Its primary areas of study are recurrent economic cycles and broad economic growth and development. Topics studied include foreign trade, government fiscal and monetary policy, unemployment rates, the level of inflation and interest rates, the growth of total production output as reflected by changes in the Gross Domestic Product GDP , and business cycles that result in expansions, booms, recessions, and depressions. Micro- and macroeconomics are intertwined.
Aggregate macroeconomic phenomena are obviously and literally just the sum total of microeconomic phenomena. However these two branches of economics use very different theories, models, and research methods, which sometimes appear to conflict with each other.
Integrating the microeconomics foundations into macroeconomic theory and research is a major area of study in itself for many economists. There are many competing, conflicting, or sometimes complementary theories and schools of thought within economics.
Economists employ many different methods of research from logical deduction to pure data mining. Economic theory often progresses through deductive processes, including mathematical logic, where the implications of specific human activities are considered in a "means-ends" framework.
This type of economics deduces, for example, that it is more efficient for individuals or companies to specialize in specific types of labor and then trade for their other needs or wants, rather than trying to produce everything they need or want on their own. It also demonstrates trade is most efficient when coordinated through a medium of exchange , or money. Economic laws deduced in this way tend to be very general and not give specific results: they can say profits incentivize new competitors to enter a market, but not necessarily how many will do so.
Still, they do provide key insights for understanding the behavior of financial markets , governments, economies—and human decisions behind these entities. Other branches of economic thought emphasize empiricism, rather than formal logic—specifically, logical positivist methods, which attempt to use the procedural observations and falsifiable tests associated with the natural sciences.
Some economists even use direct experimental methods in their research, with subjects asked to make simulated economic decisions in a controlled environment. Since true experiments may be difficult, impossible, or unethical to use in economics, empirical economists mostly rely on simplifying assumptions and retroactive data analysis. However, some economists argue economics is not well suited to empirical testing, and that such methods often generate incorrect or inconsistent answers.
Two of the most common in macroeconomics are monetarist and Keynesian. Monetarists are a branch of Keynesian economics that argue that stable monetary policy is the best course for managing the economy, and otherwise often have generally favorable views on free markets as the best way to allocate resources. Economic indicators are reports that detail a country's economic performance in a specific area.
These reports are usually published periodically by governmental agencies or private organizations, and they often have a considerable effect on stocks, fixed income , and forex markets when they are released. They can also be very useful for investors to judge how economic conditions will move markets and to guide investment decisions.
Below are some of the major U. It represents the total market value of all finished goods and services produced in a country in a given year or another period the Bureau of Economic Analysis issues a regular report during the latter part of each month. This is because the final GDP figure is frequently considered a lagging indicator , meaning it can confirm a trend but it can't predict a trend.
In comparison to the stock market, the GDP report is somewhat similar to the income statement a public company reports at year-end. Reported by the Department of Commerce during the middle of each month, the retail sales report is very closely watched and measures the total receipts, or dollar value, of all merchandise sold in stores.
Because consumer spending represents more than two-thirds of GDP, this report is very useful to gauge the economy's general direction. Also, because the report's data is based on the previous month sales, it is a timely indicator. The content in the retail sales report can cause above normal volatility in the market, and information in the report can also be used to gauge inflationary pressures that affect Fed rates.
The industrial production report, released monthly by the Federal Reserve, reports on the changes in the production of factories, mines, and utilities in the U. One of the closely watched measures included in this report is the capacity utilization ratio , which estimates the portion of productive capacity that is being used rather than standing idle in the economy. The Bureau of Labor Statistics BLS releases employment data in a report called the non-farm payrolls , on the first Friday of each month.
Likewise, potential contractions may be imminent if significant decreases occur. While these are general trends, it is important to consider the current position of the economy. For example, strong employment data could cause a currency to appreciate if the country has recently been through economic troubles because the growth could be a sign of economic health and recovery.
Conversely, in an overheated economy, high employment can also lead to inflation, which in this situation could move the currency downward. The Consumer Price Index CPI , also issued by the BLS, measures the level of retail price changes the costs that consumers pay and is the benchmark for measuring inflation. For example, economists may propose that price rises are caused by excess demand, and then attempt to construct a model of price that explains how excess demand can raise price.
