Summary of Macroeconomics • 5 big questions • 3 processes • 8 fundamental ideas
5 big questions • What to produce • How to produce • When to produce • Where to produce • Who produces
Approaches Positive How things are Normative How things ought to be Processes/Tasks: Observing and measuring Modeling Testing 3 processes used in 2 approaches
Positive Issues Growth tradeoff consumption today for more future consumption Employment +/ - Inflation +/ - Budget Deficits +/ - Normative Issues Fiscal Policy Monetary Policy Macroeconomic issues, by approach
8 fundamental ideas • Choices are tradeoffs because of scarcity • Choices are made at the margin because of incentives • Diminishing marginal returns: • “What have you done for me lately?” • “It’s never as good as the last time”
8 fundamental ideas • Voluntary tradeoffs/exchange make transacting parties better off because of rationality • Markets are very efficient ways of organizing this sort of exchange • When incentives conflict with marginal choices, markets may fail and alternative mechanisms designed and employed (contracts, government, clubs).
8 fundamental ideas • Income = expenditure = gross value • Productivity gains enhance living standards
8 fundamental ideas • inflation occurs when production grows at a slower rate than the quantity and use of money in the economy • Some unemployment is inevitable and necessary
Fundamentals: Opportunity Cost • The value of a commodity as a function of the next best, foregone alternative. • Resources are always scarce. • There is always a trade-off due to scarcity. • Opportunity cost is a mechanism that helps us measure the value of trade-offs in making decisions when resources are scarce.
Fundamentals: Marginal Benefits and Costs • “Marginal” refers to accounting for the benefit or cost of the “last” unit under consideration for exchange. • Law of diminishing returns • Cumulative effect of scarcity • What has a commodity done for you lately?
Fundamentals: Production Possibilities Frontier Attainable/ efficient Unattainable B C Attainable/ efficient D A E Attainable/ efficient Attainable/ inefficient
Fundamentals: Diminishing Returns • Production Possibilities Frontiers bow outward because of diminishing returns in production. • If a scarce resource yields large amounts of a commodity, then using up the resource means that, to keep making more of the commodity, we must use less productive resources • The net result is that greater production of a commodity results in rising opportunity costs—getting less of one commodity for a greater amount sacrificed.