dr Marek Szczepański

L.1 INRODUCTION TO

MACROECONOMICS

Contents

The economic problem

Opportunity cost

Definition of macroeconomics

Production possibility frontiers

The circular flow of goods and incomes

Positive and normative economics

The Economic ProblemEconomic problems

production and consumption

scarcity: the central economic problem

Macroeconomic issuesgrowth

unemployment

inflation

balance of trade deficits

cyclical fluctuations

The Economic ProblemIndividual choice: the core

of economics

Economics is about making choices.

What to buy?What to study?Where to live?

The Economic Problem

Choices in society,

national and global

economy.

Unlimited Wants

Scarce Resources –

Land, Labour,

Capital

Resource Use

The Economic ProblemThe key economic problem for society: how to reconcile the conflict

between people’s virtually limitless desires for goods and services and the scaricity of resources (labour, machinery, raw materials) with which these goods and services can be produced.

Economics explains how and for whom to produce, explains how scarce resources are allocated between compiting cliams of their use.

The Economic Problem

What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing?

How should goods and services be produced? – labour intensive, land intensive, capital intensive? Efficiency?

Who should get the goods and services produced? –even (equal) distribution? more for the rich? for those who work hard?

The economic problem

Opportunity cost

Definition of macroeconomics

Production possibility frontiers

The circular flow of goods and incomes

Positive and normative economics

The Economic ProblemWhy do individuals have

to make choices?Different alternatives.Limited income / budget.Limited time.Other limitations.

Opportunity CostThe concept of opportunity cost

crucial to understanding individual choice.

The real cost of an item is an oppotunity cost:

whtat we have to give up in order to get it.

Every choice we make means forgoing some other alternative.

„The real cost of something is what you must give up to get it”

(Krugman, Wells 2009 : 9)

Opportunity CostDefinition – the cost expressed in

terms of the next best alternative sacrificed

Helps us view the true cost of decision making

Implies valuing different choices

Individual chices: Summing upIndividuals have to make choices beceause

the resources are scarce.All costs are opportunity cost.People usually want to ecxploit the

possibilities to makres themselves better off (that’s

why they respond to incentives).

The economic problem

Opportunity cost

Definition of macroeconomics

Production possibility frontiers

The circular flow of goods and incomes

Positive and normative economics

Economics - definition

Economics is the study of how society decides

what

how

and for whom

to produce.

Goods (phisical commodities) and services

(activities).

Economics belongs to social sciences.

Macroeconomics - definitionMacroeconomics - the field of economics

that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

Macro- and microeconomicsMacroeconomics is focused on the movement

and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals.

The factors that are studied by macro and micro will often influence each other, such as the current level of unemployment in the economy as a whole will affect the supply of workers which an oil company can hire from, for example.

The economic problem

Definition of macroeconomics

Opportunity cost

Production possibility frontiers

The circular flow of goods and incomes

Positive and normative economics

Production Possibility FrontiersShow the different combinations of goods

and services that can be produced with a given amount of resources

No ‘ideal’ point on the curveAny point inside the curve – suggests

resources are not being utilised efficientlyAny point outside the curve – not attainable

with the current level of resourcesUseful to demonstrate economic growth and

opportunity cost

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

BY1

X1

Ym

Xm

Production Possibility Frontiers

Capital Goods

Consumer Goods

Yo

Xo

A

.B

CY1

X1

Production inside the PPF – e.g. point B means the country is not using all its resources

It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.

O

Growth in potential outputGrowth in potential outputF

oo

d

Clothing

Now

O

Fo

od

Clothing

Now

Growth in potential outputGrowth in potential output

5 years’ time

O

Fo

od

Clothing

Growth in potential and actual outputGrowth in potential and actual output

x

y

The economic problem

Definition of macroeconomics

Opportunity cost

Production possibility frontiers

The circular flow of goods and incomes

Positive and normative economics

The circular flow of income

Interactions in economies:

firms and households

goods markets

real flows: goods and services

money flows: consumer expenditure

The circular flow of goods and incomes

The circular flow of goods and incomesGoods and services

Goods and services

PLNConsumer

expenditure

The circular flow of goods and incomesThe circular flow of goods and incomes

Goods and services

PLNConsumer

expenditure

Services of factors of production (labour, etc)

The circular flow of goods and incomesThe circular flow of goods and incomes

The economic problem

Opportunity cost

Definition of macroeconomics

Production possibility frontiers

The circular flow of goods and incomes

Positive and normative economics

The Economic ProblemThe circular flow of income (cont.)

macroeconomic issues

the size of total flows

microeconomic issues

individual markets

choices within goods and factor markets

Positive and Normative Economics

Health care can be improved with more tax funding

Pollution control is effective through a system of fines

Society ought to provide homes for all

Any strategy aimed at reducing factory closures in deprived areas would be helpful

Positive Statements: Capable of being

verified or refuted by resorting to fact or further investigation

Normative Statements:Contains a value

judgement which cannot be verified by resort to investigation or research

Lecture 1 – SUMMARY (1/2)Economic analysis is based on simple

principles: - understanding how individual people make

choices - understanding how these choices interact - how het economy functions overallThe reason for making choices is scarcity of

resuorces.The true cost of antyting is an alternative cost

(what you must give up). A trade-off different opportunities.

Interactions – the choices of consumes interact the choices od producers – and vive versa.

Lecture 1 – SUMMARY (2/2)One person’s spending is antother persons

income.People expliot opportunities to make

themselves better of.A trade-off in het overall economy:

production possibilities frontier.