Economists frequently use versions of the demand and supply model to help explain events such as house price trends and movements. Economic models usually employ graphical and mathematical analysis to help explain and illustrate such economic processes.
Models must be tested against the real world, which means gathering statistical data about real events.
In this way, a model can be improved and revised when necessary. The ultimate goal of the economist is to predict future behaviour. For example, by using a demand and supply model and by inputting real data about the housing market , economists can show that even a small fall in bank lending can trigger behaviour that leads to a significant fall in house prices in the short run.
The ultimate value of an economic model is that it can accurately predict the onset and the effect of an economic event.
The better the model is, the more useful it is in helping economists make predictions. Economists assume that economic events and phenomena do not occur at random, but are determined by underlying and understandable causes.
Unlike the pure scientist, economists cannot undertake controlled experiments, so they must test their models in different ways. Statistical analysis of actual economic data can provide a flow of information from which to build models and test hypotheses. For example, by gathering data about changes in house prices it is possible to deduce factors that cause house prices to go up or down, and by how much. Economists use index numbers to help make comparisons between countries and over time. Correlation analysis can help determine the strength of particular causal relationships so that strong and weak relationships can be identified.
For example, it might be possible to demonstrate that, of all the factors that have contributed to falling house prices, the reduced availability of credit is the single biggest factor. Professional economists apply their skills of description, analysis, model building, and prediction to generate knowledge and, from this, provide advice to private firms, to governments and other organisations.
In providing advice, the economist will always make an assessment of the other options that could have been chosen. For example, a large petrol refiner and retailer may be faced with a significant rise in the costs of crude oil — should it now raise price? If we have full employment, we produce MORE. If we have unemployed resources, we produce LESS. This is why society's strive for full employment - it reduces scarcity and helps achieve the maximum satisfaction possible because with full employment MORE is produced.
Issues would include the determination of prices of individual products, studying individual industries, or making individual consumer choices. The only component of economics not included in either a Macroeconomics course or a Microeconomics course is "Reducing consumer wants. One last thing I'd like to discuss briefly in this introductory lecture is "why study economics?
Most of you are probably business majors management, finance, marketing, accounting, etc. Another reason to take an economics course is to become a more informed voter and citizen. Much of what the candidates and political leaders discuss can be better understood with a knowledge of economics. This semester let's pay attention to the economic and political news. We can use the discussion forum to discuss what we see and hear. We have discussed the necessity of choice, scarcity limited resources and unlimited wants and achieving the maximum satisfaction possible 4Es.
We have not yet discussed the "study of" part of our definition. To make it a little more complicated, economists often use graphs to illustrate theories. First let's talk about the theoretical nature of economics. You have probably heard it said that something "sounds good in theory, but it doesn't work in the real world". Ross Perot, billionaire and Reform Party candidate for president in , said this about the theory of comparative advantage, the theory behind international trade.
Good theories have to work in the real world or they are not good theories. Five characteristics of economic theories are worth noting:. Theories are based on facts data. Economists gather data then try to find theories to explain the data. Let's take a simple theory:. This theory is based on the facts, but memorizing hundreds of different price and quantity combinations for various types of pizza would be difficult and quite useless.
Theories then simplify the facts. Hundreds of pages of facts would not be very useful to us. It is much simpler to learn that if the price of pizza rises, the quantify sold declines. A former instructor at Harper College coined the term "Aunt Martha Syndrome" to illustrate that theories are generalizations of the facts. Every semester there seems to be a student who tries to prove that a theory is wrong by finding an exception. An economist can't explain Aunt Martha's behavior. Maybe a psychologist can help.
Theories are also abstractions. Like modern, abstract, art, theories may bear little actual resemblance to the real world. Yet, like modern art, theories can still be useful. For example, if I needed to draw a picture of a person for this economics class, I might draw something like:. Even though this doesn't look much like people really do - it is a quick, and useful, way to represent reality.
BUT, if I was in an art class and drew this picture for my final class project I would fail. It is not a good and useful drawing for an art project. Theories, as abstractions, are similar. In order to make them simple, they are designed to be used only for specific purposes. One of your jobs as a student of economics is to learn what each theory is designed to explain and what they don't explain.
