Transcript The economic problem

L.1
INRODUCTION TO MACROECONOMICS
dr Marek Szczepański
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 Problem
Economic problems
 production and consumption
 scarcity: the central economic problem
Macroeconomic issues
 growth
 unemployment
 inflation
 balance of trade deficits
 cyclical fluctuations
The Economic Problem
 Individual 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 Problem
 The 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 Problem
 Why do individuals have to make




choices?
Different alternatives.
Limited income / budget.
Limited time.
Other limitations.
Opportunity Cost
 The 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 Cost
 Definition – 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 up
 Individuals 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 - definition
 Macroeconomics - 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 microeconomics
 Macroeconomics 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 Frontiers
 Show the different combinations of goods and services




that can be produced with a given amount of resources
No ‘ideal’ point on the curve
Any point inside the curve – suggests resources are not
being utilised efficiently
Any point outside the curve – not attainable with the
current level of resources
Useful to demonstrate economic growth and
opportunity cost
Production Possibility Frontiers
Capital Goods
Ym
Yo
A
B
Y1
Xo
X1 Xm Consumer Goods
Production Possibility
Frontiers
Production
Capital Goods
C
Y1
Yo
.
A
It can only produce at
points outside the PPF
inside the PPF
if it finds a way of
– e.g. point
B
expanding
its
resources
improves
means or
the
the
productivity
of
country
is not
those resources it
usinghas.
all This
its will
already
resources
push
the PPF further
outwards.
B
Xo X1
Consumer Goods
Food
Growth in potential output
Now
O
Clothing
Growth in potential output
Food
5 years’ time
Now
O
Clothing
Growth in potential and actual output
y
Food
x
O
Clothing
 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 incomes
Goods and services
The circular flow of goods and incomes
Goods and services
PLN
Consumer
expenditure
The circular flow of goods and incomes
Goods and services
PLN
Consumer
expenditure
Services of factors of production (labour, etc)
 The economic problem
 Opportunity cost
 Definition of macroeconomics
 Production possibility frontiers
 The circular flow of goods and incomes
 Positive and normative economics
The Economic Problem
 The 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 overall
 The 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.