UNIT-1-INTRODUCTION (1) PDF

COM5029 BASIC MACROECONOMICS Second Semester, AY 2024-2025 Asst. Prof. Mary Hildence M. Baluyot  UNIT 1A ETYMOLOGY OF ECONOMICS   Economics came from the Greek word “OEIKONOMIA” which means the art of household management that is rela...

COM5029 BASIC MACROECONOMICS Second Semester, AY 2024-2025 Asst. Prof. Mary Hildence M. Baluyot  UNIT 1A ETYMOLOGY OF ECONOMICS   Economics came from the Greek word “OEIKONOMIA” which means the art of household management that is related to budgeting.  Economics became a science in 1776 when Adam Smith made his famous treatise the “The Wealth of Nations” – An Inquiry into the Nature and Causes of the ETYMOLOGY Wealth of Nations. OF  The concept of Wealth is related to ECONOMICS resources of the country and the first two resources identified by Adam Smith are Land and Labor. Later additional resources such as Capital and Entrepreneurial ability were identified by other economists.   Resources in general are classified into two groups:  Non-economic which are free and abundant and no need for efficient allocation  Economic which are scarce or limited, have a price attached to them and versatile and need to be allocated  Economic Resources are also known as Factors of Production and are divided into two types and have ETYMOLOGY corresponding prices attached to them: OF  Human resources  Labor – mental & physical effort exerted = salaries ECONOMICS or wages  Entrepreneurial ability – organizer of production activity – risk-taker & innovator = profit, royalties  Non-human resources  Land – all natural resources (God-given) = rent or lease  Capital – man-made goods to produce other goods = interest   Thus, Economics is the social science that deals with the efficient allocation of scarce resources in order to satisfy man’s unlimited needs and wants. ETYMOLOGY OF  Economics has always been related ECONOMICS to the concept of Scarcity.  Man’s needs and wants are unlimited, insatiable and constantly changing & dynamic.   Man’s Needs & Wants can be categorized as follows  According to Importance  Basic  Secondary ETYMOLOGY  Luxury OF  According to Origin ECONOMICS  Built-in  Created  According to Scope  Private  Public  Needs & wants must be satisfied by utilizing resources and creating products. ETYMOLOGY In utilizing resources, a certain OF ECONOMICS resource-mix or technology is used which can be: Labor-intensive technology Capital-intensive technology   Products are those that can satisfy needs & wants, which can either be:  Goods – tangible & material  Consumer or Direct or Final which are for end-use or consumption ETYMOLOGY  Producer or Capital Goods OF which are for the production of ECONOMICS other goods  Raw Materials  Intermediate or Semi- finished or Semi-processed  Services – intangible & immaterial  FUNDAMENTAL ECONOMIC ACTIVITIES:  Production = creation of products  Distribution = making the goods available to the consumers through ETYMOLOGY the different channels OF ECONOMICS  Exchange = giving money in return for the products  Consumption = utilization of products  Public Finance = sourcing and using of funds by the government  FUNDAMENTAL ECONOMIC QUESTIONS:  What to produce?  How to produce?  How much to produce?  For whom to produce? * related to the Production Possibilities Curve ETYMOLOGY (PPC) or Production Possibilities Frontier (PPF) OF  https://www.youtube.com/watch?v=4UbKAlMTL7c ECONOMICS  Production Possibilities Curve- Macro Topic 1.2 (Micro Topic 1.3) by Jacob Clifford, July 31, 2019  https://www.youtube.com/watch?v=O6XL__2CDPU  Production Possibilities Curve Review by Jacob Clifford, August 30, 2014  https://www.youtube.com/watch?v=FwPiWz1a1Tw  Shifting the Production Possibilities Curve - Macro Topic 1.2 (Micro Topic 1.3) by Jacob Clifford, Sept 2, 2014  ECONOMIC SYSTEMS:  Traditional  Command  Market  Mixed ETYMOLOGY OF  https://www.youtube.com/watch?v=qR-U1p8dXwI  The Four Economic Systems by Bianca Sulaica ECONOMICS  Sep 17, 2020  https://www.youtube.com/watch?v=B43YEW2FvDs  Economic Systems and Macroeconomics: Crash Course Economics #3 by Jacob Clifford & Adrianne Hill  Jul 31, 2015  TRADITIONAL ECONOMIC SYSTEM: ETYMOLOGY The fundamental economic questions are answered by customs & traditions and how these were handed down OF from one generation to another ECONOMICS Basically agriculture in nature Barter is the exchange system Feudalistic or communal property  COMMAND ECONOMIC SYSTEM: Also known as Planned economy, Controlled economy, Totalitarian economy, Communist economy The basic economic questions are answered and ETYMOLOGY dictated upon by the government or a central-planning OF body. ECONOMICS Resources are owned and controlled by the government so government says there is egalitarianism (equality or classless society). Rationing is the manner of how goods are distributed in exchange for forced labor.  MARKET ECONOMIC SYSTEM:  Otherwise known as free enterprise or laissez faire (French word for “Leave us alone”) or capitalist economy  The economic questions are answered through the price system founded on the invisible hands (demand & supply) ETYMOLOGY  Monetized system of exchange OF  Free enterprise and presence of competition and profit ECONOMICS motive of firms  Consumer sovereignty  Existence of private property and in effect, the ills of wealth inequality  UNIT 1B TEN PRINCIPLES OF ECONOMICS  How individuals make decisions TEN PRINCIPLES How people interact OF ECONOMICS How the economy as a whole works  People face TRADE-OFFS The Cost of Something is How WHAT YOU GIVE UP to get it Individuals Make Rational People think at the Decisions MARGIN (P1- P4) People respond to INCENTIVES   People are likely to make good decisions only if they understand the options they have available – acknowledging life’s trade-offs.  