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Welcome to Principles of Macroeconomics Welcome to Principles of Macroeconomics

Economics is the study of how individuals and societies allocate scarce resources among competing Economics is the study of how individuals and societies allocate scarce resources among competing alternative ends

The geneology of economics Economics Webster’s Ninth New Collegiate Dictionary. eco • nom • The geneology of economics Economics Webster’s Ninth New Collegiate Dictionary. eco • nom • ic 1. archaic: of or relating to a household or its management. eco = oikos, meaning “house” or “household” nom = nemein, meaning “to manage” ic = ic, mean “of” or “relating to”

Hall and Lieberman definition Economics is the study of choice under conditions of scarcity Hall and Lieberman definition Economics is the study of choice under conditions of scarcity

Economists are concerned with a wide range of issues, including: • The costs and Economists are concerned with a wide range of issues, including: • The costs and benefits of environmental regulation. • The nature and social contribution of entrepreneurship. • The connection between wages/compensation and worker productivity and loyalty. • The advantages and disadvantages or rights to intellectual property. • Should government “bail out” failing business enterprises? • Should domestic companies be protected from foreign competition? • Causes of inflation and unemployment.

à Land à Labor à Capital Economic resources are also called “factors of production, à Land à Labor à Capital Economic resources are also called “factors of production, ” since they furnish the physical and intellectual means to produce and distribute goods and services

Labor or “Human Resources” Labor or “Human Resources”

Capital or “man-made instruments of production” Capital or “man-made instruments of production”

Types of capital • Private, tangible capital Examples: Aircraft and trucks used by Federal Types of capital • Private, tangible capital Examples: Aircraft and trucks used by Federal Express; Nuclear Plants “owned” by Entergy; Plants “owned” by Case Equipment Co. • Public, tangible capital or “infrastructure” Examples: Bridges and viaducts; Water collection and filtration systems; navigable waterways; Mass transit systems; Airports. • Human capital, defined as “the skills and training of the labor force. ” Examples: Network engineers and webmasters; Accountants; Chemists; Machinists; Nurses; Pilots.

Resources give us the means to produce and distribute goods and services that satisfy Resources give us the means to produce and distribute goods and services that satisfy human needs and wants. Unhappily, these resources are NOT available in unlimited quantities.

The Three Fundamental Questions We can’t have it all; hence we must decide : The Three Fundamental Questions We can’t have it all; hence we must decide : • What gets produced, and in what quantities? • How are these goods produced? • For whom are these goods produced ?

 • If you buy a new car, you won’t be able to afford • If you buy a new car, you won’t be able to afford a new TV set. • If you attend college, you give up income you could have earned by working full-time. • If a farmer opts to grow soybeans, the land will not be available to grow cotton. • If resources are allocated to manufacture military aircraft, then those resources will not be available to manufacture civilian aircraft. • If state politicians allocate more state revenues for prison construction, then less money is left over for teacher salaries.

Income distribution is an explosive issue Income distribution is an explosive issue

Out of school for less than 10 years Out of school for less than 10 years

What is an economic model ? It is a simplified version of economic reality. What is an economic model ? It is a simplified version of economic reality. Models “abstract” from many features of the real world. We do this to avoid unnecessary complication--we want to keep things simple.

Positive and Normative economics Positive is what is. Normative is what ought to be Positive and Normative economics Positive is what is. Normative is what ought to be ¢ Positive economics attempts to set forth scientific statements--that is, statements subject to verification or falsification. For instance: ¢“ If they raise tuition again at ASU, enrollment will decline. ” OR: ¢ “The Christmas season will be a bust because consumers are near their credit limit on charge cards. ”

I say professors are overpaid College professors are underpaid Who is right? It is I say professors are overpaid College professors are underpaid Who is right? It is a normative question.

The fallacy of composition Beware of these pitfalls as you begin to reason about The fallacy of composition Beware of these pitfalls as you begin to reason about relationships among economic variables to commit the fallacy of composition is to suppose that what is true in the individual case also holds true for the group. • Example: “The best way to leave a burning theater is to run for the exit. ”

I washed my spaceship today, and that’s why it rained You’ve committed the post I washed my spaceship today, and that’s why it rained You’ve committed the post hoc, ergo propter hoc fallacy! Association as causation fallacy