NEW
PICTURE
TO COME
Module 1
The Study of Economics
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How scarcity and choice are central to the
study of economics
• The importance of opportunity cost in
individual choice and decision making
• The difference between positive
economics and normative economics
• When economists agree and why
sometimes disagree
• What makes macroeconomics different
from microeconomics
Individual Choice: The Core
of Economics
• Economics:
•the study of choices
individuals make about how
to use their scarce resources
• Choices:
•decisions about what and
what not to do
• Scarce:
•not available in sufficient
quantities to satisfy unlimited
wants
Opportunity Cost: The Real Cost of Something
Is What You Must Give Up to Get It
• Opportunity Cost
• Why all costs are opportunity costs
•with every choice, an alternative is foregone - money or
time spent on one thing can’t be spent on another
Basketball star LeBron James chose to
skip college and go straight to the NBA
from high school when offered a $13
million contract.
Individual Choice: The Core
of Economics
• Economy:
•a system for coordinating a
society’s productive and
consumptive activities
• Market Economy:
•system in the U.S.; producers
and consumers determine
what, how and for whom to
produce, with little
government interference
Resources Are Scarce
• Resources (Factors of Production)
• Land -
• Labor • Capital -
• Entrepreneurship • Scarcity and society:
•societal decisions can be the result of individual
choices or they may be better made through
community-wide representation
Microeconomics Versus
Macroeconomics
• Microeconomics
• Macroeconomics
• Economic Aggregates
•Unemployment data,
inflation data, gross
domestic product
Table 1.1 Microeconomic Versus Macroeconomic Questions
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Macro or Micro?
A family’s decision about how much income
to save.
The effect of government regulations on
auto emissions.
The impact of higher national savings on
economic growth.
?
A firm’s decision about how many workers
to hire.
?
Positive Versus Normative
Economics
• Positive economics
1. How much revenue will the
tolls yield?
2. How much more revenue
would be collected if the toll
were raised from $1.00 to
$1.50?
• Normative economics
1. Should the toll be raised?
Positive or Normative
Statements?
A reduction in the rate of growth of money
will reduce the rate of inflation.
?
Society faces a short run tradeoff between
inflation and unemployment.
?
The Federal Reserve should reduce the
rate of growth of money.
Society ought to require welfare recipients to
look for jobs.
Lower tax rate encourage more work and
more saving.
When and Why Economists
Disagree
• Economists may disagree because
they have different values or opinions
• Economists may disagree because
they use different models or methods
to conduct their analysis
• Over time, disputes in economics are
resolved by the accumulation of
evidence (but this can sometimes
take a long time!)