Economics: Economic Review and Macro Basics

The Language of Macroeconomics MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT Economics Economic Review and Macro Basics 2 Why Economics? Economic Question Scarcity limited resources, unlimited. Economic Question Scarcity: limited resources, unlimited wants Resources (i.e. factors of production) Labor Capital Entrepreneurial Ability Time Information Scarcity=>choices => tradeoffs=>opportunity costs Opportunity Costs Value of whatever you sacrifice in order to dobe Value of next best option Subjectively valued Answer to economic question: Command Economy vs. Market Economy

AND THE GLOBAL BUSINESS ENVIRONMENT

Economics: Economic Review and Macro Basics

Why Economics?

Economic Question

 Scarcity: limited resources, unlimited wants

 Resources (i.e factors of production)

 Labor

 Capital

 Entrepreneurial Ability

 Time

 Information

 Scarcity=>choices => tradeoffs=>opportunity costs

 Opportunity Costs

 Value of whatever you sacrifice in order to do/be

 Value of next best option

 Subjectively valued

Answer to economic question:

Command Economy vs Market Economy

A Successful Market Economy

 Private property

 create incentives to wisely use resources

 store fruits of labor/ savings

 Rule of Law

 everyone plays by the same rules

 protects private property

 market system presupposes government

 Price Mechanism

 transmits information

 creates incentives

 Ultimately, a rationing device

 Can you think of other rationing devices?

A Successful Market Economy

 Little Information Asymmetry

 Information dominance for one party in transaction

 Can sometimes be corrected by market

 Specialization

 increase productivity

 permits complex, large scale production

 expands field of knowledge

 Voluntary Trade

 only trade if benefits traders

 positive sum game: all parties better off

 trade utilizes unrecognized gains from trade

 tend to trade those goods/services that have the lowest opportunity costs for us

A Successful Market Economy

 Comparative Advantage: individuals, firms,

countries with the lowest opportunity costs of producing a particular good/service should produce that good and trade for the

goods/service for which they have the highest opportunity cost

 Examples:

 Woodrow Wilson

 China-U.S example

A Successful Market Economy

 Question: Ellen holds the world record in

speed typing You expect Ellen (a) will never hire another person to do her typing

(b) is a professional typist

(c) still might hire someone else to do her typing (d) has a comparative advantage in typing

Microeconomics vs Macroeconomics

 Microeconomics: the study of the behavior of

individual economic agents Microeconomics asks

 how individuals allocate their time, income,

and wealth among various opportunities for labor, leisure, consumption, and savings

 Example: do I work more or less hours given a pay raise?

 how firms decide on output levels, prices, and the resources that will be used in the

production process

 Example: how sensitive is the demand for gasoline to price changes?

Microeconomics vs Macroeconomics

 Macroeconomics: concerned with overall

economic performance of the nation rather

than individuals or firms

 An analysis of the backdrop of economic

conditions against which firms and consumers make decisions

 Current Issues

 Will the U.S Federal Reserve continue to increase interest rates?

 What are the consequences of China’s export-driven growth on other economies?

 Why has Europe’s economic growth been so weak?

Microeconomics vs Macroeconomics

Microeconomics vs Macroeconomics

Why Study Macroeconomics?

 Importance of Economic Policy Institutions and Issues

 Monetary authority (usually central bank)

 Controls money supply

 Influences interest rates and exchange rates

 Fiscal Authority

 Controls tax system

 Purchases goods and services

 Redistributes income

 International Policy Makers

 IMF, World Trade Organization, G7

 Significance of Firm-Specific and Aggregate Risk

 Assessment of Long-Run Economic Environment

 How will trade policy, monetary policy, fiscal policy, technological advancement, political stability affect future economic growth?

 Where will the economy be 10, 20, 30 years from now?