Basic Macroeconomics Notes PDF

PRELIMS INTRODUCTION TO ECONOMICS THAT DEALS WITH EFFICIENT ALLOCATION… WHAT IS SCARCITY? - Economics is a science of efficiency in - Universal problem. Unlimited wants;...

PRELIMS INTRODUCTION TO ECONOMICS THAT DEALS WITH EFFICIENT ALLOCATION… WHAT IS SCARCITY? - Economics is a science of efficiency in - Universal problem. Unlimited wants; the use of scarce resources. Limited resource - EFFICIENCY refers to the optimal (best) - Human wants are unlimited, but the use of resources means to satisfy the wants are limited - Efficiency requires FULL EMPLOYMENT - Resources can only be used for one of available resources and FULL purpose at a time. Hence, it is PRODUCTION important to study Economics 1. FULL EMPLOYMENT - means all - The term “economics” came from two available resources should be employed Greek words, 'eco' meaning (used) home/household and 'nomos' meaning 2. FULL PRODUCTION - means that accounts/management; hence, it employed resources are providing means management of household. maximum satisfaction of our economic - how do your parents manage the wants; producing the RIGHT GOODS in household? They have limited the RIGHT WAY. resources, right? And you have Full production implies 2 kinds of unlimited wants. Hence, they should efficiency efficiently allocate whatever is available. a. PRODUCTIVE EFFICIENCY - means The subject has developed from being that least costly production techniques about how to keep the family accounts are used to produce any particular mix into the wide-ranging subject of today. of goods and services (producing in the RIGHT WAY) WHAT IS ECONOMICS? b. ALLOCATIVE EFFICIENCY - means that - A social science that deals with efficient resources are used for producing the allocation of scarce resources to satisfy combination of goods and services people’s economic (something that is most wanted by the society (producing bought using money) wants and needs. the RIGHT GOODS) - Productive efficiency may occur A SOCIAL SCEINCE… without allocative efficiency. Goods can - Economics is a social science (society) be produced at the least costly method because it deals with the behavior of without being the most wanted by the people (note that scarcity requires that society. Allocative efficiency requires choices be made) that there be productive efficiency to - People are RATIONAL BEINGS: human be considered an efficient production. beings always pursue their self-interest - HEDONISM: pursuit of pleasure OF SCARCE RESOURCES... and avoidance of pain WHAT ARE ECONOMIC RESOURCES? - Rational self-interest entails - Economic resources are sometimes making decisions to achieve called FACTORS OF PRODUCTION or maximum satisfaction inputs (Inputs are required to produce - Different preferences and an output/products) circumstances lead to different - Economic resources are natural, human choices and manufactured inputs used to - Rational self-interest is not the produce goods and services same as selfishness - Economic resources include 4 categories: a. LAND RESOURCES - natural resources (not man-made) 2E3 | Mary Angeline Chan  - The problem is the start-up HUMAN ECONOMIC NEEDS AND WANTS… capital - Economics wants are desires of people - E.g. minerals, river, mountain, to use goods and services that provide air utility b. LABOR RESOURCES - human - The term “economic” means something resources, which include that can be bought/produced physical (blue-collar jobs) and - Economic wants and needs can be mental abilities (white collar satisfied by PRODUCTS/OUTPUTS jobs) used in production (produced from the INPUTS/FACTORS - Anyone who’s WILLING and OF PRODUCTION) CAPABLE of producing goods - PRODUCTS are sometimes classified as or services luxuries (WANTS - something you can - Note that a person who is live without) or necessities (NEEDS - incapable of producing is not something you can not live without), considered a labor resource but the division is subjective to a c. CAPITAL RESOURCES - person investment goods which are all - PRODUCTS can be in the form of a manufactured aids to GOOD (something tangible) or a production SERVICE (something intangible) - Man-made goods that are used - A bottle of wine is a GOOD; it is to produce other goods. tangible - E.g. equipment, tools, factories, - A plane ticket to Korea from transportation, etc. Philippine Airlines is a SERVICE; - In Economics, money is not a it is something intangible. You capital resource but a MEDIUM are not paying for the paper OF EXCHANGE (what can where the ticket was printed, money do?). We use money to you do not bring home the acquire resources (land, labor, airplane either. Because you are capital) paying for the service. d. ENTREPRENEURIAL ABILITY - - Like a haircut, you don't have to combines resources (land, bring the hairdresser’s scissors labor, capital) needed in home! production; makes business - Consumers have needs and wants, but policy decisions; an innovator so do businesses and governments for new products, production - Overtime, wants change and multiply techniques, and organizational forms; bears the risk of time, effort, and funds MICROECONOMICS - Put all factors of production to - Looks at specific economic units produce. (household, firm, workers) - Quantities of resources are - deals with questions about the limited relative to the total behavior of individual amount of goods and services households/consumers/buyers, desired individual firms/producers/sellers, and individual markets/industries TO SATISFY… (economic units) - The goal of economics is to achieve - Analogy; is an examination of trees and MAXIMUM SATISFACTION not forests; an examination of how the - UTILITY is a term used in Economics mechanical parts of a mobile phone that refers to SATISFACTION, function, and not how to use the HAPPINESS, OR PLEASURE. mobile phone as a whole. 