Lecture 1

Macroeconomics Introduction

abdul-Ghaffar

Institute of Management Sciences, HayatAbad

Lecture 1
a) K.E. Case and R. C. Fair view that economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices b) David N. Hyman defined economics as a study of how scarce resources are allocated among alternative uses c) Economics is a science that studies human behavior as a relationship between ends and scarce, which have alternative uses, according to L. Robbins
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The Scope of Economics
Microeconomics deals with individual units; a household, a firm and an industry. Studies the interrelationship between these units to determine the pattern of distribution of goods and services Macroeconomics looks at the economy as a whole. Its deal with the economic behavior of aggregates; national output, overall price level, inflation, unemployment.
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OBJECTIVES
Individuals may try to maximize utility given the constraints of income, time, prices, etc. Firms may have objectives such as the maximization of profits, sales, market share, etc. or the minimization of costs per unit Social objective, maximize the well being of the members of society

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Human wants are always greater than the available resources Society has limited (scarce) resources (factors of production), and therefore cannot produce all the goods and services people wish to have.
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How people make decisions???

People face tradeoffs.

Rational people think at the margin.

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People face Tradeoffs
To get one thing, we usually have to give up another thing. Guns v. butter Food v. clothing Leisure time v. work Efficiency v. equity
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Opportunity Cost The Cost of Something Is What You Give Up to Get It

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Basic ECONOMIC PROBLEM: SCARCITY AND CHOICE What to Produce
- Type of goods and services

How to Produce - Method of production For Whom to Produce (Distribution Theory)

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Factors of production
also known as production inputs

Natural resources/Land Labor

Physical capital & Financial Capital

Technology
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Typical taxonomy
land / natural resources labor Capital Entrepreneurial ability

Alternative view
Matter Energy Time Technology
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Positive Versus Normative Economics Positive analysis Answers the question What is? or What will be? Normative analysis Answers the question What ought/should/ could/would to be?

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positive analysis Answers the question What is? or What will be? normative analysis Answers the question What ought/should/ could/would to be?

Table 1.1 COMPARING POSITIVE AND NORMATIVE QUESTIONS

Positive Versus Normative Analysis

Positive Questions
If the government increases the minimum wage, how many workers will lose their jobs? If two office-supply firms merge, will the price of office supplies increase? How does a college education affect a persons productivity and earnings? How do consumers respond to a cut in income taxes?

If a nation restricts shoe imports, who benefits and Should the government restrict imports? who bears the cost?

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THE ECONOMIC WAY OF THINKING
Four elements of the economic way of thinking: Use Assumptions to Simplify
Economists use assumptions to make things simpler and focus attention on what really matters. Isolate VariablesCeteris Paribus

Economic analysis often involves variable and how they affect one another.
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Think at the Margin

Economists often consider how a small change in one variable affects another variable and what impact that has on peoples decision making
Rational People Respond to Incentives A key assumption of most economic analysis is that people act rationally, meaning that they act in their own self-interest.

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ECONOMIC SYSTEMS
laissez-faire economy (free market) Literally from the French: allow [them] to do. An economy in which individual people and firms pursue their own self-interests without any central direction or regulation
Market The institution through which buyers and sellers interact and engage in exchange
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Command economy An economy in which a central government either directly or indirectly sets output targets, incomes, and prices

tMixed economy is an economic system that incorporates a mixture of private and government ownership or control, or a mixture of capitalism and socialism
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Economic Systems
Free Market Economy
Private ownership of resources Price mechanism Freedom of enterprise and choice Consumers sovereignty Laissez-faire Free competition

Planned Economy
Public ownership of resources Central planning authority Price mechanism of less importance Central control and ownership No competition

Mixed Economy
Public and private ownership of resources Price mechanism and economic plans Selective government intervention Government control of monopolies Free competition

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End of Lecture

Questions???

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