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8/7/2019 Macro Mcconnell Chpt 1
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Slides prepared by Bruno Fullone, George Brown College 2010 McGraw-Hill1
PART ONE: ANPART ONE: ANINTRODUCTION TOINTRODUCTION TO
ECONOMICS AND THEECONOMICS AND THEECONOMYECONOMY
CHAPTER 1CHAPTER 1LIMITS, ALTERNATIVESLIMITS, ALTERNATIVES
AND CHOICEAND CHOICE
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2
In this chapter you willIn this chapter you willlearnlearn
1.1 The Ten Key Concepts to retain for alifetime
1.2 The features of the economic way ofthinking
1.3 The role of economic theory in economics1.4 The distinction between microeconomics
and macroeconomics
1.5 The nature of the economic problem andthe categories of scarce resources1.6 About production possibilities analysis and
increasing opportunity costs
1.7 What economic growth is, and how presentchoices determine future production
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LO1.1 3
1 .1 Ten Key Concept s1 .1 Ten Key Concept s
The Individual
1. Facing trade-offs2. Opportunity Costs
3. Choosing a Little More or Less
4. The Influence of Incentives
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LO1.1 5
Ten Key ConceptsTen Key Concepts
The Economy as a Whole & theStandard of Living
8. Production & the Standard of Living
9. Money & Inflation
10.Inflation-Unemployment Trade-off
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LO1.2 6
1.2 The Economic Way of1.2 The Economic Way ofThinkingThinking
Scarcity & Choice Purposeful Behaviour
Marginal Analysis: Benefits & Costs
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1.3 Theories, Principles and1.3 Theories, Principles andModelsModels
The scientific method: observe the world formulate hypotheses
test by comparing actual outcomes to thehypothesized predictions
accept, reject, modify hypotheses asindicated
continue testing against the facts theory or model
law or principle
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1.31.3 Theories, Principles andTheories, Principles andModelsModels
Deriving Theories
Terminology
Generalizations
Other-Things-Equal Assumption Abstractions
Graphical Expression
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1.4 Macroeconomics versus1.4 Macroeconomics versusMicroeconomicsMicroeconomics
Macroeconomics examines the whole economy
the subdivisions or aggregates
Microeconomics examines Individual units (household, firm or
industry) and their decision makingprocess
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Positive & NormativePositive & NormativeEconomicsEconomics
POSITIVE STATEMENTS. based upon facts & cause-and-effect
relationships
what is without value judgments
NORMATIVE STATEMENTS based upon subjective beliefs what ought to be
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1.5 The Nature of the1.5 The Nature of theEconomic Problem: IndividualsEconomic Problem: Individuals
We all have a finite amount of income
Most people have unlimited wants
The budget line
Illustrated...
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Figure 1-1Figure 1-1A Consumer Budget LineA Consumer Budget Line
DVD($20)
Book($10)
TotalExpenditure
6 0 120 = 120 + 0
5 2 120 =100 +204 3 120 = 80 + 40
3 6 120 = 60 + 60
2 8 120 = 40 + 80
1 10 120 = 20+100
0 12 120 = 0 + 120
0
2
4
6
8
0 2 4 6 8 10 12 14
Books
DVD
Attainab
le
Unattainabl
e
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The Economic Problem forThe Economic Problem forSocieties: Scarce ResourcesSocieties: Scarce ResourcesProperty Resources Land Capital
Human Resources Labour Entrepreneurial Ability
takes initiative
makes policy decisions innovates bears risk
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1.6 The Production1.6 The Production
Possibilities ModelPossibilities Model
Assumptions:
full employment & productive efficiency
fixed resources
fixed technology two goods
pizzas symbolize consumer goods
industrial robots symbolize capital goods
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Production Possibilities
0
2
4
6
8
10
12
0 1 2 3 4 5
Pizzas (hundred thousands)
R
obots(thousands
)
AABB
CC
DD
EE
WW
attainableattainable
unattainableunattainableattainable butattainable but
inefficientinefficient
Figure 1-2
The Production Possibilities Table
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Production PossibilitiesProduction Possibilities
Law of Increasing Opportunity Cost
opportunity cost increases with amountproduced
as we make more pizzas, the # of robotswe have to give up (per pizza)increases
illustrated...
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The Law of Increasing OpportunityThe Law of Increasing OpportunityCostsCosts
Pizza (00,000s) 0 1 2 3 4
Robots (000s) 10 9 7 4 0
op po rtun ity cost of 1 st 10 0,00 0 pizza s = 1 ,00 0
robots
op p ortun ity cost of 2 st 100,000 pizzas = 2,000 robots
opportunity cost of 3st 100,000 pizzas = 3,000 robots
opportunity cost of 4st 100,000 pizzas = 4,000 robots
the more pizzas we make,the more pizzas we make,the more each one costs,the more each one costs,
in terms of machines foregonein terms of machines foregone
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LO1.6 18
The Law of IncreasingThe Law of IncreasingOpportunity CostOpportunity Cost
Shape of the Curve
concave to the originEconomic Explanation
resources are not completely adaptableto alternative uses
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LO1.6 19
Optimal AllocationOptimal Allocation
Decide on optimal allocation bycomparing Marginal (extra) Cost (MC)to Marginal Benefit (MB)
Marginal Benefit is the extra benefitassociated with consuming one moreunit
Marginal Cost is the extra opportunity
cost of that extra unit
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LO1.6 20
Figure 1-3Figure 1-3Optimal Allocation MB = MCOptimal Allocation MB = MC
0
5
10
15
1 2 3
Quantity of Pizz
M
B/MC
Optimal allocation requiresthe expansion of a goodsoutput until its MC and MB
are equal.
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LO1.7 21
1.7 Unemployment, Growth and1.7 Unemployment, Growth andthe Futurethe Future
A Growing Economy increases in factor supplies
advances in technology
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LO1.7 22
Figure 1.5Figure 1.5 Economic GrowthEconomic Growthand the PPCand the PPC
A B C D E
Pizza 0 2 4 6 8
Robot 14 12 9 5 0
P ro d u c tio n P o s s i
0
2
4
6
8
1 0
1 2
1 4
0 2 4 6 8 1 0
P iz z a s ( h u n d r e d t h o u
Robots(thousands)
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LO1.7 23
Figure 1.6Figure 1.6 Present Choices &Present Choices &Future PossibilitiesFuture Possibilities
FAVOURINGFAVOURINGPRESENT GOODSPRESENT GOODS
FutureFuture
CurveCurve
Goods
fortheFutu
re
Goods
forth
eFuture
Goods for theGoods for the
PresentPresent
FAVOURINGFAVOURINGFUTURE GOODSFUTURE GOODS
Goods
fortheFutu
re
Goods
forth
eFuture
Goods for the PresentGoods for the Present
FutureFuture
CurveCurve
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LO1.7 24
A Qualification: InternationalA Qualification: InternationalTradeTrade
an individual nation is limited by theproduction possibilities curve
but NOT when there is international
specialization and trade! possible to consume ABOVE the production
possibilities curve
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Ch t 1 25
Chapter 1 SummaryChapter 1 Summary
1.1 Ten Key Concepts to Retain for aLifetime
1.2 The Economic Way of Thinking
1.3 Theories, Principles and Models1.4 Macroeconomics and Microeconomics1.5 The Economic Problem
1.6 The Production Possibilities Model andIncreasing Opportunity Costs1.7 Economic Growth, Present Choices,
and Future Possibilities
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