ROSE MARY THURSDAY ORTIZ HONRADO

!
Macroeconomics Chapter 1
 !
Introduce yourself.
Why you took your course. What gadgets u use for class. Preferred sched for class.
 !
How do you budget your allowance?
 By the end of this section,

• you will be able to:

• Discuss the importance of studying economics

• Appreciate economics in the face of scarcity and

unlimited wants

 Chapter 1: Economics
• In this chapter, you will
learn about: Economics

• What Is Economics, and

Why Is It Important?
Microeconomics Macroeconomics
• Microeconomics and
Macroeconomics

• How Economists Use

WHAT’S GOING ON?
Theories and Models to
Understand Economic
Issues
Economic Models and Theories

 Economics
• is the study of how humans make decisions in the face of scarcity. These can be
individual decisions, family decisions, business decisions or societal decisions. If
you look around carefully, you will see that scarcity is a fact of life

• Branches

• Microeconomics is the part of economics concerned with individual units such as

a person, a household, a firm, or an industry. At this level of analysis, the econo-
mist observes the details of an economic unit, or very small segment of the
economy, under a figurative micro- scope. In microeconomics we look at decision
making by individual customers, workers, households, and business firms.

• Macroeconomics examines either the economy as a whole or its basic

subdivisions or aggregates, such as the govern- ment, household, and business
sectors. An aggregate is a collection of specific economic units treated as if they
were one unit.

 Micro and Macro

• Microeconomics focuses on the actions of individual

agents within the economy, like households, workers,
and businesses;

• Macroeconomics looks at the economy as a whole. It

focuses on broad issues such as growth of production,
the number of unemployed people, the inflationary
increase in prices, government deficits, and levels of
exports and imports. Microeconomics and
macroeconomics are not separate subjects, but rather
complementary perspectives on the overall subject of
the economy.

 Scarcity

• means that human wants for goods, services and

resources exceed what is available. Resources, such
as labor, tools, land, and raw materials are necessary
to produce the goods and services we want but they
exist in limited supply. Of course, the ultimate scarce
resource is time- everyone, rich or poor, has just 24
hours in the day to try to acquire the goods they
want. At any point in time, there is only a finite
amount of resources available.
 The Division of and Specialization of Labor

• The formal study of economics began when Adam

Smith (1723–1790) published his famous book The
Wealth of Nations in 1776. Many authors had
written on economics in the centuries before Smith,
but he was the first to address the subject in a
comprehensive way. In the first chapter, Smith
introduces the division of labor, which means that
the way a good or service is produced is divided into
a number of tasks that are performed by different
workers, instead of all the tasks being done by the
same person.



 Why Study Economics?

Now that we have gotten an overview on what economics studies, let’s quickly discuss why you
are right to study it. Economics is not primarily a collection of facts to be memorized, though
there are plenty of important concepts to be learned. Instead, economics is better thought of as a
collection of questions to be answered or puzzles to be worked out. Most important, economics
provides the tools to work out those puzzles. If you have yet to be been bitten by the economics
“bug,” there are other reasons why you should study economics.
• Virtually every major problem facing the world today, from global warming, to world poverty, to
the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to
be part of solving those problems, you need to be able to understand them. Economics is crucial.
It is hard to overstate the importance of economics to good citizenship. You need to be able to
vote intelligently on budgets, regulations, and laws in general. When the U.S. government came
close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues involved? Did
you know?
A basic understanding of economics makes you a well-rounded thinker. When you read articles
about economic issues, you will understand and be able to evaluate the writer’s argument. When
you hear classmates, co-workers, or political candidates talking about economics, you will be able
to distinguish between common sense and nonsense. You will find new ways of thinking about
current events and about personal and business decisions, as well as current events and politics.

John Maynard Keynes (1883–1946),

• one of the greatest economists of the twentieth

century, pointed out that economics is not just a
subject area but also a way of thinking. Keynes,
shown in Figure 1.5, famously wrote in the
introduction to a fellow economist’s book:
“[Economics] is a method rather than a doctrine, an
apparatus of the mind, a technique of thinking,
which helps its possessor to draw correct
conclusions.” In other words, economics teaches you
how to think, not what to think.
 Circular Flow of Goods and Services
• A good model to start with in PROVIDE LAND
economics is the circular flow LABOR CAPITAL
diagram, which is shown in Figure
1.6. It pictures the economy as PROVIDE RENT
SALARY
consisting of two groups—
INVESTMENT
households and firms—that HH
interact in two markets: the goods FIRMS
and services market in which firms
sell and households buy and the Provide
labor market in which households goods
sell labor to business firms or
Buy goods
other employees.
 Circular Flow of Goods and Services
• A good model to start with in PROVIDE LAND
economics is the circular flow LABOR CAPITAL
diagram, which is shown in Figure
1.6. It pictures the economy as PROVIDE RENT
SALARY
consisting of two groups—
INVESTMENT
households and firms—that HH
interact in two markets: the goods FIRMS
and services market in which firms
sell and households buy and the Provide
labor market in which households goods
sell labor to business firms or
Buy goods
other employees.
 Circular Flow of Goods and Services
• A good model to start with in PROVIDE LAND
economics is the circular flow LABOR CAPITAL
diagram, which is shown in Figure
1.6. It pictures the economy as PROVIDE RENT
SALARY
consisting of two groups—
INVESTMENT
households and firms—that HH
interact in two markets: the goods FIRMS
and services market in which firms
sell and households buy and the Provide
labor market in which households goods
sell labor to business firms or
Buy goods
other employees.
!
!
Instructions:
For each
agenda of
Pres.
marcos
express
your
opinion if
he will
succeed or
not and
justify your
answer in 2
sentences.

