1. Principles of Macroeconomics
Economics is the study of choice under conditions of scarcity (scarcity of what?).
- intuitively, we are forced to make some choice
As individuals and societies we are faced with limited resources (don’t you believe?) and virtually unlimited wants (hope you agree!).
Economists study the choices we make and also the consequences of these choices.

2. Scarcity and Social Choice
Goals of society:
High standards of living for our citizens
Clean air
Low crime rates
Good healthcare
Economists classify resources into four categories
Labor
Capital – Physical, Human
Land/ Natural Resources
Entrepreneurship
Resource vs inputs
The term resources often confused with more general term inputs. An input is anything used to make a good or services – including (but not limited to) a resource. Example??
any of the other inputs can be traced back to the resources used to produce it.

3. Continued..
Labor?
- the time human beings spend producing good and services - that means ‘labor hrs’.
Capital?
-something produced that is ‘long-lasting’ – a good rule of thumb is that capital should last at least a year - example?
- useful to distinguish two different types of capital
1) Physical capital.. example?
2) Human capital – skills and knowledge possessed by workers
- does that satisfy our definition of capital? Yes ..why?
because they are produced (through??) and help us produce other things
- what about ‘lasting’?

4. Continued..
So the Capital stock is the total amount of capital at a particular point in time – consists of all the physical capital and human capital made in previous period that is still productively useful
Land/ Natural resources ? Pre-existing ‘gifts of nature’
Entrepreneurship ? Individuals ability (and the willingness to use this ability) to combine the other resources into a productive enterprise.
May be an innovator, may be a risk taker
Now an example which includes all..

5. Scarcity and Social Choice
On the face of it, scarcity of these resources causes the scarcity of all goods and services (we might desire) produced out of them.
Is it entirely true? No
Misallocation of resources at least partly responsible too…so the idea of optimum allocation of resources.
early 90’s debate on Soviet Union
Never ending debates between Democrats and Republicans about tax rates , government services etc

6. Scarcity and Social Choice
Hence, society has to choose:
What to produce/ what not to produce?
How much to produce?
How to produce? Notion of efficiency?

7. Economics – some distinctions we make
By the level of detail
Microeconomics – study of the behavior of individual households, firms and govts.; the choices they make; and their interactions.
Macroeconomics – study of the behavior of the overall economy

8. Economics – some distinctions we make
By our purpose of analysis:
Positive economics deals with how the economy works – bare facts.
Normative economics deals with what should be – used to make judgments about the economy, identify problems and prescribe solutions

9. Scarcity, Choice and Economic Systems
Key concept: Opportunity Costs
The opportunity cost of any choice is what we must forgo when we make that choice – that is this money (or time) could have been used for other things that you value.
In a different way, true cost of any choice you make
Everything you actually sacrifice in making the choice.
The opportunity cost of a choice is the best among the available alternatives to that choice.
Direct money cost of a choice may only be a part of opportunity cost of that particular choice

10. Opportunity cost continued..
Opportunity cost of a choice includes both explicit costs and implicit costs
Explicit cost—dollars actually paid out for a choice
Implicit cost—value of something sacrificed when no direct payment is made ( what is the biggest sacrifice in this category?)
Let us calculate the opportunity cost – we will discuss two different problems -
Opportunity cost of attending a college
b) Opportunity cost of watching Mission Impossible III