1. Economics – the social science that studies mankind’s attempts to deal with ….
… we will always want more than we can have
… the allocation of scarce resources to satisfy alternative wants.
… how to match
Supply -- the scarce resources, and
Demand – the wants
The wants
the available resources
DEMAND
SUPPLY
Demand = (is measured by) how much we are willing to spend.
Supply is what we are capable of producing.

2. Economics is divided into two large fields
Microeconomics studies the behavior of individual consumers, businesses and markets
Macroeconomics studies the behavior of “the economy” as a whole
We’re doing macro

3. TWO BIG MACROECONOMIC QUESTIONS
1. What determines (causes) long-run economic growth?
Why do we have a higher “standard of living” (i.e. “more stuff”) than people in the past and in other parts of the world?
Why has the output of goods and services and the standard of living risen over time?
***********************************
2. What determines (causes) short-run economic fluctuations?
Why do we have good years and bad years?
Why is the growth of output and employment very uneven?
The answers to “all” questions in economics is, “Supply and Demand.”

4. Supply determines the long run; Demand determines the short run.
PRINCIPLE 0
Supply determines the long run;
Demand determines the short run.
Supply
-- the ability to
produce
-- the quantity, quality
and prices of the
factors of production
These are the things that determine long run growth
Demand
-- the willingness to
spend
-- total spending
This is what determines short run ups and downs of output and employment.

5. Long-run growth can be said to be the result of:
-- our ability to produce goods and services.
-- the supply side of the economy.
-- the quantity, quality and prices of our factors of production
Factors of Production Factor Costs
Labor Wages
Land Rent
Capital Interest
Entrepreneurship Profit
(or “risk” or “human capital”)
The Factor Costs can also be described as the sources of Income

6. Another list
Factors of Production Factor Costs
Labor Wages
Land Rent
Credit/Money Interest
Capital/Entrepreneurship Profit
Another list
Raw Materials
Energy
Knowledge
Learn the list on the previous page!

7. “Capital” and “Investment” have particular definitions in economics:
“Capital” refers to physical capital: machines, factories and inventories. “Capital” describes man-made items used to produce other items.
This does not include money, stocks, bonds,etc.
“Investment” is defined as “the purchase of capital.” In economics, therefore, to invest means to buy a machine, a factory or inventories.

8. Short-run fluctuations are the result of demand changes; of spending changes.
Comments: 1. some economists (a minority) disagree.
2. The recessions of the 1970s are likely an exception.
3. We measure spending (and production) by the most important economic statistic – Gross Domestic Product (GDP), “the dollar value of the goods and services produced in an economy during some time period.” GDP is the sum of spending by the sectors.
4. Real GDP is (nominal) GDP corrected for the effect of inflation. Real GDP is intended to measure “production” or “output” not just “spending.”

9. Sector ----------------------------- Spending
Who does the spending? We classify spending by breaking the economy into four sectors and the four types of spending.
Sector Spending
Household Consumption (Cd)*
Business Investment (I)**
Government Gov’t Purchases (G)
The Rest of the World Exports (E)
(the Foreign Sector)
* Cd stands for “domestic Consumption, spending on US-produced goods & services
** Recall the definition of Investment.
We will summarize this with an important equation: X = Cd + E + I + G
where X (Xpenditures) stands for total spending = nominal GDP

10. Another important list of four is the four uses of income
Income is used for:
Cd – buying domestic Consumption
F – buying Imports (think “Fimports”)
S – Saving
T – Taxes
This is summarized by the equation:
Y = Cd + F + S + T
where Y stands for total National Income
(think Yncome”)

11. The “job” of the economy is to balance DEMAND (what we want, expressed in our willingness to spend) with SUPPLY (what we are able to produce, determined by the quantity, quality and prices of the factors of production).

12. LISTS OF FOUR -- A summary
1a. The Factors of Production (FOPs):
Land, Labor, Capital, Entrepreneurship
1b. Payments to the FOPs =
Wages + Rent + Interest + Profit = Sources of Income
2a. The Sectors:
Households, Business, Government, Foreign
2b. Spending by the sectors
X = Cd + E + I + G
3. The Uses of Income
Y = Cd + F + S + T
The Equations: Y = Cd + F + S + T and
X = Cd + E + I + G are illustrated on the Circular Flow Diagram