Introduction
The Principles
These slides supplement the
textbook, but should not
replace reading the textbook
What is
the main thesis of
this book?
To have a basic
knowledge of
macroeconomic
principles and to gain an
understanding of the
world economy
2
What is
Macroeconomics?
Macro means large – it
deals with the
performance,
structure, behavior,
and decision making of
the whole economy.
3
What are some
examples of
Macroeconomics?
• Inflation
• Unemployment
• Money and banking
• Economic growth
• Business cycles
4
Who is
Friedrich Hayek?
He is an Austrian economist
whose main premise is that
economic planning will
eventually lead to
economic stagnation and
loss of personal freedom.
5
Who is
John Maynard Keynes?
He is an economist who
believed that government
intervention in a stalled
economy may be
necessary to stimulate
demand for recovery.
6
What is
opportunity cost?
That which is given up in
the best alternative choice
when making a decision.
7
What are two types
of opportunity cost?
Financial
Activity
8
What are some
examples of
opportunity cost?
The money you are giving
up to be a student.
An activity you would
rather be doing than
being in class.
9
How is opportunity
cost estimated?
Opportunity cost is
subjectively estimated
by the individual
decision maker
10
What is the
opportunity cost of
cleaning your room?
It’s greater on sunny days
than on rainy days
11
What is the opportunity
cost of a city to use local
taxes to pay for a park?
The best alternative
foregone by not
building the park
12
What is your
opportunity cost of
attending college?
If you make $300 a week, but
you expect you could make
$500 without school - your
opportunity cost is $200
13
Should you paint
the room yourself
or hire someone?
If you paint the room
yourself, what is your
opportunity cost? How
much will you pay
someone to paint?
14
What is the
opportunity cost of
low interest rates?
Retired people and
others make less
money on their savings.
15
What does the term
“margin” mean?
Margin means the last unit
or the last increment. For
example, MR is the
revenue received on the
last unit of output.
16
What is
marginal analysis?
Economists use marginal
analysis to predict cause
and effect. For example,
how many sodas will a
person buy when
standing in front of a
soda pop machine?
17
What is an example
of marginal analysis?
You will decide to do
something if your
marginal benefit exceeds
your marginal cost
18
How many soda pops
will a person buy?
A consumer will purchase
additional sodas as long
as his marginal benefit
(on the last unit) is
greater than his marginal
cost (on the last unit).
19
What is leverage?
Leverage is a way
of multiplying a
gain or a loss.
20
What are examples of
leverage?
• Buying stock on the
margin
• Borrowing money to grow
a business
• Hiring employees
• Recording this lecture
21
What is Price
Elasticity of Demand?
A measure of demand
responsiveness to a
change in price.
22
When does something
face an elastic
demand curve?
When a business owner
raises the price of his
product and total
revenue decreases.
23
When does something
face an inelastic
demand curve?
When a business owner
raises the price of his
product and total
revenue increases.
24
What is
moral hazard?
Moral hazard exists when
someone has a
tendency to invest in
something or pursue an
activity without regard to
potential losses.
25
What is
an example of
moral hazard?
After 2008 large financial
firms were bailed out by
the government
shielding them from their
greed and protecting
them from losses.
26
What is
a consequence of
moral hazard?
To minimize moral hazard
the government has
increased regulations
over large corporations.
27
What is rent seeking?
Resources are used for
personal gain without
benefiting society.
28
What is an example
of rent seeking?
Companies hire
lobbyists to petition
Congress for favors.
29
What is the
Laffer Curve?
30
“Anyone can arrange
his affairs so that his
taxes shall be as low
as possible; he is not
bound to choose that
pattern which best
pays the treasury …”
Judge Learned Hand
31
What is
stock and flow of
economic analysis?
Flow is time
dimensional – Stock
is a point in time.
32
What are other
names for stock
and flow?
Short run vs. long run
Static vs. dynamic
33
Will an increase in
taxes lead to an
increase in
government revenue?
In the short run yes, in
the long run maybe not.
34
What is Economies
of Scale?
As a company grows
its costs decrease
up to a certain point.
35
Should a farmer
pay $50,000 for a
new tractor?
That depends on
the size of the
farmer’s operation.
36
Why do large
corporations favor
minimum wage laws
and small firms do not?
Economies of scale
differences
37
What is price, cost,
revenue and profit?
• Price is what consumes pay
• Cost is what producers pay
• Revenue is total money in
• Profit is money in minus
money out
38
What is Gross
Domestic Product?
The dollar value of all
new and final goods
and services produced
in a given year.
39
How do we
measure growth?
Gross Domestic
Product (GDP)
40
END