Macroeconomics ECON 2301 Fall 2009 Marilyn Spencer, Ph.D. Professor of Economics Introduction to course & Chapter 1

Book 4 Miller, Economics Today, The Macro View, 14 th or 15 th edition (2006 or 2008).

Course Description 4 An overview of how the economy of the United States is organized and functions in a market system. 4 Market processes are used to show how resources and incomes are allocated by households and businesses. 4 Determination of national income, employment, prices, interest rates, and growth are the focus of simple analytical techniques. 4 Monetary and fiscal policies are examined including their international dimensions. 4 Satisfies the economics component of the University core curriculum. (6 core skills) 4 Learning Objectives

Please fill out and return index card - PRINT LEGIBLY: 1. Your name 2. year in college (1st, 2nd, etc.) 3. major - or “deciding” 4. ECON course in high school - “yes” or “no” 5. If you’re working this semester, whether as volunteer or for pay, approx. # of hours/week, - or “N/A” 6. Last math class successfully completed in college - or “N/A” 7. Usual source of local & national news 8. Any particular topic you’d like us to consider as part of this course

Syllabus: Contact information 4 Text 4 Course description 4 Role of course in you undergraduate curriculum 4 Course methodology 4 Course content 4 Grades 4 Course outline

Algebra competency 4 Students need to be comfortable with: ÜSimple linear equations ÜTables of numbers ÜGraphing 4 Read Chapter 1, Appendix A to see if you are comfortable with graphing that you’ll be required to use.

Topics: 4 Introduction to course 4 Chapter 1, Economics: Foundations and Models

Out-of-Class Quiz #1 By 5 p.m., Thursday, September 3: 1. Create an Islander account. 2. me so that I will have your address. Include your name and your course & section numbers. My address is 4 points

Chapter 1: The Nature of Economics

Change of date for 1 st exam!!! The 1 st midterm exam has been rescheduled to Wednesday, September 23. On this exam, you will be tested on concepts from Ch. 4 that we will have had time to go over in class. The 2 nd midterm exam will pick up the rest of Ch. 4.

4 The economic way of thinking is a framework to analyze solutions to economic problems. ÜHow much time to study ÜChoosing which courses to take ÜWhether troops should be sent abroad The Power of Economic Analysis

The Power of Economic Analysis (cont'd) 4 The economic way of thinking gives you the power—the power to reach informed conclusions about what is happening in the world. 4 Economic analysis helps you make better decisions, and increases your understanding when watching or reading the news on the Web.

The Power of Economic Analysis (cont'd) 4 Economic analysis is a way of thinking about all decisions: ÜYour education, career, financing your home, family ÜYour involvement in the business world, or in politics as a voter

Defining Economics 4 Economics ÜThe study of how people allocate their limited resources to satisfy their unlimited wants ÜThe study of how people make choices

Defining Economics (cont'd) 4 Resources ÜThings used to produce other things to satisfy people’s wants 4 Wants ÜWhat people would buy if their incomes were unlimited

Defining Economics (cont'd) 4 With limited income (resources), people must make choices to satisfy their wants. 4 We never have enough of everything, including time, to satisfy our every desire.

Defining Economics (cont'd) 4 Individuals, businesses, and nations face alternatives, and choices must be made. 4 Economics studies how these choices are made.

Microeconomics versus Macroeconomics 4 Microeconomics ÜThe study of decision making undertaken by individuals (or households) and by firms ÜLike looking though a microscope to focus on the smaller parts of the economy Decision of a worker to work overtime or not A family’s choice of having a baby An individual firm advertising

Microeconomics versus Macroeconomics (cont'd) 4 Macroeconomics ÜThe study of the behavior of the economy as a whole ÜDeals with economy-wide phenomena The national unemployment rate The rate of growth in the money supply The national government’s budget deficit

Microeconomics v. Macroeconomics (cont'd) 4 Macroeconomics deals with aggregates, or totals—such as total output in an economy. 4 Modern economic theory blends micro and macro concepts.

The Economic Person: Rational Self-Interest 4 Economists assume that individuals act as if motivated by self-interest and respond predictably to opportunities for gain.

The Economic Person: Rational Self-Interest (cont'd) 4 Rationality Assumption ÜThe assumption that people do not intentionally make decisions that would leave them worse off 4 Bounded Rationality ÜHypothesis that people are nearly, not fully, rational. This is because we cannot examine every choice available to us. So we use simple “rules of thumb” to sort alternatives

The Economic Person: Rational Self-Interest (cont'd) 4 Responding to incentives - rewards for engaging in a particular activity ÜRationality and the use of incentives Positive incentives Negative incentives ÜMaking choices Balancing cost and benefits

The Economic Person: Rational Self-Interest (cont'd) 4 Some examples of incentives ÜResponding to positive incentives Schoolchildren getting gold stars, working to have a “better life” for yourself ÜResponding to negative incentives Penalties, punishments, using credit cards to avoid check overdrafts

The Economic Person: Rational Self-Interest (cont'd) 4 Defining self-interest ÜThe pursuit of one’s goals, does not always mean increasing one’s wealth Prestige Friendship Love

Economics as a Science 4 Models or Theories ÜSimplified representations of the real world used as the basis for predictions or explanations A map is the quintessential model Other models you’ve worked with?

Economics as a Science (cont'd) 4 Assumptions ÜThe set of circumstances in which a model is applicable ÜEvery model, or theory, must be based on a set of assumptions.

Economics as a Science (cont'd) 4 Ceteris Paribus Assumption [KAY-ter-us PEAR-uh-bus] ÜNothing changes except the factor or factors being studied. Ü“Other things constant” Ü“Other things equal”

Economics as a Science (cont'd) 4 Economics is an empirical science. ÜReal-world data is used to evaluate the usefulness of a model. ÜModels are useful if they predict economic phenomena. ÜEconomic models predict how people react, not how they think.

Empirical evidence: Did You Know That... 4 Economics is one of the fastest-growing college majors? 4 During the past 10 years, the number of students majoring in economics at U.S. colleges has increased by 40%? 4 Economics majors typically land higher paying jobs than other majors?

Positive v. Normative Economics 4 Positive Economics ÜPurely descriptive statements or scientific predictions; “If A, then B,” a statement of what is 4 Normative Economics ÜAnalysis involving value judgments; relates to whether things are good or bad, a statement of what ought to be

1 - 1 When Economists Disagree: A Debate Over Outsourcing Does outsourcing by U.S. firms raise or lower incomes in the United States?

4 What type of statement would “A minimum wage actually reduces employment” be considered? Üa.A positive statement. Üb.A marginal statement. Üc.A normative statement. Üd.An irrational conclusion.

Assignments to be completed before class September 2: 4 Having read Chapter 1, be able to answer these end-of- chapter problems: Ü14 th edition: 1-1 through 1-7 & 1-11 on pp Ü15 th edition: 1-1, 1-3, 1-4, 1-5, 1-8, 1-12, 1-13 & 1-14 on pp Read Chapter 2 & also read these end-of-chapter problems: Ü 14 th edition: 2-1 through 2-6, 2-9, 2-10, 2-12 & 2-13 on pp Ü15 th edition: 2-1, 2-2, 2-4, 2-5, 2-6, 2-8, 2-9, 2-10, 2-13 & 2-14 on pp

Out-of-Class Quiz #1 By 5 p.m., Thursday, September 3, me from your Islander account, so that I will have your address. Include your name and your course & section numbers. My address is 4 points