MACROECONOMICSINTRODUCTION TO MACROECONOMICS- Economics is the study of how people, institutions, and society make economic choices under conditions of scarcityo When you make a decision, you give something else upo What to produce, how much to charge. - Scarcity is anything that is limitedo Moneyo Natural Resources o Time- Economics tell us how to make the best use of our scarce resourceso How are we going to utilize the resource? Ex: Corn to fuel or to livestock food Ex: plot of land to build housing or stores- When you decided to attend USC, what did you give up?- When you decided to enroll in this class, what did you give up?- When you decided to come to class today, what did you give up?o The answer to those questions is your opportunity cost. - Opportunity cost is the value of the good, service, or time forgone to obtain something else- What is the opportunity cost of attending USC?o Entering workforceo Attending a different collegeo Living off your parents- When you made the decision, you asked yourself what makes me the most happy.o You weighted the benefits and costso Made the decision that maximized your utility (Happiness)- Economics assumes people are rational and self-interestedo Not selfish, but make decisions to make themselves happy- MICRO vs MACRO- Some economists explore the decisions of business and individuals. Others focus on the economy as a whole; states, nations, and global- Microeconomics explores the decisions of the consumer, worker, or a businesso Very smallo Why are there fewer women in the labor force than men?o Determine whether a small business should make the decision to remain open on Sundays. - Macroeconomics is concerned with the economy as whole or major components of the economy.o Big pictureo Compare the GDP for developed countrieso What has the national unemployment rate done over the past 10 quarters?- Positive and Normative Statements- Economists have 2 roles:o Inform about the economy- tell the facts Making positive statements: anything that could potentially be proved or disproved is a positive statement. - The unemployment rate for the month of July was 7.4%- As the price of pizza increases, people will buy fewer slices- GDP fell in the second quarter of 2013o Give advice on improvising the economy-opinion Giving a normative statement- The income tax rates should be lowered- The government should lower the unemployment rate by spending money- The minimum wage rate should be increased- Individual’s Economic Problem:o We have unlimited wants I want everything: a BMW, a house on the beach, a boat, pearls, to eat at my favorite restaurant every day, etc… o I don’t have these because I have limited resources Income constraints I can only work so many hours in a dayo The economic problem for an individual is determining which our of our unlimited wants should be purchased with our limited resources- Budget Line o Attainable and unattainable optionso Trade-offs and opportunity costso Make the best choice possible - Sue’s parents give her $60 to spend on food a week. - Sue loves to eat pizza and hamburgers and spends her weekly allotment on those two items- A slice of pizza costs $2 and a hamburger costs $5- If sue decides to spend all of her money on pizza, how many slices can she buy?o 30 Slices- If she decides to spend all of her money on hamburgers, how many can she buy?o 12 HamburgersTradeoff and Opportunity Cost - If she decides she wants two more hamburgers, she has to give up 5 slices of pizza to have those and stay obtainable Choice based on Utility UnattainableAttainableIncome and price changes - If Sue’s income now becomes 30 dollars a week, her budget line will have to change. o If she spends all of her money on pizza, she could get 15 sliceso If she spends all of her money on hamburgers, she could get 6 burgers - If her income increased, her budget line would shift outward from the origin. - If the prices change, if pizza now cost $1 , hamburgers still cost $5o If she spends all of her money on pizza, she could get 60 sliceso If she spends all her money on hamburgers, she could get 12 burgers- If the prices change and the price of hamburgers is now $10o The budget line would pivot inwardso If she spends all her money on hamburgers, she could consume 6- Society’s Economic Problem- Scarce Resourceso Land o Labor o Capital (in economic terms is tools, a shovel, a truck for a business, a dishwasher for a restaurant, tools, equipment: things that produce other things NOT STOCKS AND BONDS)o Entrepreneurial ability  Takes initiative  Makes decisions Innovates Takes risk CHAPTER TWO - Economic Systemso A particular set of institutional arrangements and a coordinating mechanism to respond to society’s problem o Differences in systems exist by: Who owns the factors of production What method is used to motivate, coordinate, and direct economic activityo The Command System Known as socialism or communism  Government ownership, in charge of factors of production Decisions made by a central planning board/ planner at core of government. The government is involved heavily with economic activity North Korea and Cuba are last remaining examples of largely centrally planned economies The two Koreas:o The Market System  Known as capitalism  Private ownership of resources  Decisions based on markets Pure capitalism- laissez-faire capitalism- the government’s role is limited to protecting private property and establishing an environment to keep the market working efficientlyo Characteristics of the Market System  Private Property- The right of persons to obtain, own, control, employ, dispose of, and bequeath land, capital, and property Freedom of enterprise and choice- firms have the freedom to produce and sell any goods or services of their choice  Self-Interest- each economic unit tries to advance their own goal Competition- the presence of independent economic buyers and sellers who have the choice to enter or leave the market Markets and prices- markets bring buyers and sellers together to decide on a common price  Technology and Capital Goods- advances in technology and capital goods are encouraged Specialization- division of labor, geographic specialization- Makes trade easier -o Active but Limited Government Government may be needed to alleviate market failures Government can increase effectiveness of a