PPT_SayreMacro10e_Chapter_01_FINAL.ppt

Principles of Macroeconomics SAYRE // MORRIS Tenth Edition CHAPTER 1 The Economic Problem Prepared by Hanika Bhojwani-Chen, Centennial College...

Principles of Macroeconomics SAYRE // MORRIS Tenth Edition CHAPTER 1 The Economic Problem Prepared by Hanika Bhojwani-Chen, Centennial College © 2021 McGraw Hill  CHAPTER 1 The Economic Problem Learning Objectives: 1.Describe why economics is a very relevant discipline 2.Define economics and make a distinction between macroeconomics and microeconomics 3.Demonstrate that scarcity, choice, and opportunity cost are at the heart of economics, making efficiency a cornerstone of the discipline © 2021 McGraw Hill 1-2  CHAPTER 1 The Economic Problem Learning Objectives: 4.Explain why trade results in more productive economies 5.Explain the three fundamental questions that all societies must address 6.Explain the four different ways that economic societies can be organized © 2021 McGraw Hill 1-3  CHAPTER 1 The Economic Problem Learning Objectives: 7.Use the production possibilities model to illustrate choice, opportunity cost, efficiency, and unemployment 8.List the economic goals of society and explain why they are often difficult to achieve. © 2021 McGraw Hill 1-4  LO1: The Relevance of Economics © 2021 McGraw Hill 1-5  Relevance of Economics Current Controversies: 1. Economic growth 2. Income redistribution 3. Road pricing 4. Globalization © 2021 McGraw Hill 1- 6  LO2: What is Economics? © 2021 McGraw Hill 1-7  What is Economics? Economics is a social science that studies the ways humans and societies organize themselves to make choices about the use of scarce resources, which are used to produce the goods and services necessary to satisfy human wants and needs. – it uses the scientific method in order to construct theories which explain the world around us © 2021 McGraw Hill 1- 8  What is Economics? Positive Statement – Facts that can be verified with empirical data Normative Statement – Based on a person’s beliefs or value system – Cannot be verified with data © 2021 McGraw Hill 1- 9  Test Your Understanding Identify each of the following statements as either positive (P) or normative (N) A The federal government’s budget this year is the largest in history. B The national debt is at a manageable level and therefore is nothing to worry about. C The price of gasoline is higher than it needs to be. D Rising Canadian exports are creating many new jobs in the country. © 2021 McGraw Hill 1- 10  Test Your Understanding Identify each of the following statements as either positive (P) or normative (N) A The federal government’s budget POSITIVE this year is the largest in history. B The national debt is at a manageable level and therefore is nothing to worry about. C The price of gasoline is higher than it needs to be. D Rising Canadian exports are creating many new jobs in the country. © 2021 McGraw Hill 1- 11  Test Your Understanding Identify each of the following statements as either positive (P) or normative (N) A The federal government’s budget POSITIVE this year is the largest in history. B The national debt is at a NORMATIVE manageable level and therefore is nothing to worry about. C The price of gasoline is higher NORMATIVE than it needs to be. D Rising Canadian exports are POSITIVE creating many new jobs in the country. © 2021 McGraw Hill 1- 12  What is Economics? Economic Theory – Looks at how positive statements are related – Uses the scientific method: Set up a hypothesis Define terms, state assumptions Gather data to test hypothesis Accept, reject, or modify theory © 2021 McGraw Hill 1- 13  What is Economics? Macroeconomics – How the major components of an economy interact – Unemployment, inflation, government economic policies, interest rates Microeconomics – Outcomes of decisions by people and firms – Supply and demand, costs of production, market structures © 2021 McGraw Hill 1- 14  Macro vs. Micro MACRO MICRO Of particular Prices Average of all products products Of a particular firm Production Of the whole economy or industry Of a profession or Incomes Total national income factor income Overall national By firm, industry or Employment employment occupation For an individual or Taxes For the government firm © 2021 McGraw Hill 1- 15  Test Your Understanding Identify which of the following topics would likely appear in a microeconomics course and which in macroeconomics course. A The price of iPods B Unemployment rates C The presence of monopolies D The rate of economic growth © 2021 McGraw Hill 1- 16  Test Your Understanding Identify which of