Introductory macroeconomics David A. Penn

 How much economics do I need to know to participate in conversations?  Most of the economics that is suitable for advising policymakers is about at the level of the introductory undergraduate course.  – Herb Stein, American economist

 Why study economics?  The reason to study economics is “to avoid being deceived by economists.” – Joan Robinson, British economist

 What should be produced by a society?  How should it be produced?  Who gets to consume what is produced?

Total Government Total Individual Limited Government Cradle to Grave

 Choices require tradeoffs  Self-interest is not a bad way of organizing economic activity  Costs are opportunity costs  Scarcity is always with us

 Choices require tradeoffs

 Self-interest is not a bad way of organizing economic activity

 Costs are opportunity costs ◦ The cost of something is measured by what one gives up to it or acquire it.

 Scarcity is always with us

 Economics – the study of how a society allocates scarce resources.  With limited resources and unlimited wants, we must make choices.

 Positive economics – deals with ‘what is’  Normative economics – has to do with ‘what should be’

 Microeconomics – focuses on individual markets and industries; ‘little picture’ ◦ Competition ◦ Efficiency ◦ Trade ◦ Market failures

 Macroeconomics – issues for the whole economy; ‘big picture’ ◦ Unemployment ◦ Economic growth ◦ Inflation ◦ Trade ◦ Business cycles

 Normative or Positive? ◦ The unemployment rate is 5.5 percent. ◦ The price of gasoline is too high. ◦ Sales taxes are worse than income taxes. ◦ Wages are the largest component of income. ◦ When gasoline prices rise, consumption drops. ◦ The government should be more involved in health care.

 Macroeconomics or microeconomics? ◦ Standard Oil once was the prime example of monopoly. ◦ Unemployment is still a major problem for the economy. ◦ Inflation is less of a problem than it has been in years. ◦ A tax on imported oil will increase the price of gasoline. ◦ Anti-trust laws are needed to prevent the concentration of market power in a particular industry. ◦ Households benefit when they can purchase a good for a price that is less than they are willing to pay.

 Most of the economies in the world are market economies to at least some degree.  Market economies are characterized by individuals and businesses making decisions based on incentives.  Example: price is a powerful incentive ◦ When the price of gasoline rises:  Consumers use less  Refiners make more  Did society or government have to require consumers to use less gasoline or refiners to make more?

 Very few economies rely on government direction to determine what goods are produced and in what quantities. ◦ North Korea ◦ Cuba  In many economies, however, government rules govern the prices of some goods and services.  Example: the price of gasoline is subsidized in Iran ◦ Result: consumers use too much and local refiners do not make enough gasoline  The degree of government intervention varies from nation to nation.  Not all government intervention in the economy is bad.

 Economics is a social science  It is difficult to use experiments to test economic theories (but the field of experimental economics is growing rapidly)  Consequently, economists use economic models to test theories

 Three important economic models: ◦ Production possibilities frontier ◦ Circular flow diagram ◦ Gains from trade analysis  These models will be examined in the next three presentations.