Principles of Macroeconomics PDF

Principles of Macroeconomics Thirteenth Edition Part 1 Introduction to Economics Chapter 1 The Scope and Method of...

Principles of Macroeconomics Thirteenth Edition Part 1 Introduction to Economics Chapter 1 The Scope and Method of Economics Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Chapter Outline and Learning Objectives (1 of 2) 1.1 Why Study Economics? Identify three key reasons to study economics. Think of an example from your life in which understanding opportunity costs or the principle of efficient markets could make a difference in your decision making. 1.2 The Scope of Economics Describe microeconomics, macroeconomics, and the diverse fields of economics. Chapter Outline and Learning Objectives (2 of 2) 1.3 The Method of Economics Think about an example of bad causal inference leading to erroneous decision making. Identify the four main goals of economic policy. 1.4 Economic Skills and Economics as a Career Describe economics as a career and the key skills you can learn from studying economics. Appendix: How to Read and Understand Graphs Understand how data can be graphically represented. Chapter 1 The Scope and Method of Economics economics The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. The key word in the definition is choose. Economics is a behavioral, or social, science. Economics is the study of how people make choices. Why Study Economics? To Learn a Way of Thinking Economics has three fundamental concepts: Opportunity Cost Marginalism Efficient Markets To Learn a Way of Thinking (1 of 3) Opportunity Cost opportunity cost The best alternative that we forgo, or give up, when we make a choice or decision. scarce Limited. Economics In Practice (1 of 4) Rainfall and Schooling in India Much of India is still rural and dependent on agriculture. When rains are plentiful, the opportunity cost of sending children to school—the loss in current agricultural output—increases. Using data from more than 2 million children ages 5–16 across rural India, economists find that an unusually high rainfall reduces school enrollments and thus lower math test scores. CRITICAL THINKING 1. For urban children in India, work opportunities are few. What would you expect to see happen to the urban-rural gap in test scores in high rainfall periods? To Learn a Way of Thinking (2 of 3) Marginalism marginalism The process of analyzing the additional or incremental costs or benefits arising from a choice or decision. To Learn a Way of Thinking (3 of 3) Efficient Markets—No Free Lunch efficient market A market in which profit opportunities are eliminated almost instantaneously. The study of economics teaches us a way of thinking and helps us make decisions. To Understand Society Industrial Revolution The period in England during the late eighteenth and early nineteenth centuries in which new manufacturing technologies and improved transportation gave rise to the modern factory system and a massive movement of the population from the countryside to the cities. The study of economics is an essential part of the study of society. To Be an Informed Citizen To be an informed citizen requires a basic understanding of economics.  Test your understanding Suppose that you purchased a ticket to a jazz festival for $100 from an online ticket broker. Once you arrived at the festival, you discovered that parking costs you an additional $15. In this situation, the additional $15 you pay for parking is an example of A) an economic loss. B) opportunity cost. C) marginal cost. D) an inefficient cost. If your tuition is $5,000 this semester, your books cost $600, you can only work 20 rather than 40 hours per week during the 15 weeks you are taking classes and you make $15 per hour, and your room and board is $3,000 this semester (same as if not attending college), then your opportunity cost of attending college this semester is A) $5,600. B) $5,900. C) $10,100. D) $11,600. The Scope of Economics (1 of 2) Microeconomics and Macroeconomics microeconomics The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, firms and households. macroeconomics The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale. The Scope of Economics (2 of 2) Microeconomics and Macroeconomics Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.” Table 1.1 Examples of Microeconomic and Macroeconomic Concerns Division of Production Prices Income Employment Economics Microeconomics Production/output Prices of Distribution of Employment by in individual individual income and wealth individual businesses industries and goods and Wages in the auto and industries businesses services industry Jobs in the steel How much steel Price of medical Minimum wage industry How much office care Price of Executive salaries Number of employees space gasoline Poverty in a firm How many cars Food prices Number of Apartment rents accountants Macroeconomics National Aggregate price National income Employment and production/output level Consumer Total wages and unemployment in the Total industrial prices Producer salaries economy output prices Total corporate Total number of jobs Gross domestic Rate of inflation profits Unemployment rate product Growth of output  Test your understanding Studying how the management of Hewlett Packard decides how many computers to produce and the price to charge for its computers would be considered A) microeconomics. B) macroeconomics. The Method of Economics Economics deals with two kinds of questions: positive and normative. positive economics An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. normative economics An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics. Theories and Models (2 of 5) All Else Equal ceteris paribus or all else equal A device used to analyze the relationship between two variables while the values of other variables are held unchanged. Using the device of ceteris paribus is one part of the process of abstraction. In formulating economic theory, the concept helps us simplify reality to focus on the relationships that interest us.  