the following topics would likely appear in a microeconomics course and which in macroeconomics course. A The price of iPods MICRO B Unemployment rates C The presence of monopolies D The rate of economic growth © 2021 McGraw Hill 1- 17  Test Your Understanding Identify which of the following topics would likely appear in a microeconomics course and which in macroeconomics course. A The price of iPods MICRO B Unemployment rates MACRO C The presence of monopolies MICRO D The rate of economic growth MACRO © 2021 McGraw Hill 1- 18  LO3: Efficiency and Allocation © 2021 McGraw Hill 1-19  Scarcity and Choice Resources are Scarce: – Resources (or “factors of production”, or “inputs”) are anything used to produce goods and services – Scarcity means we do not have enough resources to produce everything everybody wants – Must have some way to ration scarce resources © 2021 McGraw Hill 1- 20  Economic Resources Labour: Human mental and physical effort Land: Any natural resource used to produce goods or services Capital: Tools, equipment, factories, and buildings used in production process Enterprise: The human resource that innovates and takes risks © 2021 McGraw Hill 1- 21 Economic Resources and Payments RESOURCE EARNS Labour Wages Land Rent Capital Interest Enterprise Profit © 2021 McGraw Hill 1- 22 Technology and Opportunity Cost Technology – Method of production – Way in which resources are combined to produce goods and services Opportunity Cost – The value of the next-best alternative that is given up as a result of making a particular choice © 2021 McGraw Hill 1- 23  Scarcity Scarcity forces choice (for society, government, and the individual), and choice involves an opportunity cost which is the sacrificed benefit of the next best alternative. © 2021 McGraw Hill 1- 24  Consumer and Capital Goods Consumer goods and services – Products used by consumers to satisfy wants and needs Capital goods – Factories, tools and equipment used to make other goods for sale – Making more capital goods increases growth, but there is an opportunity cost in terms of consumer goods foregone © 2021 McGraw Hill 1- 25  Test Your Understanding Decide whether each of the following is a: consumer good (C), capital good (K), or both (B): A A jackhammer B A carton of cigarettes C An office building D A tooth-brush E A hammer F A farm tractor © 2021 McGraw Hill 1- 26  Test Your Understanding Decide whether each of the following is a: consumer good (C), capital good (K), or both (B): A A jackhammer K B A carton of cigarettes C An office building D A tooth-brush E A hammer F A farm tractor © 2021 McGraw Hill 1- 27  Test Your Understanding Decide whether each of the following is a: consumer good (C), capital good (K), or both (B): A A jackhammer K B A carton of cigarettes C C An office building K D A tooth-brush C E A hammer B F A farm tractor K © 2021 McGraw Hill 1- 28  Test Your Understanding Indicate whether the resource in question is: labour (L), capital (K), land (N), or enterprise (E): A A bar-code scanner in a supermarket B Fresh drinking water C Copper deposits in a mine D The work of a systems analyst E The first application of e- technology to an economics textbook F An office building © 2021 McGraw Hill 1- 29  Test Your Understanding Indicate whether the resource in question is: labour (L), capital (K), land (N), or enterprise (E): A A bar-code scanner in a supermarket K B Fresh drinking water C Copper deposits in a mine D The work of a systems analyst E The first application of e- technology to an economics textbook F An office building © 2021 McGraw Hill 1- 30  Test Your Understanding Indicate whether the resource in question is: labour (L), capital (K), land (N), or enterprise (E): A A bar-code scanner in a supermarket K B Fresh drinking water N C Copper deposits in a mine N D The work of a systems analyst L E The first application of e- technology to an E economics textbook F An office building K © 2021 McGraw Hill 1- 31 Importance of Efficiency © 2021 McGraw Hill 1-32  Efficiency Productive Efficiency – Production of an output at the lowest possible average cost Allocative Efficiency – Production of that combination of outputs that best satisfies consumers’ demands © 2021 McGraw Hill 1- 33  Five Allocative Methods first come, first served lottery sellers’ preference government decree the market © 2021 McGraw Hill 1- 34  LO4: The Power of Trade © 2021 McGraw Hill 1-35  Trade Voluntary trade benefits both parties The more trade, the greater the benefits Applies to individuals as well as to nations Greater specialization and trade can make economies more productive © 2021 McGraw Hill 1- 36  No Trade Maximum Potential Output: Bread Plows Athens 20 OR 10 Sparta 10 OR 20 With NO trade, the cities produce half of each item: Bread Plows Athens 10 AND 5 Sparta 5 AND 10 Total Output 15 AND 15 © 2021 McGraw Hill 1- 37  Benefits of Trade Maximum Potential Output: Bread Plows Athens 20 OR 10 Sparta 10 OR 20 WITH trade, each country produces what it is best at: Bread Plows Athens 20 AND 0 Sparta 0 AND 20 Total Output 20 AND 20 © 2021 McGraw Hill 1- 38  LO5: Three Fundamental Questions © 2021 McGraw Hill 1-39  Three Fundamental Questions All economic societies must answer these questions. 