Lecture 1: Introduction to macroeconomics

Distinguish microeconomics from macroeconomics and positive economics from normative economics.. Differentiate between positive & normative economics; short-run & long-run in economics..

Principles of Macroeconomics

Dr.Do Xuan Luan

Faculty of economics and rural development (FERD), Thai Nguyen

University of Agriculture and Forestry (TUAF)

List of all lectures

1 Introduction to macroeconomics;

2 Gross Domestic Product (GDP);

3 Economic growth;

4 Unemployment

5 Inflation;

6 Aggregate Demand & Aggregate Supply (AS-AD model);

7 Expenditure decision and GDP

8 Fiscal Policy;

9 Monetary Policy;

10 Combined effects of monetary and fiscal policy;

11 Trading with the world;

Lecture 1 Introduction of macroeconomics & learning outcome

1 Define economics and the features of the economic perspective

Describe the role of economic theory in economics

2 Distinguish microeconomics from macroeconomics and positive

economics from normative economics

3 List the categories of scarce resources and delineate the nature of the

economizing problem

4 Differentiate between positive & normative economics; short-run &

long-run in economics

Unit1:Introduction to Economics

Scarcity

1

Economic activity and

economics

2

Choice

3

The production Possibilities

Model

4

Opportunity costs

5

The economics perspective

• Purposeful behavior

• Decision making

tool: comparing

costs and benefits

• Choice

• Scarcity

3

4

Resource scarcity

• Scarcity means that wants

always exceed the resources

available to satisfy them

– You can not always get

what you want

– i.e: Government

expenditure on increasing

wage can reduce national

investment

Economic activity and economics

• Economic activity: is what

people do to cope with scarcity

• Economics: Economics is the study of how people use their limited resources to try to satisfy unlimited wants (dismal

science)

Choice

• Faced with scarcity, people

must make choices

• we have to choose among

the available alternatives

• To make a choice, we

compare the benefits of

having more of one thing

against the costs

Purposeful Behavior

Economics assumes that human behavior reflects

“rational self-interest.” Individuals look for and pursue opportunities to increase their utility

Purposeful in deciding:

- what goods and services to buy

- what products to produce and how to produce them

- what public services to provide and how to finance them

“Purposeful behavior” does not assume that people and institutions are immune from faulty logic and therefore are perfect decision makers

Choice by government

Benefits

for

economy

Costs for

economy

Government decision making tool

The role of economic theory in economics

Economists develop theories of the behavior of economy: i.e how fiscal & monetary policy work?

Theories, principles, and models are “purposeful simplifications.” i.e: the circular flow of goods & services, the AS-AD model

Economic principles and models are highly useful in analyzing behavior and understanding how

the economy operates

Tradeoff by the choices of government

• Making choices in the face of

scarcity implies a cost

• What must be given up in

order to have something

(opportunity cost)

For example:

- Economic growth or

environmental pollution?

– Fish or steel?

– Unemployment or inflation?

Positive

economics

the economic of

what is… and

predicting:

i.e: inflation is a

continuous

increase in

average price

Economics

Normative economics judges is it good or bad? The economic

of what should be?

i.e: Government should control inflation

Difference between macroeconomics and microeconomics

• Macroeconomics

 deal with the performance,

structure, behavior, and

decision-making of an economy

as a whole

 GDP, aggregate demand &

supply, economic growth,

average price, happiness,

inflation, unemployment, etc

 to determine an economy's

overall health, standard of living

• Microeconomics

 deal with the behavior of individual entities such as a particular market, firms consumers

 Revenue, cost, profit, price, utility in consumption, elasticity, supply and demand, labor

market, etc

 to determine methods of improvement for individual business entities

Time period in macroeconomics

Short Run

At least one resource

(labor, capital, land,

production processes)

are fixed or taken as

given

Short-run v.s Long-run

Long Run All resources (labor, capital, land, production processes) can be all variable (i.e

changeable)

Key point summary

1 Economics examines how individuals, institutions, and society make choices

under conditions of scarcity

2 Economists categorize economic resources as land, labor, capital, and

technology

3 The economic perspective stresses (a) resource scarcity and

the necessity of making choices, (b) the assumption of purposeful (or

rational) behavior, and (c) comparisons of benefit and cost

4 In choosing the best option, government incurs an tradeoff or opportunity

Economists use the scientific method to establish economic

theories—cause-effect generalizations about the economic

behavior of an economy

5 Macroeconomics examines the economy as

a whole while microeconomics focuses on specific decision-making units of the economy,

6 Positive economics deals with factual statements (“what is”);

normative economics involves value judgments (“what ought

to be”)

Assignment 1

1) Give an example of opportunity cost

2) Give an example to show the difference

between macroeconomics and

macroeconomics

3) Give an example to show the difference

between normative and positive economics;

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