Test your understanding Which of the following is a positive question? A) Will the level of teenage unemployment increase if the minimum wage is increased? B) Should the minimum wage be set at one-half the average manufacturing wage to guarantee individuals a decent standard of living? C) Wouldn't it be more equitable if the minimum wage increased automatically with the cost of living? D) Wouldn't it be better to try to increase people's wages through job-training programs rather than by requiring employers to pay minimum wages?  Test your understanding: True or False The rate of unemployment is a topic of microeconomics. Answer: FALSE The aggregate price level is a topic of macroeconomics. Answer: TRUE "Ceteris paribus" literally translated means, "buyer beware." Answer: FALSE Positive economics questions "What ought to be?" Normative economics predicts the consequences of alternative actions, answering questions "What is?" or "What will be?" Answer: FALSE Appendix – self study  Table 1A.1 Total Disposable Personal Income in the United States, 1975–2017 (in billions of dollars) Total Disposable Total Disposable Total Disposable Year Year Year Personal Income Personal Income Personal Income 1975 1,219 1991 4,485 2007 10,507 1976 1,326 1992 4,800 2008 10,994 1977 1,457 1993 5,000 2009 10,943 1978 1,630 1994 5,244 2010 11,238 1979 1,809 1995 5,533 2011 11,801 1980 2,018 1996 5,830 2012 12,404 1981 2,251 1997 6,149 2013 12,396 1982 2,425 1998 6,561 2014 13,033 1983 2,617 1999 6,876 2015 13,615 1984 2,904 2000 7,401 2016 13,969 1985 3,099 2001 7,752 2017 14,379 1986 3,288 2002 8,099 1987 3,466 2003 8,466 1988 3,770 2004 9,002 1989 4,052 2005 9,401 1990 4,312 2006 10,037 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Figure 1A.1 Total Disposable Personal Income in the United States: 1975–2017 (in billions of dollars) Source: See Table 1A.1. Graphing Two Variables X-axis The horizontal line against which a variable is plotted. Y-axis The vertical line against which a variable is plotted. origin The point at which the horizontal and vertical axes intersect. Y-intercept The point at which a graph intersects the Y-axis. X-intercept The point at which a graph intersects the X-axis. Plotting Income and Consumption Data for Households positive relationship A relationship between two variables, X and Y, in which a decrease in X is associated with a decrease in Y and an increase in X is associated with an increase in Y. negative relationship A relationship between two variables, X and Y, in which a decrease in X is associated with an increase in Y and an increase in X is associated with a decrease in Y. Table 1A.2 Consumption Expenditures and After-Tax Income, 2016 Blank Average After-Tax Income Average Consumption Expenditures Bottom fifth $ 11,832 $ 25,138 2nd fifth $ 29,423 $ 36,770 3rd fifth $ 47,681 $ 47,664 4th fifth $ 75,065 $ 64,910 Top fifth $ 157,215 $ 112,221 Source: Consumer Expenditures in 2016, U.S. Bureau of Labor Statistics. Figure 1A.2 Household Consumption and Income A graph is a simple two- dimensional geometric representation of data. The graph in Figure 1A.2 displays the data from Table 1A.2. Along the horizontal scale (X-axis), we measure household income. Along the vertical scale (Y-axis), we measure household consumption. Source: See Table 1A.2. Note: At point A, consumption equals $25,138 and income equals $11,832. At point B, consumption equals $36,770 and income equals $29,423. Slope slope A measurement that indicates whether the relationship between variables is positive or negative and how much of a response there is in Y (the variable on the vertical axis) when X (the variable on the horizontal axis) changes. ΔY Y  Y1 = 2 ΔX X 2  X1 Figure 1A.3 A Curve with (a) Positive Slope and (b) Negative Slope A positive slope indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y. A negative slope indicates the opposite—when X increases, Y decreases; and when X decreases, Y increases. Figure 1A.4 Changing Slopes along Curves Some Precautions (1 of 2) Table 1A.3 Total Disposable Personal Income and Consumption for the United States, 1930–2017 (in billions of dollars) Year Total Disposable Personal Income Total Consumption 1930 75 70 1940 78 71 1950 215 192 1960 377 332 1970 762 648 1980 2,018 1,755 1990 4,312 3,826 2000 7,401 6,792 2010 11,238 10,202 2011 11,801 10,689 2012 12,404 11,051 2013 12,396 11,361 2014 13,033 11,928 2015 13,615 12,332 2016 13,969 12,821 Source: U.S.2017 14,379of Economic Analysis. Department of Commerce, Bureau 13,396 Some Precautions (2 of 2) Figure 1A.5 Disposable Personal Income and Consumption It is important to think carefully about what is represented by points in the space defined by the axes of a graph. In Figure 1A.5 we have graphed income with consumption, as in Figure 1A.2, but here each observation point is total disposable income and total consumption in different years, measured in billions of dollars. Source: See Table 1A.3.