1. What to produce? (capital or consumer goods; necessities or luxuries) 2. How to produce (technology)? 3. For whom? (how should the goods-or income-be distributed) © 2021 McGraw Hill 1- 40  LO6: Four Types of Economies: The Four Cs © 2021 McGraw Hill 1-41  Four Types of Economies 1. Co-operative Economies (foraging societies) 2. Command Economies (totalitarian states) 3. Customary Economies (traditional, religious societies) 4. Competitive Economies (market economies) Modern countries are usually a combination of all of the above, i.e., MIXED ECONOMIES © 2021 McGraw Hill 1- 42  LO7: Production Possibilities © 2021 McGraw Hill 1-43  Production Possibilities Model Production Possibilities Curve: – A graphical representation of the various combinations of maximum output that can be produced from the available resources and technology – Assumptions: Full employment Use of the best technology available Productive efficiency © 2021 McGraw Hill 1- 44  Production Possibilities Model Production of Cars and Tonnes of Wheat (Millions of Units) CARS WHEAT % of % of Possible Resources Output Resources Output Outputs Used Used A 0 0 100 100 B 20 50 80 95 C 40 90 60 85 D 60 120 40 65 E 80 140 20 40 F 100 150 0 0 © 2021 McGraw Hill 1- 45 Production Possibilities Model Production of Cars and Tonnes of Wheat (Millions of Units) A B C D E F Cars 0 50 90 120 140 150 Wheat 100 95 85 65 40 0 © 2021 McGraw Hill 1-46  Production Possibilities for Cars and Wheat A B C D E F Cars 0 50 90 120 140 150 Wheat 100 95 85 65 40 0 Wheat a Unattainable 100 b 95 x Points on the curve represent c 85 maximum output possible with Attainable d available 65 resources e 40 f 50 90 120 14 15 Cars © 2021 McGraw Hill 0 0 1- 47  Production Possibilities Model Scarcity – Represented by points outside the curve Choice – Represented by points on the curve (efficient) and points within the curve (inefficient) Opportunity Cost – Represented by the downward slope of the curve © 2021 McGraw Hill 1- 48 The Law of Increasing Costs The Law of increasing costs: as an economy’s total production level of any particular item increases, the per unit cost of producing additional units of that item will rise. Implications of the law of increasing costs: – Factors of production are not equally suitable for the production of different products – As output increases, the per unit costs of additional units increases – Gives the production possibilities curve its bowed out shape © 2021 McGraw Hill 1-49  Law of Increasing Opportunity Costs As more cars are Wheat a produced, an 100 increasing amount of 95 +4 b 0 - wheat must be given 85 10 +3 up c 0 -20 +2 65 d 0 -25 40 e f 50 90 120 14 15 Cars © 2021 McGraw Hill 0 0 1- 50  Test Your Understanding a) If society produces 1000 units of butter, how many guns can it produce? b) If society is at “b” on the PPC, what is the cost of 1000 more units of butter? b Quantity of guns per period 400 c) Is opportunity cost c greater for move 300 from “c” to “d” compared to a move from “b” to “c”? d 150 1000 2000 3000 © 2021 McGraw Hill Quantity of butter per period 1- 51  Test Your Understanding a) If society produces 1000 units of butter, how many guns can it produce? 400 units of guns b) If society is at “b” on the PPC, what is the cost of 1000 more units of butter? b Quantity of guns per period 400 c) Is opportunity cost c greater for move 300 from “c” to “d” compared to a move from “b” to “c”? d 150 1000 2000 3000 © 2021 McGraw Hill Quantity of butter per period 1- 52  Test Your Understanding a) If society produces 1000 units of butter, how many guns can it produce? 400 units of guns b) If society is at “b” on the PPC, what is the cost of 1000 more units of butter? 