Macroeconomics

Module 1: Economic Thinking

Understanding Economics and Scarcity

• Scarcity means that there are never enough resources to satisfy all human wants.
• Every society, at every level, must make choices about how to use its resources.
• Economics is the study of the trade-offs and choices that we make, given the fact of scarcity.
• Opportunity cost is what we give up when we choose one thing over another.
Goods and Resources

• Economic Goods: goods or services a consumer must pay to obtain; also called scarce
goods.
• Free Goods: goods or services that a consumer can obtain for free because they are
abundant relative to the demand.
• Productive Resources: the inputs used in the production of goods and services to make a
profit: land, economic capital, labor, and entrepreneurship; also called “factors of
production”
Productive Resources
Four productive resources also called factors
of production:
• Land: any natural resource, including
actual land, but also trees, plants,
livestock, wind, sun, water, etc.
• Economic capital: anything that’s
manufactured in order to be used in the
production of goods and services. Note
the distinction between financial capital • Labor: any human service—physical or
(which is not productive) and economic intellectual. Also referred to as human
capital (which is). While money isn’t capital.
directly productive, the tools and
• Entrepreneurship: the ability of
machinery that it buys can be. someone (an entrepreneur) to recognize a
profit opportunity, organize the other
factors of production, and accept risk.
Concept of Opportunity Cost

Opportunity Cost: the value of the next best alternative.

• Individual Decisions: In some cases, recognizing the opportunity
cost can alter personal behavior.
• Societal Decisions: Opportunity cost comes into play with societal
decisions.
trade-offs also arise with government policies. 
Labor, Markets, and Trade

The Division and Specialization of Labor

• division of labor: the way in which the work
required to produce a good or service is divided
into tasks performed by different workers.
• specialization: when workers or firms focus on
particular tasks for which they are well suited
within the overall production process.
Why the Division of Labor Increases
Production
• economies of scale: when the average cost of
producing each individual unit declines as total
output increases.
Microeconomics and Macroeconomics

Micro vs. Macro

• Macroeconomics: the branch of economics that focuses on broad issues such as growth,
unemployment, inflation, and trade balance.
• Microeconomics: the branch of economics that focuses on actions of particular agents
within the economy, like households, workers, and businesses. We learn about the theory of
consumer behavior and the theory of the firm.
Understanding Microeconomics

Questions to Ask with Microeconomics

• What determines how households • How do people decide whether to
and individuals spend their work, and if so, whether to work
budgets? full time or part time? 
• What combination of goods and • How do people decide how much
services will best fit their needs and to save for the future, or whether
wants, given the budget they have they should borrow to spend
to spend? beyond their current means?
Understanding Microeconomics (cont.)

More Microeconomics Questions

• What determines the products, and • What determines how many
how many of each, a firm will workers it will hire?
produce and sell? • How will a firm finance its
• What determines what prices a firm business?
will charge? • When will a firm decide to
• What determines how a firm will expand, downsize, or even close?
produce its products?
Understanding Macroeconomics

Macroeconomics: Macroeconomic policy pursues its goals through monetary policy and fiscal

policy.

• Monetary Policy: policy that involves altering the level of interest rates, the availability of
credit in the economy, and the extent of borrowing

• Fiscal Policy: economic policies that involve government spending and

Using Economic Models

Economic Model: a simplified version of reality that allows us to observe, understand, and
make predictions about economic behavior.
Economic Models and Math
• Economic models can be represented using words or using mathematics. 
• Algebra and graphs are utilized to explain economic models.
Using Economic Models: Examples

Circular Flow Diagram: a diagram indicating that the

economy consists of households and firms interacting
in a goods-and-services market and a labor market.
• goods-and-services market (also called the product
market), in which firms sell and households buy. 
• labor market, in which households sell labor to
business firms or other employees.
• real world, there are many different markets for
goods and services and markets for many different
types of labor. The circular flow diagram simplifies
these distinctions in order to make the picture easier Note: Economists don’t figure out the solution to a
to grasp. problem and then draw the graph. Instead, they use the
graph to help them discover the answer.
Purpose of Functions

• Function: a relationship or expression involving one or more

variables.
• In economics, functions frequently describe cause and effect.
• Economic models tend to express relationships using economic
variables, such as:
• Budget = money spent on econ books + money spent on music
Solving Simple Equations

