1. Macroeconomics CHAPTER 1 First Principles PowerPoint® Slides by Can Erbil © 2004 Worth Publishers, all rights reserved

2. 2 What you will learn in this chapter: How individuals make choices:  Scarcity  Opportunity cost  Trade-offs  Marginal analysis How individual choices interact:  Trade  Gains from trade  Specialization  Equilibrium  Efficiency and equity

3. 3 How Individuals Make Choices: Basic principles behind the individual choices: 1. Resources are scarce. 2. The real cost of something is what you must give up to get it  Opportunity cost It is all about what you have to forgo to obtain your choice.

4. 4 How Individuals Make Choices: 3. “How much?” is a decision at the margin.  Trade-offs  Marginal decisions and marginal analysis 4. People usually take advantage of opportunities to make themselves better off.  Incentives

5. 5 Interaction: How Economies Work Principles behind the interaction of individual choices: 1. There are gains from trade.  Specialization  Trade and gains from trade 2. Markets move toward equilibrium. 3. Resources should be used as efficiently as possible to achieve society’s goals.  Efficiency  Equity

6. 6 Interaction: How Economies Work 4. Markets usually lead to efficiency.  Exceptions: Market failure 5. When markets don’t achieve efficiency, government intervention can improve society’s welfare.

7. 7 The End of Chapter 1 coming attraction: Chapter 2: Economic Models: Trade-offs and Trade