There is no such a thing as a “free lunch”.  Economic goals, such as Efficiency vis-a-vis Equality.  Equality = the benefits are uniformly distributed among the members of the society  Efficiency = it means that society is getting the maximum benefits or the most it can from its scarce resources  Allocative efficiency = when consumers pay a market price People face that reflects the private marginal cost of production, MC = P.  Productive efficiency = when a firm is combining resources TRADE-OFFS in such a way as to produce a given output at the lowest possible average total cost – cost minimization  Technical efficiency = relates to how much output can be P1: People face obtained from a given input – output maximization  X-efficiency = occurs when the output of firms, from a given TRADE-OFFS amount of input, is the greatest it can be. Originated from Harvey Leibenstein in the 1960s.  Dynamic efficiency = it means technological progressiveness and innovation and associated with Austrian economist Joseph Schumpeter  Social efficiency = it exists when all private and external costs and benefits are taken into account when producing an extra unit   Making decisions requires comparing costs and benefits of alternative courses of action. The cost of an action is not only limited to its Explicit costs or Out-of-pocket P2 : TThe Cost of costs but also its OPPORTUNITY Something is COST or IMPLICIT costs or WHAT WHAT YOU GIVE UP to get it iscost YOU GIVE UP to get what you of something is want, otherwise known as your WHAT YOU GIVE FOREGONE BENEFIT.   Rational people = people who systematically and purposefully do the best they can to achieve their objectives  Marginal change = a small incremental adjustment to a plan of action  A rational decision maker takes an action if P3: Rational and only if the marginal benefits (marginal People think at revenue) exceeds the marginal cost. the MARGIN  Marginal decision making can help explain people think at some otherwise puzzling economic the MARGIN phenomena such as the Water-Diamond Paradox, wherein the willingness of a person to pay much more is based on the marginal benefit or marginal utility that an extra unit yields rather than its total utility or usefulness.  Incentives = something that induces a person to act or things that induce people to alter their actions or People respond behaviors. to INCENTIVES respond to  Related to reinforcements INCENTIVES which can be positive (REWARDS or MERITS) or negative (PUNISHMENTS or DEMERITS)  TRADE can make everyone better-off MARKETS are usually a good How People way to organize economic Interact activity (P5 – P7) GOVERNMENTS can sometimes improve market outcomes   Trade allows countries to specialize in what they do TRADE can best. make everyone  By trading with others, better off can people can buy a greater variety of goods and services at a lower cost.   Market economy = an economy that allocates resources through the decentralized decisions of MARKETS are many firms and households usually a good as they interact in the factor way to organize and product markets. economic  The price system is the signal activity light to all market activities and the price is determined by the invisible hands of demand and supply.   Governments are regulatory agencies and are needed to enforce rules and maintain the institutions that are key to the market system.  Enforce property rights – the ability of an individual to own and exercise control over scarce resources.  Government is needed when there is market GOVERNMENTS failure – a situation in which a market left on its own fails to allocate resources efficiently. One can sometimes possible cause of this market failure is an externality – the impact of one person’s action on improve market the well-being of a bystander such as the case of pollution which is a negative externality. There are outcomes also positive externality such as a park or basketball court established by the company in its area of operation or the employment it generates in the community. Another cause of market failure is market power – the ability of a single entity (person or group) to have a substantial influence or control on market prices.  A country’s STANDARD OF LIVING depends on its ability to produce goods and services How the Prices rise when the Economy as government PRINTS TOO a Whole MUCH MONEY Works (P8 – P10) Society faces SHORT-RUN TRADE-OFF BETWEEN INFLATION & UNEMPLOYMENT   Standard of Living – Human Development Index (HDI) which includes per capita GDP, income distribution or income equality measured by Gini coefficient or A country’s Lorenz Curve, life expectancy, functional literacy rate, unemployment rate STANDARD OF  Standard of Living is attributable to LIVING depends productivity – the amount of goods and on its ability to services produced from each unit of labor input. Growth rate of productivity produce goods determines the growth rate of its average and services income. Labor productivity is brought about by ensuring well-educated workforce, presence of tools needed to produce products and access to the best available technology.   