cups of flour • No matter what we do with our time or resources, we always incur opportunity cost…TINSTAAFL!

TINSTAAFL! There is no such thing as a free lunch! Everything has a cost/trade-off/opportunity cost!

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Trade-Offs Illustrated: PPC Production Possibilities Curve/Frontier: Shows all of the possible combinations of output & the trade-offs in an economy fully using all of its resources & only producing 2 goods

all points along the line are “productively efficient” unless the society imports resources

Increasing Opportunity Costs = Increasing Slope PPC’s slope = opportunity cost for the X-axis good in terms of the Y-axis good As more fish are produced, its opportunity cost rises

Types of Efficiency • Productive: when an economy is at ANY point along the PPC • Allocative: when an economy is at THE SPECIFIC point along the PPC that best fits the demands of its consumers

Business Cycle • The US’ GDP is not constant from year to year; it grows in most years & shrinks in some • The upturns & downturns in GDP over time = the business cycle

Business Cycle • Peak • Temporary max in output (real GDP) & employment • Unemployment low & inflation high • Recession • Output (real GDP) & employment falling • By definition, must last for at least 6 months • Depression: deep, prolonged economic downturn • Trough • Bottom of cycle • Unemployment high & inflation low • Recovery/Expansion • Output (real GDP) & employment rising

Business Cycle • Causes • Irregularity of investment • Changes in productivity & spending • Durable goods industries have been most susceptible to the cycle’s effects • Has become less severe over time (macroeconomics)

Business Cycle • Labor force: employment + unemployment • Employment: total # of people currently working for pay • Unemployment: total # of people actively looking for work but not currently employed • Unemployment rate: % of the labor force that is unemployed • Output: quantity of goods & services produced • Aggregate output: an economy’s total production of goods & services for a given time period, usually a year

Business Cycle • During a recession, unemployment ____ & output ____ • During a recovery/expansion, unemployment ____ & output ____ • Within the business cycle, unemployment & output move in ____ directions

Business Cycle • Price level (PL): assesses prices of goods & services across a society • Inflation: rise in overall PL • Deflation: fall in overall PL • Price stability: overall PL is changing very slowly or not at all; helps keep the economy stable • Economic growth: increase in the max possible output (real GDP) of a society; leads to higher wages & standard of living

Economic Growth 2 sources of economic growth: 1) Increase in LLC or E 2) Technological progress

Gross national product (GNP) • The dollar value of all final goods, services, and structures produced within a country’s borders 12 -month period.