L.1 INRODUCTION TO MACROECONOMICS

1. L.1 INRODUCTION TO MACROECONOMICS dr Marek Szczepański

2. Contents • The economic problem • Opportunity cost • Definition of macroeconomics • Production possibility frontiers • The circular flow of goods and incomes • Positive and normative economics

3. The Economic Problem Economic problems • production and consumption • scarcity: the central economic problem Macroeconomic issues • growth • unemployment • inflation • balance of trade deficits • cyclical fluctuations

4. The Economic Problem • Individual choice: the core of economics • Economics is about making choices. • What to buy? • What to study? • Where to live?

5. The EconomicProblem • Choices in society, national and global economy. • Unlimited Wants • Scarce Resources – Land, Labour, Capital • Resource Use

6. The EconomicProblem • 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.

7. The EconomicProblem • 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?

8. The economic problem • Opportunity cost • Definition of macroeconomics • Production possibility frontiers • The circular flow of goods and incomes • Positive and normative economics

9. The Economic Problem • Why do individuals have to make choices? • Different alternatives. • Limited income / budget. • Limited time. • Other limitations.

10. 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)

11. 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

12. 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).

13. The economic problem • Opportunity cost • Definition of macroeconomics • Production possibility frontiers • The circular flow of goods and incomes • Positive and normative economics

14. Economics - definition • Economicsisthestudy of howsocietydecides what how and for whom to produce. • Goods (phisicalcommodities) and services (activities). • Economicsbelongs to social sciences.

15. 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.

16. 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.

17. The economic problem • Definition of macroeconomics • Opportunity cost • Production possibility frontiers • The circular flow of goods and incomes • Positive and normative economics

18. 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

19. Production Possibility Frontiers Capital Goods If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods. If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer Ym A Yo If it devotes all resources to capital goods it could produce a maximum of Ym. If it devotes all its resources to consumer goods it could produce a B Y1 Consumer Goods Xo X1 Xm Assume a country can produce two types of goods with its resources – capital goods and consumer goods

20. Production Possibility Frontiers 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. Production inside the PPF – e.g. point B means the country is not using all its resources Capital Goods C Y1 A .B Yo Xo X1 Consumer Goods

21. Growth in potential output Now Food O Clothing

22. Growth in potential output 5 years’ time Food Now O Clothing

23. Growth in potential and actual output y x Food O Clothing

24. The economic problem • Definition of macroeconomics • Opportunity cost • Production possibility frontiers • The circular flow of goods and incomes • Positive and normative economics

25. The circular flow of income Interactions in economies: • firms and households • goods markets • real flows: goods and services • money flows: consumer expenditure

26. The circular flow of goods and incomes

27. The circular flow of goods and incomes Goods and services

28. The circular flow of goods and incomes Goods and services PLN Consumer expenditure

29. The circular flow of goods and incomes Goods and services PLN Consumer expenditure Services of factors of production (labour, etc)

30. The economic problem • Opportunity cost • Definition of macroeconomics • Production possibility frontiers • The circular flow of goods and incomes • Positive and normative economics

31. 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

32. 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 Positive and Normative Economics

33. 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.

34. 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.