This picture of a stick man is based on facts people have two arms, two legs, etc. Finally, since economics is a social science , economists study human behavior. If you were to conduct a biology experiment to see how the amount of light affects plant growth you may select five plants of the SAME kind, put them in the SAME size pot, add the SAME amount of water and fertilizer to each, but then give each plant a different amount of light each day.
But if you wanted to test what happens to the quantity of pizza sold when the price of pizza rises. You could not control all other factors that may affect the experiment. Many other factors may also affect the quantity of pizza sold - higher incomes, different lifestyles, cheaper beer, etc. Therefore, economists as social scientist employ the ceteris paribus assumption.
Ceteris paribus is Latin for "all other things remain equal". This isolates the issues being studied price and quantity , but it does make the theory less realistic. Economists often use graphs to illustrate their theories. Pay close attention to the appendix to chapter 1 and to the study guide questions if you are uncomfortable using graphs. I don't have much to add to it except this: any point on a graph represents two numbers.
You find one number by looking at the x-axis directly beneath the point. And you find the other number by looking at the y-axis directly to the left usually left of the point. They only represent different combinations of two numbers.
We've already discussed scarcity and the necessity of making choices in an earlier lecture. Here we begin looking at the consequences of making choices.
We'll begin by looking at economic resources since this is where it all begins, we probably should have began there.
Then we'll introduce our first models the budget line and the production possibilities graph and use them to illustrate 1 the necessity of making choices and 2 some of the consequences. First we will take a quick look at what are resources. Remember, it is because of limited reasources and unlimited wants that we have to make choices. Finally, we will look at society's economizing problem and use a model graph called the production possibilities curve.
Economists classify resources into four categories or types: 1 land, 2 labor, and 3 capital. Is money a resource? If resources are those things that we use to produce the goods and services we want, then what do we make out of money? I guess you could use it to wallpaper a room, or if you bleach all the ink off of money you could make a notepad.
Capital, then, is a manufactured resource - something that you produce and use it to produce something else. Without the entrepreneur all the other resources just lie around and do nothing. For example, Russia has much "land" natural resources. They have a fairly well educated labor force.
What Russia is lacking are entrepreneurs. People with the ideas and abilities to put hose ideas into action.
Now take this short quiz: Resource Quiz. Before studying this part of the textbook you may want to study the appendix to chapter 1 on graphs. Ifg the graph confuses you just write down the two numbers. Two numbers should not be confusing to anyone. Outline of the textbook. Limited income - everyone, even the most wealthy, has a finite amount of money to spend. Even the wealthiest have wants that extend beyond their means e.
Bill Gates'charitable efforts. The combination of limited income and unlimited wants force us to choose those goods and services that will maximize our utility. The model assumes two goods, but the analysis generalizes to all goods available to consumers. The location of a budget line depends on a consumer's money income, and the prices of the two products under analysis.
The slope of the graphed budget line is the ratio of the price of the good measured on the horizontal axis Pb in the text to the price of the good measured on the vertical axis Pdvd.
A change in the price of one of the goods will change the slope of the budget line and change the purchasing power of the consumer. Points outside up and to the right the budget line are unattainable. Tradeoffs and opportunity costs - the negative slope of the budget line represents that consumers must make tradeoffs in their consumption decisions; the value of the slope measures precisely the opportunity cost of one more unit of a good under analysis.
Limited income and positive prices force people to choose. Note that the budget line does not indicate what a consumer will choose, only what they can choose. Income changes will shift the budget line. Greater income will shift the line out and to the right, allowing consumers to purchase more of both goods.
Increasing income lessens scarcity, but does not eliminate it. Our textbook does a good job discussing the production possibilities curve. I will just highlight a few points here. These first two assumptions taken together means that there is no economic growth. We said in an earlier lecture that economic growth is caused by:. This means that they are producing as much as they can with the resources available.
This also means that businesses are producing as much as they can. Our authors use the term "full production" to mean both productive efficiency and full employment.
It means that we are producing as much as we can with the resources we have hence "full production". We can use the production possibilities model to demonstrate many important and fundamental economic principles.
The PPC can demonstrate the fact that because of scarcity, we must make choices. A point outside the PPC like point A is unattainable. Given our assumptions, this economy cannot produce at point A. As we learned in our lesson on graphing above, any point on a graph represents two numbers. Point A then represents 15 Wheat and 3 Robots. This combination 15W and 3 R is impossible to produce given our assumptions.
