2. Welcome to Principles of Macroeconomics

3. Economics is the study of how individuals and societies allocate scarce resources among competing alternative ends

4. Hall and Lieberman definition Economics is the study of choice under conditions of scarcity

5. Available resources are insufficient to satisfy wants. We cannot produce enough goods and services to satisfy everyone—we don’t have the resources!

6. Economics Webster’s Ninth New Collegiate Dictionary. eco  nom ic 1. archaic: of or relating to a household or its management. eco = oikos, meaning “house” or “household” nom = nemein, meaning “to manage” ic = ic, mean “of” or “relating to” The genealogy of economics

7. Economics is the social science that studies the choices we make as we cope with scarcity and the incentives that influence and reconcile our choices.

8. A reward or penalty—a “carrot” or a “stick”— that encourages or discourages an action. The risk of a getting a ticket for speeding gives you an incentive to obey they speed limit—or at least slow down. Time-of-day variability of phone rates give you an incentive to phone at night.

9. Economic Resources Resources are the tangible things that make the production and distribution of goods and services possible.

10. Economic Resources by Category Land Labor Capital Entrepreneurship

11. “Free gifts of nature” Land or natural resources

12. Labor or “Human Resources”

13. Capital “Manmade instruments of production.”

14. Types of capital Private, tangible capital Examples: Aircraft and trucks used by Federal Express; Nuclear Plants “owned” by Entergy; Plants “owned” by Case Equipment Co. Public, tangible capital or “infrastructure” Examples: Bridges and viaducts; Water collection and filtration systems; navigable waterways; Mass transit systems; Airports. Human capital, defined as “the skills and training of the labor force.” Examples: Network engineers and webmasters; Plumbers; Accountants; Chemists; Machinists; Nurses; Pilots.

15. Entrepreneurship Entrepreneurship is the willingness and ability to combine land, labor and capital into productive enterprises. Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage. Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.

16. The World of Economics Microeconomics Macroeconomics Positive economics Normative economics

17. Microeconomics The study of the choices that individuals and businesses make and the way these choices respond to incentives, interact, and are influenced by government Examples of microeconomic questions? What determines the price of gasoline? Why is housing so much more expensive in San Francisco compared to Dallas? Will more students enroll in nursing schools in response to rising incomes of nurses? Will the “free” availability of Linux affect sales of Windows?

18. Macroeconomics The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.

19. Macroeconomic Questions What determines the value of total spending and output? What are the determinants of total employment? What are the determinants of personal income? What are the determinants of the cost of living What causes economic fluctuations—recessions and expansions

20. The Business Cycle þThe term business cycle is used to describe observed fluctuations in key macroeconomic measures such as real GDP, personal income, profits, or employment. þA full cycle consists of an expansion and a contraction (or recession). þBusiness cycles are recurring phenomena; however, they are irregularly recurring. Time Real GDP

21. Total Production Year Business Cycle Phases and Turning Points Expansion Peak Recession Trough 248

22. Economics deals with questions of “what is” and “what ought to be.” The former set of questions belong to positive economics; the latter to normative economics Positive and Normative Economics

23. Positive economics attempts set forth scientific statements --that is, statements subject to verification or falsification For instance: “ If they raise tuition again at ASU, enrollment will decline.” The recent increase in interest rates should depress housing construction. Total employment in the U.S. fell in 2002.

24. The Bush tax plan is tilted excessively to the rich

25. Now wait a minute! The rich pay higher taxes to begin with. Shouldn’t they receive a bigger tax cut?

26. Who is right? It is a normative issue.

27. A model is a simplified version of economic reality. Models “abstract” from key features of the real world. A model should be as simple as possible to accomplish its purpose.

28. This map of Latvia is a good example of a model

29. Assumptions and Other Conclusions Simplifying assumption: makes a model simpler without affecting its important conclusions Critical assumption: affects the conclusions of a model in a critical way

30. Ceteris Paribus “All other things being equal” or “All other factors held constant.” Simplification in model building is achieved by the ceteris paribus assumption. It allows us to reason about the relationship between two variables without the intrusion of other variables.

31. Correlation versus Causation Correlation is the tendency for the values of two variables to move in a predictable and related way. For example, beer consumption tends to rise when unemployment rises—that is, these variables are correlated. Does it follow that beer consumption causes unemployment?

32. Other examples Researchers at the Aabo Akademi found that Finns who speak the language of their Nordic neighbors were up to 25 percent less likely to fall ill than those who do not. My rooster died—the sun won’t come up tomorrow. Crimes rates tend to be higher in cities with more police per capita.

33. I washed my spaceship today, and that’s why it rained You’ve committed the post hoc fallacy! “After this, therefore because of this.” Post hoc, ergo propter hoc Meaning:

34. To commit the fallacy of composition is to suppose that what is true in the individual case also holds true for the group. Example: “The best way to leave a burning theater is to run for the exit.” The fallacy of composition