2E3 | Mary Angeline Chan  - Classical microeconomic theory was b. Empirical verification means to developed by Adam Smith (1723-1790), verify using the father of Economics, who wrote The facts/science/measurable Wealth of Nations (first book) in 1776 evidence that an explanation is valid/correct MACROECONOMICS c. Uses logic and statistics - Examines the economy as a whole 4. Acceptance, rejection, or - Deals with questions about how the modification of the hypotheses economy functions as a whole 5. Forming conclusions/generalizations. - The term “aggregate” (total) is often Determination of a theory, law, or used to describe the collective/total principle. behavior of a group of people a. Laws are universal and are - Includes measures of total always true under all output/income, total circumstances. Theories are employment/unemployment, proven and factual too, but not aggregate expenditure, general price always universal; they are not level (inflation) valid under all circumstances - Analogy: it is a general overview because other proven examining the forest, not the trees ideas/theories contradict them. - Keynesian economics (macroeconomic b. Uses logic theories about output and spending) was developed by the British economist ECONOMIC TOOLS John Maynard Keynes (1883-1946) - While formulating theories, a number during the 1930s to understand the of tools are used by economists: Great Depression. 1. LOGIC - the science of correct reasoning ECONOMIC METHODOLOGY - 2 TYPES OF REASONING: SCIENTIFIC METHOD a. Deductive reasoning - from a - The scientific method is the technique general idea (bigger) to a more economists use to determine economic specific (smaller) idea laws or principles. b. Inductive reasoning - from a - These laws and principles are specific idea (smaller) to a formulated to explain and/or predict general (bigger) idea the behavior of individuals or - Logic is used in formulating institutions. hypotheses, analyzing 1. Observation of facts empirical data, and forming 2. Hypotheses formulation: formulations conclusions of explanations of cause and effect - Avoid using inductive relationships reasoning as it may result in a. Hypothesis - an educated fallacies. guess, yet to be proven Ex. The Ph is export-oriented; The Ph is b. Uses logic in Asia; ∴ All Asian countries are 3. Empirical verification: testing export-oriented. hypotheses: facts used to prove your 2. MATHEMATICS - used to show the claim relationship between variables a. “Empirical” means based on, a. Algebra - relates 2 or more concerned with, or verifiable by variables (e.g. given the observation or experience equation: Y = A + B - C, hence, if rather than theory or pure logic. A increases, assuming all other things held constant (y and z), Y will also increase; and if C 2E3 | Mary Angeline Chan  increases, all other things held 1. WHAT TO PRODUCE? constant, will decrease Y. - It is important to know what goods to produce. Recall that resources are scarce and can only be used for one purpose at a time. Recall that we should have allocative efficiency in b. Geometry - relates only 2 production (we should produce what variables (we use graphs in society needs because resources are Economics. Recall that graphs scarce.) have only 2 variables, the one in 2. HOW TO PRODUCE? the x-axis and the one in the - Recall productive efficiency (producing y-axis. The slope of the graph at the least possible cost); we should tells us the relationship choose the best production technique between 2 variable to achieve this; The most efficient technique will be the one that produces a given amount of output with the smallest input of scarce resources when both inputs and outputs are measured in monetary terms. - 3 TYPES OF PRODUCTION TECHNIQUE: i. Labor-intensive production (manpower) - production that uses more labor than machines ii. Capital-intensive production (machines) - production that uses more machines than manpower iii. Technology-intensive production - production that uses advanced technology to carry out tasks; ***two firms with the same quantity and quality of labor and capital will not necessarily produce the same quantity and quality of output; it depends on their technology---(technology is how they do things; how they make use of labor and capital to produce) - The question of who is the most efficient depends on the production scale. 3. STATISTICS - used in empirical 3. HOW MUCH TO PRODUCE? verification of hypotheses; a form of - The economy should produce the right mathematical analysis that uses quantity of goods society needs since quantified models, representations and the goal is to achieve maximum utility synopses for a given set of experimental for all. data or real-life studies. - To avoid shortage and surplus - Econometrics - use in 4. FOR WHOM TO PRODUCE? Economics - The answer to this question is directly related to how income is distributed among individuals and households and 4 FUNDAMENTAL ECONOMIC QUESTIONS 2E3 | Mary Angeline Chan  the tastes and preferences of - Examples: consumers. - Consumers are free to decide - Products go to those who are willing where and when to spend their and able to pay for them money on various goods and - Consumers’ ability to pay (income) services depends on: - Workers and laborers are free to - The property and human choose occupations, change resources they supply to the jobs, and organize labor unions market to protect their interests - The prices these resources - Private individuals are free to command in the market establish businesses and - The resource markets, which determine decide what to sell