So we have to make a choice. Or as I would say: "We can't have all the boats we want. First, ALL costs in economics are opportunity costs.
Economists always mean "opportunity costs" whenever they use the term "cost". Opportunity costs measure what you "give up" when you make a decision.
Answer: 1W. If we are producing 16W than we can't produce any Robots 16W and 0R. When we produce our first Robot, Wheat production drops from 16W to 15 W. So the first Robot costs 1W. When we produce our second Robot, Wheat production drops from 15W to 13 W. So the second Robot costs 2W. The first two Robots together cost 3W. Answer: 3W If we are producing 2R then we can produce 13W.
When we produce our third Robot, Wheat production drops from 13W to 10 W. So the second Robot costs 3W. We call this shape "concave to the origin".
Why is the law of increasing costs true? Why is the PPC concave to the origin bowed out? Why does it cost more to produce the second Robot than to produce the first assuming that the Robots are identical?
The first robot cost 1W. The Second Robot cost 2W. Why is the law of increasing cost true? The rationale is quite simple. Not all resources are the same. When we decide to produce the first Robot, we take the best engineers from the wheat fields and put them in the robot factory. Since these engineers are very good at producing Robots we don't need very many of them and Wheat production goes down only a little we lose only 1W.
When we decide to produce the second Robot we need to shift more engineers from the wheat fields, but now all the best engineers are already in the robot factories and we need to take the second-best engineers, and MORE OF THEM, to produce just one more Robot. Think back to pioneer days, when individuals knew how to do so much more than we do today, from building their homes, to growing their crops, to hunting for food, to repairing their equipment.
Most of us do not know how to do all—or any—of those things. It is not because we could not learn. Rather, we do not have to. The reason why is something called the division and specialization of labor , a production innovation first put forth by Adam Smith , Figure 2 , in his book, The Wealth of Nations.
The formal study of economics began when Adam Smith — published his famous book The Wealth of Nations in 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.
To illustrate the division of labor, Smith counted how many tasks went into making a pin: drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale, to name just a few. Smith counted 18 distinct tasks that were often done by different people—all for a pin, believe it or not!
Modern businesses divide tasks as well. Even a relatively simple business like a restaurant divides up the task of serving meals into a range of jobs like top chef, sous chefs, less-skilled kitchen help, servers to wait on the tables, a greeter at the door, janitors to clean up, and a business manager to handle paychecks and bills—not to mention the economic connections a restaurant has with suppliers of food, furniture, kitchen equipment, and the building where it is located.
A complex business like a large manufacturing factory, such as the shoe factory shown in Figure 3 , or a hospital can have hundreds of job classifications. When the tasks involved with producing a good or service are divided and subdivided, workers and businesses can produce a greater quantity of output. In his observations of pin factories, Smith observed that one worker alone might make 20 pins in a day, but that a small business of 10 workers some of whom would need to do two or three of the 18 tasks involved with pin-making , could make 48, pins in a day.
How can a group of workers, each specializing in certain tasks, produce so much more than the same number of workers who try to produce the entire good or service by themselves? Smith offered three reasons. First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. In later chapters, we will develop this idea by discussing comparative advantage.
People have different skills, talents, and interests, so they will be better at some jobs than at others. The particular advantages may be based on educational choices, which are in turn shaped by interests and talents. Only those with medical degrees qualify to become doctors, for instance. For some goods, specialization will be affected by geography—it is easier to be a wheat farmer in North Dakota than in Florida, but easier to run a tourist hotel in Florida than in North Dakota.
If you live in or near a big city, it is easier to attract enough customers to operate a successful dry cleaning business or movie theater than if you live in a sparsely populated rural area. Whatever the reason, if people specialize in the production of what they do best, they will be more productive than if they produce a combination of things, some of which they are good at and some of which they are not. Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality.
This pattern holds true for many workers, including assembly line laborers who build cars, stylists who cut hair, and doctors who perform heart surgery. In fact, specialized workers often know their jobs well enough to suggest innovative ways to do their work faster and better. A similar pattern often operates within businesses. Third, specialization allows businesses to take advantage of economies of scale , which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines.
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