Inflation – an increase in the overall level of prices in the economy  Monetary inflation is brought Prices rise about by government’s when the overprinting of money which government in turn leads to excessive PRINTS TOO spending (demand-pull MUCH MONEY inflation). The relationship of price level and quantity of money are observed to be direct or positive.   Phillips’ curve – short-run trade- off between inflation rate and unemployment rate; inverse or negative relationship between inflation rate and unemployment Society faces a rate. SHORT-RUN  This SR trade-off plays a key TRADE-OFF role in the analysis of the between business cycle – the irregular INFLATION & and largely unpredictable UNEMPLOYMENT fluctuations in economic activity, as measured by the production of goods and services or the number of people employed. This Photo by Unknown Author is licensed under CC BY-SA   https://www.youtube.com/watch?v=PXJvyHe1aZk TEN  Mankiw's Ten Principles of Economics PRINCIPLES  Oct 16, 2013 OF ECONOMICS  UNIT 1C METHODOLOGY OF ECONOMICS   https://www.youtube.com/watch?v=eG-6_Il9daA  Positive, Normative Statements and Economic Methodology  Apr 18, 2018 METHODOLOGY OF ECONOMICS  https://www.youtube.com/watch?v=Y6-Qt9W6TUY  The Scientific Method of Economics.  Dec 6, 2020  5 Steps in the Methodology of Economics or Scientific Method (activities done and tools used): 1. Observation = identify the specific problem and collect or gather relevant data; tools used are common sense and five senses and survey tools 2. Definitions and Assumptions = give the operational meaning of the terms used and the conditions set; tools used are review of related literature; e.g., ceteris paribus concept 3. Deductions = analyze and formulate generalizations or METHODOLOGY conclusions or hypotheses or theories or models; tools used are logic and mathematics, for Logic – either the deductive (G-P)or OF ECONOMICS inductive (P-G) reasonings can be made, for Mathematics – graphical illustrations (2 variables only; y-axis is the dependent variable and x-axis is the independent variable) or algebraic expressions or equations can be used (2 or more variables) Hypothesis = educated guess Models are simplifications of reality usually in diagrams or equations, e.g., circular flow model and production possibilities frontier Theories are still to be proven Principles or Laws are proven to be True and Correct already  5 Steps in the Methodology of Economics (activities done and tools used): 4. Empirical Verification = hypothesis-testing or METHODOLOGY validation of the hypothesis; tools used are Statistics OF ECONOMICS (Inferential) or Econometrics (Regression analysis) 5. Policy Formulation and Application = formulation of the solution or action plan for the problem and apply or implement the said policy  3 Phases of Economics: 1. Descriptive Economics = refers to observing the What, When, Where, Who and How of economic events 2. Theoretical Economics or Economic Analysis = it involves definitions & assumptions, METHODOLOGY deductions and empirical verifications; refers to OF ECONOMICS answering the question Why??? 3. Applied Economics or Economic Policy = it relates to the formulation of solution or action plan for the problem and apply or implement the said policy  2 Branches of Analysis in Economics: 1. Positive Economics = deals with ”What is” and relies heavily on Facts only; it is related to step 1 - Observation & Descriptive Economics. Positive statements are Objective. 2. Normative Economics = deals with “What METHODOLOGY should be” or “What ought to be” and uses both Facts and Value Judgements; it is related to steps 2-5 OF ECONOMICS as well as to Theoretical Economics (Economic Analysis) and Applied Economics (Economic Policy). Normative statements are Prescriptive but also Subjective. Value Judgments = these are belief systems, customs & traditions, environmental considerations that are considered in the formulation of solutions and policies to address economic issues.  2 Approaches in the Study of Economics: * the main difference lies in the scope or level of aggregation and not the subject matter METHODOLOGY 1. MICROECONOMICS = study of an individual or OF ECONOMICS specific or particular unit of the economy, e.g., consumer or firm 2. MACROECONOMICS = study of the aggregate economy or the economy as a whole or all of the units of the economy, e.g., household sector, business firm sector, foreign trade sector, the government sector  Why Economists Disagree or Appear to Give Conflicting Advice: 1. Economists may disagree about the validity METHODOLOGY of alternative positive theories about how the world works or differences in scientific OF ECONOMICS judgments 2. Economists may have different values and therefore different normative views about what policy should try to accomplish or differences in perceptions versus reality. REFERENCES: Mankiw, Gregory N. (2018). Principles of Economics. Cengage Learning Asia Pte Ltd: Singapore. McConnell, Campbell R., Stanley L. Brue, & Sean M. Flynn. (2012). Economics. McGraw-Hill Education (Asia)