Macroeconomics ECON 2301 Summer Session 1, 2008 Marilyn Spencer, Ph.D. Professor of Economics June 3, 2008

Topics: 4 Introduction to course 4 Chapter 1, Economics: Foundations and Models

Please fill out and return index card - PRINT LEGIBLY: 1. Your name 2. year in college (1st, 2nd, etc.) 3. major - or “deciding” 4. ECON course in high school - “yes” or “no” 5. If you’re working this semester, whether as volunteer or for pay, approx. # of hours/week, - or “N/A” 6. Last math class successfully completed in college - or “N/A” 7. Usual source of local & national news 8. Any particular topic you’d like us to consider as part of this course

Syllabus: Contact information 4 Text(s) 4 Course description 4 Role of course in you undergraduate curriculum 4 Course methodology 4 Course content 4 Grades 4 Course outline

Algebra competency 4 Students need to be comfortable with: ÜSimple linear equations ÜTables of numbers ÜGraphing

Out-of-Class Quiz #1 Before class on Tuesday, June 10: 1. Create an Islander account. 2. me so that I will have your address. Include your name and your course & section numbers. My address is 4 points

After studying this chapter, you should be able to: Discuss these three important economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin. Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services? Understand the role of models in economic analysis. Distinguish between microeconomics and macroeconomics. Become familiar with important economic terms. What Happens When U.S. Firms Move to China? LEARNING OBJECTIVES Many U.S., Japanese, and European firms have been moving the production of goods and services to other countries.

What is Economics? 4 Economics is a social science. ÜEconomists study how individuals, individually and collectively, make decisions about: Working and hiring Buying consumer goods and services (consumption) Producing goods and services for sale Building factories, equipment, and tools Building and buying houses Setting prices and reacting to them Coordinating activities in the economy Import goods rather than make them themselves

What is Economics? (Continued) 4 Economics is form of applied logic (reasoning). ÜEconomists study the reasoning that drives economic decisions and outcomes. ÜThe linkages, the chains of cause and effect, are very long and complex in real-world economies. ÜAs a result, one might think of economics as the study of unintended consequences. ÜUnderstanding such linkages is critical to: understanding the ultimate consequences of economic events and effective and responsible policy making.

Economics: Foundations and Models 4 In this textbook, economics is used to answer questions such as the following: Ü“How are the prices of goods and services determined?” Ü“How does pollution affect the economy, and how should government policy deal with these effects?” Ü“Why do firms engage in international trade, and how do government policies affect international trade?” Ü“Why does government control the prices of some goods and services, and what are the effects of those controls?”

Economics: Foundations and Models Scarcity The situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics The study of the choices people make to attain their goals, given their scarce resources. Economic model Simplified versions of reality used to analyze real-world economic situations.

4 Which of the following statements best describes scarcity? Üa. Scarcity studies the choices people make to attain their goals. Üb. Scarcity is a situation where unlimited wants exceed limited resources. Üc. Scarcity is an imbalance between buyers and sellers in a specific market. Üd. Scarcity refers to a lack of tradeoffs.

Building a Foundation: Economics and Individual Decisions LEARNING OBJECTIVE 1 Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. 4 Marginal analysis Analysis that involves comparing marginal benefits and marginal costs. Three important ideas:  People are rational  People respond to economic incentives  Optimal decisions are made at the margin

Apple Computer Makes a Decision at the Margin LEARNING OBJECTIVE 1 Should Apple produce an additional 300,000 iPods? In solving the problem, consider the following: Optimal decisions are made at the margin. An activity should be continued to the point where the marginal benefit is equal to the marginal cost. In this case, the correct decision requires information about additional revenue and additional cost.

The Economic Problem That Every Society Must Solve LEARNING OBJECTIVE 2 Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service. Three fundamental questions:  What goods and services will be produced?  How will the goods and services be produced?  Who will receive the goods and services produced?

Economic Problem Every Society Must Solve Centrally planned economy An economy in which the government decides how economic resources will be allocated. Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources. Centrally Planned Economies v. Market Economies: The Modern “Mixed” Economy Mixed economy An economy in which most economic decisions result from the interaction of buyers and sellers in markets, but in which the government plays a significant role in the allocation of resources.

4 Which of the following is the best classification for the economies of the United States, Canada, Japan, and Western Europe? Üa.Market economies. Üb.Mixed economies. Üc.Centrally planned economies. Üd.None of the above.

Economic Models Positive analysis Analysis concerned with what is. Normative analysis Analysis concerned with what ought to be. Normative and Positive Analysis Don’t Confuse Positive Analysis with Normative Analysis

1 - 1 When Economists Disagree: A Debate Over Outsourcing Does outsourcing by U.S. firms raise or lower incomes in the United States?

4 What type of statement would “A minimum wage actually reduces employment” be considered? Üa.A positive statement. Üb.A marginal statement. Üc.A normative statement. Üd.An irrational conclusion.

Microeconomics and Macroeconomics LEARNING OBJECTIVE 4 Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

4 Centrally planned economy 4 Economic model 4 Economic variable 4 Economics 4 Macroeconomics 4 Marginal analysis 4 Market 4 Market economy 4 Microeconomics 4 Mixed economy 4 Normative analysis 4 Positive analysis 4 Scarcity 4 Trade-off 4 Voluntary exchange

A Preview of Important Economic Terms LEARNING OBJECTIVE 5  Entrepreneur  Innovation  Technology  Firm, company, or business  Goods  Services  Revenue  Opportunity cost  Profit  Household  Factors of production or economic resources  Capital  Human capital

4 What is the stock of computers, factory buildings, and machine tools used to produce goods better known as? Üa.Physical capital. Üb.Technology. Üc.Innovation. Üd.Goods and services.

Assignments to be completed before class June 5: 4 Having read Chapter 1, be able to answer Review Questions 1-6, 8 & 9 on p. 19, and Problems and Applications 7, 9, 11, 15 & 17 on p Read Chapter 2 & also read Review Questions 2-7, 10 & 11 on pp , and Problems and Applications 1, 3, 5, 7, 21 & 23 on pp