Macro Mcconnell Chpt 1

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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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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Macro Mcconnell Chpt 1