Transcript AP Macroeconomics

AP Macroeconomics
Chapter 1: The Nature
and Method of
Economics
Why Economics?
• Advise government policy
• Increase informed citizenship
▫ Unemployment, inflation, growth, taxation,
poverty, trade, regulation, education…
Economic Perspective
• The world is seen through scarcity and choice
Scarcity and Choice
• Scarcity (limited) vs. Abundance
▫ Limits options “can’t have it all”
▫ Examples: Land, Equipment, Labor,…
Opportunity Costs
• To get one thing, you forgo
getting something else
Practice Question
• Fry has one free hour to
practice the holophonor for an
upcoming recital or work at
Planet Express for $10 per
hour or babysit Nibbler for $15
per hour. He chooses to
practice the holophonor.
What is the opportunity
cost of practicing the
holophonor?
The opportunity cost would be $15 because it would be the most profitable alternative.
Marginalism: Benefits and Costs
• Marginal Analysis
▫ Marginal Benefits vs. Marginal Costs
 Example: (MC) Large the engagement ring
(More $) = (MB)Less $ for future)
Marginal Benefit
• Additional satisfaction received from consuming an
additional unit of a good or service
▫ Maximum amount they are willing to pay
Marginal Benefit Example
• Assume there is a consumer
wishing to purchase an additional
burger. If this consumer is willing
to pay $10 for that additional
burger, then the marginal benefit
of consuming that burger is $10.
The more burgers the consumer
has, the less he or she will want to
pay for the next one. This is
because the benefit decreases as
the quantity consumed increases.
Marginal Cost
• The change in total
cost that comes from
making or producing
one additional item
Practice Question
• After dedicating two
hours to studying an
exam, Steve chooses to
spend an additional
hour studying. What is
the relationship
between marginal
benefit and marginal
cost?
The marginal benefit of the additional hour is at least as great as the marginal cost of the
additional hour. With any choice people make, they must look at the relationship
between marginal benefit and marginal cost. If a decision, whether it be purchasing an
item or going for a walk, costs more than the benefit, then the person should not do it.
Rational Behavior
• “Rational self-interest”
▫ Pursuit of increased utility
(Enjoyment)
▫ Example: Price of
Gasoline vs. Distance to
cheaper price; Debt card
charge at ATM’s
Economists Impact on History
John Maynard Keynes
“The ideas of economics and
political philosophers, both
when they are right and
when they are wrong, are
more powerful than is
commonly understood.
Indeed the world is ruled by
little else. Practical men, who
believe themselves to be quite
exempt from any intellectual
influences, are usually the
slaves of some defunct
economists.”
Economists Impact on History
Adam Smith
“Every individual... neither
intends to promote the public
interest, nor knows how much
he is promoting it... he intends
only his own security; and by
directing that industry in such
a manner as its produce may
be of the greatest value, he
intends only his own gain, and
he is in this, as in many other
cases, led by an invisible hand
to promote an end which was
no part of his intention.”
Economists Impact on History
“It is not to be understood that the natural price
of labor, estimated even in food and necessaries,
is absolutely fixed and constant. It varies at
different times in the same country, and very
materially differs in different countries. It
essentially depends on the habits and customs of
the people. An English laborer would consider
his wages under their natural rate, and too
scanty to support a family, if they enabled him
to purchase no other food than potatoes, and to
live in no better habitation than a mud cabin;
yet these moderate demands of nature are often
deemed sufficient in countries where 'man's life
is cheap', and his wants easily satisfied. Many of
the conveniences now enjoyed in an English
cottage, would have been thought luxuries in an
earlier period of our history.”
David Ricardo
Economists Impact on History
“The principle itself of dogmatic
religion, dogmatic morality,
dogmatic philosophy, is what
requires to be rooted out; not
any particular manifestation
of that principle. The very
corner-stone of an education
intended to form great minds,
must be the recognition of the
principle, that the object is to
call forth the greatest possible
quantity of
intellectual power, and to
inspire the intensest love of
truth”
John Stuart Mill
Economists Impact on History
“The history of all hitherto existing
society is the history of class
struggles.
Freeman and slave, patrician and
plebeian, lord and serf, guild
master and journeyman, in a
word, oppressor and oppressed,
stood in constant opposition to one
another, carried on an
uninterrupted, now hidden, now
open fight, that each time ended,
either in the revolutionary
reconstitution of society at large,
or in the common ruin of the
contending classes.”
Applications
• Vital to business
▫ Increased profit
▫ More informed decisions
▫ Helps consumers
*Not a vocational science; mainly academic*
Incentives
• Something that induces people to act
▫ Example: Bonus for higher productivity, faster production
Economic Methodology
• Reliance of
scientific method
1. Observation of
real-world data
2. Formulation of
explanation
3. Testing
4. Acceptance,
rejection,
modification
5. Development of
theory into law or
principle
Theoretical Economics
• Process of deriving theories and principles to systematically
arrange facts, interpret them, and generalize
Generalizations
• Economic principles are expressed as tendencies of
typical or average consumers, workers, or businesses
Abstractions
• Simplifications that omit irrelevant facts and circumstances
Economic Policy
Stalin’s 5 Year Plans
• State the goal
• Determine the policy options
• Implement and evaluate effectiveness
Economic Goals
• Growth
▫ Develop a higher standard of living
Economic Goals
• Full Employment
▫ Jobs for those willing and able to work
Economic Goals
• Economic Efficiency
▫ Society receives maximum benefits from scarce resources
Economic Goals
• Price-level Stability
▫ Avoid large upswings
and downswings
(inflation and
deflation)
Economic Goals
• Economic Freedom
▫ High degree of
freedom in economic
activities for all
involved
Economic Goals
• Equitable distribution of income
▫ Avoid poverty while others enjoy abundance
Economic Goals
• Economic Security
▫ Provide for those who unable to earn minimal
levels of income (Sick, disabled, aged, laid off)
Economic Goals
• Balance of Trade
▫ Reasonable levels of imports and exports
The Business Cycle
• The irregular fluctuations in economic activity
Equality Versus Efficiency
• Equality seeks to distribute resources uniformly,
but process lessens efficiency
Market Failure
• Market fails to
allocate
resources
efficiently
Macro vs. Micro Economics
• Macro
▫ Seeks to obtain an overview of the structure of the economy
▫ Measures total output, total employment, total income…
Macro vs. Micro Economics
• Micro
▫ Studies small segments of economy
▫ Individual industry, households, products
Positive Economics
• Focuses on facts and
cause-effect
relationships
▫ Deals with factual
statements
▫ Seeks “what is”
▫ Works with Theoretical
Economics
Normative Economics
• Incorporates value judgments
▫ Seeks “what ought to be”
▫ Deals with Policy Economics
Externalities
• When a person’s actions impact a bystander
Pitfalls to Sound Reasoning
• Bias
▫ Better economies avoid biased
thinking to be more efficient
Pitfalls to Sound Reasoning
• Loaded Terminology
▫ Incorporation of emotion to slant facts in one direction
▫ Misuse of definitions to confuse non-economic minded folk
Pitfalls to Sound Reasoning
• Fallacy of Composition
▫ Assumption that what is true
for one individual or group is
true for the whole
Pitfalls to Sound Reasoning
• Post Hoc Fallacy
▫ The belief that one event caused result
▫ Example: New coach, better record; better record due to new coach
Pitfalls to Sound Reasoning
• Correlation versus Causation
▫ The rise in one item will cause the rise of another
Example: more education = high salaries, hard work = success