100 units of guns b Quantity of guns per period 400 c) Is opportunity cost c greater for move 300 from “c” to “d” compared to a move from b to c“b” to “c”? – 100 guns d 150 per 1000 units of butter c to d – 150 guns per 1000 1000 2000 3000 units of butter, © 2021 McGraw Hill Quantity of butter per period 1- 53 PPC and Economic Growth Growth means the economy is able to produce more of everything © 2021 McGraw Hill 1- 54 PPC and Technological Change Improvement in technology in car production shifts the curve to PP2. Can now produce more of either good, or more of both. Quantity of cars per period © 2021 McGraw Hill 1- 55  Test Your Understanding Quantity per year A B C D Grain 0 25 40 50 Tools 12 8 4 0 a) Draw a PPC1 with tools on the horizontal axis. Now, assume new technology that can be used only in the tool industry is developed, which increases tool output by 50%. b) Draw a new PPC2 that reflects this new technology. c) If Finhorn produced 12 units of tools per year, how many units of grain could be produced after the introduction of the new technology? © 2021 McGraw Hill 1- 56  Test Your Understanding New Grain New technolog technolog 50 a y allows a y allows 50% 25 units 40 b b2 increase in of grain tool to be production c produced 25 c2 with 12 PPC2 units of PPC1 tools d d2 4 8 12 16 18 Tools © 2021 McGraw Hill 1- 57  LO8: Macroeconomic Goals © 2021 McGraw Hill 1-58  Macroeconomic Goals 1. Improved standard of living 2. Economic growth 3. Full employment 4. Stable prices 5. Viable balance of international trade 6. Equitable distribution of income 7. Manageable government debt & deficit © 2021 McGraw Hill 1- 59  Goal 1: Improved Standard of Living The Rise in Canada’s Average Real Income, Decade by Decade Source: Adapted by the authors from the Statistics Canada publication “Historical Statistics of Canada,” 1983, Catalogue 11-516, July 29, 1999, and from Statistics Canada CANSIM database, http://cansim2.statcan.ca, Tables 360-10-0130-01, 36-10-0276-01, 36-10-0268 and 36-10-0222-01, December 11, 2019. © 2021 McGraw Hill 1- 60  Goal 1: Improved Standard of Living Of the G7 countries (the world’s biggest and most economically advanced nations), Canada is third, behind the United States and Germany, and has an © 2021 McGraw Hill average income 1- 61  Goal 2: Economic Growth The Growth of Canada’s Average Real Income Source: Adapted by the authors from the Statistics Canada publication “Historical Statistics of Canada,” 1983, Catalogue 11-516, July 29, 1999, and from Statistics Canada CANSIM database, http://cansim2.statcan.ca, Tables 36-10-0222-01 and 17-10-0005-01, December 11, 2019. © 2021 McGraw Hill 1- 62  Goal 2: Economic Growth Note that developed nations seldom have annual growth rates above 4 percent. © 2021 McGraw Hill 1- 63  Goal 3: Full Employment In 2019 Canada was fifth among the G7 countries and seventy- seventh in the world. © 2021 McGraw Hill 1- 64  Goal 4: Stable Prices For many countries— especially the industrialized ones—the possibility of deflation is as likely as that of inflation. © 2021 McGraw Hill 1- 65 Goal 5: Viable Balance of International Trade Canada’s Exports and Imports 1971–2019 Source: Adapted from Statistics Canada, Table 36-10-0014-01, August 17, 2020. © 2021 McGraw Hill 1- 66  Goal 6: An Equitable Distribution of Income Income (Share of Disposable Income by Quintiles) in 2019 Source: Adapted by the authors from Statistics Canada, Table 36-10-0587-01, August 17, 2020. © 2021 McGraw Hill 1- 67  Goal 6: An Equitable Distribution of Income Canada’s performance is quite good at 6.2 but is distinctly average in world rankings, coming in forty-seventh. However, since the world average is 7.7, Canada’s income distribution © 2021 McGraw Hill 1- 68 is more equitable  Goal 7: A Manageable Government Debt and Deficit Canada has outperform ed most countries in managing its deficits. © 2021 McGraw Hill 1- 69  Macroeconomic Tools Fiscal policy – Taxing and government spending Monetary policy – Interest rates and the money supply Direct controls – E.g., tariffs, minimum wages, regulations © 2021 McGraw Hill 1- 70  CHAPTER 1 SUMMARY Key Concepts to Remember 1. Economics is a relevant discipline in our society 2. Scientific method is used in economics, which is divided into microeconomics and macroeconomics 3. Scarcity, choice and opportunity cost are at the heart of economics 4. Greater trade results in economies being more productive © 2021 McGraw Hill 1-71  CHAPTER 1 SUMMARY Key Concepts to Remember 5. What to produce, how to produce it, and for whom are fundamental economic questions 6. Economic societies may be organized through co- operation, command, custom and competition 7. The production possibilities model illustrates choice, opportunity cost, efficiency, and unemployment 8. Society has many economic goals which are often difficult to achieve © 2021 McGraw Hill 1-72