Order of Operations Understanding Variables

• When you solve an equation it’s important • Variable: a quantity that can assume a range of
to do each operation in the following order: values represented by a letter or a symbol.
• Simplify inside parentheses and brackets. • For example: y=9+3x
• Simplify the exponent.
•
Working with Variables
Multiply and divide from left to right.
• Add and subtract from left to right. • When you’re trying to solve an equation with
Lines one or more variables, you need to isolate the
variable.
• In this course the most common equation
you will see is for a line in graphs: y = • What does x equal if y=12?
b+mx
Creating and Interpreting Graphs

• intercept: the point on a graph where a line crosses the

vertical axis or horizontal axis.
• slope: the change in the vertical axis divided by the change
in the horizontal axis.
• variable: a quantity that can assume a range of values.
• x-axis: the horizontal line on a graph, commonly represents
quantity (q) on graphs in economics.
• y-axis: the vertical line on a graph, commonly represents
price (p) on graphs in economics.
Creating and Interpreting Graphs (cont.)

Equation for a Line: y = mx + b

• In any equation for a line, m is the slope and b is the y-intercept.
Interpreting Graphs in Economics
• It is rare for real-world data points to arrange themselves as a perfectly straight line.
• It often turns out that a straight line can offer a reasonable approximation of actual data.
Interpreting Slope

What the Slope Means: the change in the vertical

axis divided by the change in the horizontal axis.
• positive slope indicates that two variables are
positively related; when one variable increases, so
does the other, and when one variable decreases,
the other also decreases.
Interpreting Slope: Negative Slope

What the Slope Means: the change in the

vertical axis divided by the change in the
horizontal axis.
• negative slope indicates that two variables
are negatively related; when one variable
increases, the other decreases, and when
one variable decreases, the other increases.
Interpreting Slope: Slope of Zero

What the Slope Means: the change in the

vertical axis divided by the change in the
horizontal axis.
• Slope of zero indicates that there is a
constant relationship between two
variables: when one variable changes, the
other does not change. 
Types of Graphs: Line

Line Graphs: show a relationship between

two variables: one measured on the
horizontal axis and the other measured on
the vertical axis.
• Sometimes it’s useful to show more than
one set of data on the same axes.
• The data in the table, below, is displayed
in Figure 1, which shows the relationship
between two variables.
Types of Graphs: Pie

Pie Graphs: (sometimes called a pie chart) is used to

show how an overall total is divided into parts. A circle
represents a group as a whole. The slices of this circular
“pie” show the relative sizes of subgroups.
• These pie graphs show how the U.S. population was
divided among children, working-age adults, and the
elderly in 1970, 2000, and what is projected for 2030.
• In a pie graph, each slice of the pie represents a share
of the total, or a percentage. For example, 50% would
be half of the pie and 20% would be one-fifth of the
pie.
Types of Graphs: Bar

Bar Graphs: uses the height of different bars to

compare quantities.
• Bar graphs can be subdivided in a way that
reveals information similar to that we can get
from pie charts.
• It is sometimes easier for a reader to run his or
her eyes across several bar graphs, comparing
the shaded areas, rather than trying to compare
several pie graphs.
Types of Graphs: Comparison
How do you know which graph to use for your data?
• Bar graphs are especially useful when • Pie graphs are often better than line
comparing quantities. graphs at showing how an overall group
is divided.
• For example, if you are studying the
populations of different countries, bar graphs • However, if a pie graph has too
can show the relationships between the many slices, it can become difficult
population sizes of multiple countries. to interpret.
• Not only can it show these relationships, but
it can also show breakdowns of different
groups within the population
Types of Graphs: Comparison (cont.)
How do you know which graph to use for your data?
• Line graphs are often the most effective format
for illustrating a relationship between two
variables that are both changing.
• For example, time-series graphs can show
patterns as time changes, like the
unemployment rate over time.
• Line graphs are widely used in economics to
present continuous data about prices, wages,
quantities bought and sold, the size of the
economy.
Assignment: Answer the ff.:

• What is scarcity? Explain its economic impact. • How are equations and functions used to
• What is productive resources? describe relationships? What are the cause
and effects?
• What is opportunity cost and its importance in
decision-making? • How does a graph shows the relationship
between two variables?
• Why do trade and markets exist?
• What is the difference macroeconomics and • What is the difference between a positive
microeconomics? relationship and a negative relationship?
• Why are economic models are useful to • How do you interpret economic
economists? information on a graph?