Information provides the knowledge needed to make the best possible

decisions on how to utilize scarce resources.
Welcome to the world of economics!




Homework: Predict how GNP will be affected by the 8-point
agenda, if successful or not. In your opinion what items will be
!
effective and which one will not?
For BSBA/BSA students: given each agenda will affect the GNP by 100m, what will be the ending GNP if it starts at P300M and the
trend follows your opinion/prediction?
 !
Attendance Screenshot.
 Economic Thinking

Hypothesis Theory
Law

Everything
Everything Law of
we want is
is limited. Scarcity
limited.

Land
Labor
Limited Capital
Resources
Entrepreneurial ability
 Microeconomics vs Macroeconomics
• School allowance • Unemployment

• Household budget • Inflation

• Business profitability • Tax incentives

• What to buy • International trade

• What to sell • National Product

 !
Production Possibilities and the Budget Line
How do we choose…

Opportunity cost- the

cost of the alternative
not taken/chisen.

Law of increasing
opportunity costs- As the
production of a particular
good increases, the
opportunity cost of
producing an additional
unit rises.

How we make choices / how we prioritize

• Maslow’s
Hierarchy of
Needs
 CH2: Economic Systems

• traditional economies

• command economies, and

• market economies

a particular set of institutional arrangements and a

coordinating mechanism—to respond to the
economizing problem. The economic system has to
determine what goods are produced, how they are
produced, who gets them, how to accommodate
change, and how to promote technological progress.

 Traditional Economy

• The first is the traditional economy, which is the

oldest economic system and can be found in parts of
Asia, Africa, and South America. Traditional
economies organize their economic affairs the way
they have always done (i.e., tradition). Occupations
stay in the family. Most families are farmers who
grow the crops they have always grown using
traditional methods. What you produce is what you
get to consume. Because things are driven by
tradition, there is little economic progress or
development.
 Command Economies
• In a command economy, economic effort is devoted to goals passed down from
a ruler or ruling class. Ancient Egypt was a good example: a large part of
economic life was devoted to building pyramids, Medieval manor life is another
example: the lord provided the land for growing crops and protection in the
event of war. In return, vassals provided labor and soldiers to do the lord’s
bidding. In the last century, communism emphasized command economies.

• In a command economy, the government decides what goods and services will
be produced and what prices will be charged for them. The government decides
what methods of production will be used and how much workers will be paid.
Many necessities like healthcare and education are provided for free. Currently,
Cuba , Laos, and North Korea have command economies.

• Includes socialism

• Public property

 Market Economy
• A market is an institution that brings together buyers and sellers of goods or services, who may be
either individuals or businesses. The New York Stock Exchange is a prime example of market in
which buyers and sellers are brought together. In a market economy, decision- making is
decentralized. Market economies are based on private enterprise: the means of production
(resources and businesses) are owned and operated by private individuals or groups of private
individuals. Businesses supply goods and services based on demand. (In a command economy, by
contrast, resources and businesses are owned by the government.)

• What goods and services are supplied depends on what is demanded. A person’s income is based
on his or her ability to convert resources (especially labor) into something that society values. The
more society values the person’s output, the higher the income (think Lady Gaga or LeBron James).
In this scenario, economic decisions are determined by market forces, not governments.

• Pure capitalism = laissez faire capitalism = let it be ( no govt interference)

• Private property, freedom of choice, freedom of enterprise (competition)

• Encourages entrepreneurship but hastens creative destruction

• Adam Smith’s Invisible Hand : Firms and resource suppliers, seeking to further their own self-
interest and operating within the framework of a highly competitive market system, will
simultaneously, as though guided by an “invisible hand,” promote the pub- lic or social interest.

 Types of Markets

• Perfect market- pure competition: many sellers,

many buyers, homogenous product, stable price

• Imperfect competition

• Imperfect markets

• Monopoly

• Monopsony

• Oligopoly

 Underground Economies
• Heavily
regulated
economies
often have
underground
economies,
Circular Flow Of
which are Goods and
markets where Services
the buyers and
sellers make
transactions
without the
government’s
approval.
 Seatwork/Assignment
Type of market Owns LLCE Motivation to work Govt
Make a
involve
comparative table
ment
differentiating Command
command
economy from Market
market economy
Market type # of buyers # of sellers Influence on Quality of
price products
Make a Perfect
comparative table competition
differentiating the Monopsony
different market Oligopoly
types Monopoly
Imperfect
competition
What should be the economic system for the Philippines ?