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Class notes Introduction to macroeconomics (ECO1102)
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Chapter 1: Ten principles of economicsScarcity
● Limited resources and cannot produce all the goods and services
---> Trees, land, minerals, time (goods and services)
Economics and Economists
● Study of how society manages its scarce resources
● Study how people make decisions
1. People face tradeoffs (tradeoff: giving up something to get something in return)
Efficiency (society is getting maximum benefits from its scarce resources)
● Scarce resources ----> maximum benefits
Equity (the benefits of these resources divided fairly)
● Fairness
2. The cost of something is what you give up to get
● Opportunity cost (value of the next best alternative)
3. Rational people think at the margin (edge)
● Rational: (choosing the best option for “myself”), self-interested (not the same)
● Rational people do the best they can to achieve their objectives
● Marginal changes are small incremental adjustments to an existing plan of action
Marginal example: If a movie costs 15$, and one hour in, I don’t like the movie and there is one
more hour left, I decide how to spend my time. I can either sit at the movie or do anything else.
The cost for the movie is now a sunk cost. If the marginal benefit is greater than the marginal
cost, I would do anything else.
4. People respond to incentives
Incentives
● Induce people to act
Incentive example: If the tax on gasoline rises, the incentive would be to take the bus, bike, or
get a more fuel efficient car.
, 5. Trade can make everyone better off
● Trade ---> specialize ---> greater variety of goods and services
6. Markets are usually a good way to organize economic activity
● Market <--- resources allocated <--- decentralized decisions (firms and households)
7. Governments can sometimes improve market outcomes
---> market failure: Situation in which the market fails to produce an efficient allocations of
resources
---> market outcome not efficient
---> externalities (pollution, bystander, etc): Impact of one’s actions on the well-being of a
bystander
---> impacts on bystanders
---> market power
---> huge influence
8. A country’s standard of living depend on its ability to produce goods and services
● Durage income
Productivity (amount of goods and services produced from each unit of labour input)
---> quantity of goods and services
Higher productivity ---> higher standard of living
9. People rise when the government prints too much money
Inflation ---> an increase in the overall level of prices
10. There is a short run in trade off between inflation and unemployment
● High unemployment ---> low inflation
● Low unemployment ---> high inflation
● Business cycle: short-run fluctuations in economic activity (irregular unpredictable
fluctuations in economic activity)
Chapter 2: Thinking like an economist
Theory and observation
● Ideas
● Actions
,Assumptions
---> simplify complex problems
Models
---> simplified representation
Circular flow diagram (depicts simple economy), (simplifies economy)
● Two types of decision makers
Households: own land, labour, capital, and consume goods and services
Firms: use the factors of production to produce goods and services using inputs
● Two types of markets
Market for goods and services: Households (buyers) ---> buy goods and services ---> output
produced by firms (sellers)
Market for factors of production: Firms ---> use the factor of production to produce goods and
services
The possibilities production frontier (graph that shows the various combinations of output)
Various combinations of outputs <--- economy can potentially produce <--- available
technologies and factors of production
, Microeconomics: decisions and interactions of individuals and firms
Macroeconomics: economy wide phenomena
Positive statements: describe the way the world is (tested data)
Normative statements: claims about how the world should be (ethics)
Economists
● Cannot test data
● Pay attention to the natural experiments by history
● Make assumptions to simplify things
● Use models to learn about the world
● Use diagrams and equations
● May disagree about the validity of alternative positive theories about how the world
works
● May have different values and different normative views
Chapter 5: Measuring a Nation’s Income
Income and Expenditure
---> Total income = Total expenditure (whole economy)
Circular flow diagram:
Measuring Gross Domestic Product (GDP)
---> GDP is the market value (market prices) of all final goods and services (chairs, houses,
dentist, …) produced within a country in a given period of time
The expenditure approach:
GDP = Y = C + I + G + NX
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