ECO 120 - Global
Macroeconomics
TAGGERT J. BROOKS
Module 01
THE STUDY OF ECONOMICS
What is Economics?

Economics is the study of the allocation of scarce resources in an
attempt to satisfy unlimited wants

More generally it is the study of human decision making particularly
as it relates to markets.

A set of tools used for analysis, and a way of thinking.
What is Economics?

Incentives matter.

The law of unintended consequences.
Individual Choice:
The Core of Economics

Individual choice is the decision by an individual of
what to do, which necessarily involves a decision of
what not to do.
Individual Choice:
The Core of Economics

Basic principles behind the individual choices
include:
1.
Resources are scarce.
2.
The real cost of something is what you must give up to get it.
3.
“How much?” is a decision at the margin.
4.
People usually take advantage of opportunities to make themselves
better off.
Scarcity, Choice,
and Opportunity Cost

Human wants are unlimited, but resources are not.

Three basic questions must be answered in order to understand an
economic system:

What gets produced?

How is it produced?

Who gets what is produced?
Scarcity (The Fundamental Problem)

Economic Good (or service) is scarce if there is not enough to satisfy
all wants at a zero price (free). This is often called a good for short.

Free Good there is enough to satisfy all wants at a zero price.
Examples…none?

Economic Bad is something you would pay to have less of.
Resources Are Scarce

A resource is anything that can be used to produce
something else.


Ex.: Land, labor, capital, entrepreneurship
Resources are scarce – the quantity available isn’t
large enough to satisfy all productive uses.

Ex.: Petroleum, lumber, intelligence
Resources

Land


Labor


The physical and mental effort of humans
Capital


Land used in the production of goods and services
Buildings and equipment
Entrepreneurial Ability

Managerial, organizational, and risk-taking skills
Scarcity, Choice, and Opportunity
Cost

Production is the process that transforms scarce resources into useful
goods and services.

Resources or factors of production are the inputs into the process of
production; goods and services of value to households are the
outputs of the process of production.
Scarcity, Choice, and Opportunity
Cost

Capital refers to the things that are themselves
produced and then used to produce other goods and
services.

The basic resources that are available to a society are
factors of production:
 Land
 Labor
 Capital
 Entrepreneurial
ability
Payment for Resources

Rent (for land)

Wages (for labor)

Interest (for capital)

Profit (for entrepreneurial ability)
Markets

A market is a set of arrangements through which buyers and
sellers carry out exchange at mutually agreeable terms

Product Market


A market in which goods and services are exchanged
Resource Market

A market in which resources are exchanged
Economic Actors

Households

Firms

Government

Rest of the World
Opportunity Cost:

The real cost of an item is its opportunity cost: what
you must give up in order to get it.

Opportunity cost is crucial to understanding
individual choice.
Opportunity Cost

Opportunity cost is the best alternative that we forgo,
or give up, when we make a choice or a decision.

All decisions involve trade-offs.

No “Free Lunch”
Opportunity Cost

You won a free ticket to see an Eric Clapton concert (which has
no resale value). Bob Dylan is performing on the same night and
is your next-best alternative activity. Tickets to see Dylan cost $40.
On any given day, you would be willing to pay up to $50 to see
Dylan. Assume there are no other costs of seeing either
performer. Based on this information, what is the opportunity cost
of seeing Eric Clapton?
(a) $0, (b) $10, (c) $40, or (d) $50.
Another Example of Opportunity Cost in
Practice

Recently the TSA has decided to allow small scissors, knifes, etc.

Why?
Marginalism

In weighing the costs and benefits of a decision, it is important to
weigh only the costs and benefits that arise from the decision.
Marginalism

For example, when a firm decides whether to produce
additional output, it considers (should consider) only
the additional (or marginal cost), not the sunk cost.

Sunk costs are costs that cannot be avoided, regardless of what is done
in the future, because they have already been incurred.
Macroeconomics
vs. Microeconomics

Microeconomics focuses on how decisions are
made by individuals and firms and the
consequences of those decisions.
Macroeconomics
vs. Microeconomics

Macroeconomics examines the aggregate behavior
of the economy.

Macroeconomics examines how the actions of all
the individuals and firms in the economy interact to
produce a particular level of economic
performance as a whole.

In macroeconomics, the behavior of the whole macroeconomy is,
indeed, greater than the sum of individual actions and market
outcomes.
Some Sub-Fields within Economics

Micro

Macro

International Trade

International Finance

Industrial Organization

Money and Banking

Labor Economics

Economic Development

Health Economics

Growth Theory
Some Non-standard Economic
Research

Economists have done research into areas not normally
considered economics, by asking questions such as

Why are Americans so obese?

What is more dangerous a gun or a pool?

Why did crime rates fall in the 1990s?

What is the relationship between Religion and Economic
Growth?
Some Non Traditional Economic
Research

Economists have done research into areas not normally
considered economics, by asking questions such as

Matching models

Looking at how employers and employees find matches.

Husband and wives

Speed Dating.

Sexual Partners
Positive Versus Normative
Economic Analysis

A positive economic statement can be proved or
disproved by reference to facts


”The unemployment rate is 4.1%"
A normative economic statement represents a value
judgment, which cannot be proved or disproved

"The government should pay down the debt"
Identify these statements as normative or
positive economic statements

Sales Taxes are inefficient and should be eliminated.

Social security will run out of money in 2042.

Poverty inhibits economic growth.

The Unemployment Rate is 4.5%
When and Why
Economists Disagree
There are two main reasons economists disagree:
•
Which simplifications to make in a model
•
Values