Summary of Macroeconomics 5 big questions 3 processes 8 fundamental ideas

5 big questions 1.What to produce 2.How to produce 3.When to produce 4.Where to produce 5.Who produces

3 processes used in 2 approaches Approaches 1.Positive How things are 2.Normative How things ought to be Processes/Tasks: 1.Observing and measuring 2.Modeling 3.Testing

Macroeconomic issues, by approach Positive Issues –Growth tradeoff consumption today for more future consumption –Employment +/ - –Inflation +/ - –Budget Deficits +/ - Normative Issues –Fiscal Policy –Monetary Policy

8 fundamental ideas 1.Choices are tradeoffs because of scarcity 2.Choices are made at the margin because of incentives –Diminishing marginal returns: “What have you done for me lately?” “It’s never as good as the last time”

8 fundamental ideas 3.Voluntary tradeoffs/exchange make transacting parties better off because of rationality  –Markets are very efficient ways of organizing this sort of exchange 4.When incentives conflict with marginal choices, markets may fail and alternative mechanisms designed and employed (contracts, government, clubs).

8 fundamental ideas 5.Income = expenditure = gross value 6.Productivity gains enhance living standards

8 fundamental ideas 7.inflation occurs when production grows at a slower rate than the quantity and use of money in the economy 8.Some unemployment is inevitable and necessary

Fundamentals: Opportunity Cost The value of a commodity as a function of the next best, foregone alternative. –Resources are always scarce. –There is always a trade-off due to scarcity. –Opportunity cost is a mechanism that helps us measure the value of trade-offs in making decisions when resources are scarce.

Fundamentals: Marginal Benefits and Costs “Marginal” refers to accounting for the benefit or cost of the “last” unit under consideration for exchange. –Law of diminishing returns –Cumulative effect of scarcity –What has a commodity done for you lately?

Fundamentals: Production Possibilities Frontier Attainable/ inefficient Attainable/ efficient Attainable/ efficient Attainable/ efficient Unattainable A C D E B

Fundamentals: Diminishing Returns Production Possibilities Frontiers bow outward because of diminishing returns in production. –If a scarce resource yields large amounts of a commodity, then using up the resource means that, to keep making more of the commodity, we must use less productive resources –The net result is that greater production of a commodity results in rising opportunity costs—getting less of one commodity for a greater amount sacrificed.