and how to income, are linked to this decision. produce it, with limited - Ex. malayo yung factory sa consumer government intervention Cons. Tataas yung price ng product; 2. ECONOMIC EQUITY mahal yung product, onti yung bibili - The situation in which the outcome of an economic transaction is fair to each ECONOMIC SYSTEMS party - Set of institutionalized arrangements - An outcome can usually be considered Coordinating mechanism fair if each party enters into a - An economic system deals with the transaction freely and is not production, distribution, and unknowingly at a disadvantage consumption of goods in a society. - This can be seen in a command - Economic systems evolved in response economy to the fundamental economic problem 3. ECONOMIC EFFICIENCY faced by all societies: scarcity; hence, - An economic principle that businesses economic systems differ on how they and individuals should fulfill as many of answer the fundamental economic society’s needs as possible while questions (what, how, how much, and maximizing the provided resources for whom to produce) - The greater the output for a given - Economic systems also differ as to who input, the more efficient owns the factors of 4. ECONOMIC SECURITY production/resources (land, labor, - The condition of having a stable capital) and the method used to income or other resources to support a coordinate and direct economic standard of living now and in the decisions foreseeable future - Each economic system focuses on 5. ECONOMIC STABILITY certain/particular economic goals; the - This goal refers to an absence of extent of its focus on a goal depends on excessive fluctuations the nature of the economic system. - An economy with fairly constant output growth, low and stable inflation, and 6 ECONOMIC GOALS low unemployment would be 1. ECONOMIC FREEDOM considered stable - This concerns the freedom of the - Gone during the pandemic marketplace 6. ECONOMIC GROWTH - It provides members of a society the - This is the increase in the capacity of an ability to undertake economic direction economy to produce goods and and actions, with minimal government services over time intervention - Ex. China decreased the value of its - This can be seen in a market economy currency 2E3 | Mary Angeline Chan TYPES OF ECONOMIC SYSTEMS EFFICIENCY, EQUITY, & JUSTICE - There is an economy if there is a supply (production) and demand (consumption). 1. TRADITIONAL ECONOMY - Also refers to a subsistence economy - Answers to the fundamental economic questions are based on tradition - No concept of trade/money/income; they produce for their own consumption (e.g. Indigenous tribes) - Communal ownership of resources - Ex. tribes 2. COMMAND ECONOMY - Public ownership of resources (resources are owned by the state) POLICY ECONOMICS - Economic activity is coordinated by - Applies economic facts and principles central planning (the government to help resolve specific problems and to decides what, how, how much and to achieve certain economic goals whom the resources will be distributed) - Is present because we aim for efficiency - Socialism (e.g. China) has less authority than Communism (e.g North Korea) POSITIVE ECONOMICS VS NORMATIVE - No concept of rich and poor ECONOMICS - GOAL: equitable distribution, allocate - Positive economics: Economic resources equally statements that are factual. - DOWNSIDE: Corruption, unjust - Normative economics: Economic 3. MARKET ECONOMY statements that involve value - This is where the economic activity judgments. happens - Ex. values, judgments, culture, tradition, - There is private ownership of resources attitude, demographics. (Each participant acts in his or her own self-interest; Private individuals and firms own most of the property--land and capital) - Demand and supply ( markets and prices) coordinate and direct economic activity - Minimal government intervention = imperfectly elastic market, monopoly (Meralco) - Capitalism (an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state; eg. United States; Philippines) - There is a concept of rich and poor - Inequality is inevitable 2E3 | Mary Angeline Chan ECONOMIC MODELS 3. With graphs - An economic model is a simplified version of reality that allows us to observe, understand, and make predictions about economic behavior - EVERY ECONOMIC MODEL CONSISTS OF 3 THINGS: 1. A question 2. Simplifications of and abstractions from the real world MARGINALISM (MARGINAL ANALYSIS) 3. Assumptions about economic - The comparison of marginal benefits behavior and marginal costs, usually for decision - ECONOMIC MODELS ARE EXPRESSED making. IN 3 WAYS: - Marginal means “extra” or “additional.” 1. With words - Ex. Law of Demand: ceteris MARGINAL ANALYSIS APPLICATION paribus as P↑Qd↓. - Starbucks became a massive 2. With mathematical equations international company by using - Ex. marginal-benefit/marginal-cost analysis for key decisions, including: PRICE QD 1. Ranking and Selecting New 0 60 Locations 2. Determining Local Saturation 10 50 3. Setting the Menu (ex. buffet) 20 40 OPPORTUNITY COST - Opportunity cost is the value of a 30 30 forgone alternative 40 20 50 10 THE PRODUCTION POSSIBILITIES FRONTIER OR CURVE (PPF OR PPC) - An economic model that shows different combinations of two goods that an economy can produce. - ASSUMPTIONS: - Full employment - Fixed resources - Fixed technology - Two goods 1. Consumer goods 2. Capital goods 2E3 | Mary Angeline Chan  - Downward sloping - Concave because the slope is not constant, it is at an increasing rate. LAW OF INCREASING OPPORTUNITY COSTS - As more of a particular good is produced, its marginal opportunity costs increase PRODUCTION POSSIBILITIES CURVE - Concave shape - Economic rationale 2E3 | Mary Angeline Chan