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Global Macroeconomics Taggert J. Brooks What is Economics? Economics is the study of the allocation of scarce resources in an attempt to satisfy unlimited wants More generally it is the study of human decision making particularly as it relates to markets. Who gets what and how they get it Microeconomics and Macroeconomics Microeconomics is the study of the economic behavior of decision makers Macroeconomics is the study of the behavior of entire economies Sub-Fields (disciplines) Micro International Trade Industrial Organization Labor Health Macro International Finance Money and Banking Economic Development Scarcity: the central problem of economics Economic good production involves an opportunity cost scarce resources are used in its production Free good production involves no opportunity cost Trade-off A trade-off occurs every time we choose to allocate scarce resources to the production of a good The trade-off for taking IB Economics is that you are unable to take all the other courses offered in the same period Opportunity Cost The opportunity cost of that choice is the value of the next-best alternative use of the resources The opportunity cost is the specific course you would have taken if you were not taking Economics Opportunity Cost vs Financial cost Economic Costs are always based on opportunity costs Financial costs only take into account the monetary cost of a choice. Opportunity cost is a much more specific concept in terms of the true consequences of a decision. Behavioral Assumptions A behavioral assumption describes the expected behavior of economic actors Rational Self-Interest Individuals rationally select alternatives they perceive to be in their best interests Self-interest = rationality Economic Actors Households Firms Government Rest of the World Markets A market is a set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms Product Market A market in which goods and services are exchanged Resource Market A market in which resources are exchanged Resources: Factors of Production Land Natural resources used in the production of goods and services Labor The physical and mental effort of humans Capital Buildings, machinery equipment, Entrepreneurial Ability Managerial, organizational skills risk-taking Payment for Resources Rent Wages Interest Profit The circular flow model Economic Modeling Firms Households The circular flow of goods and incomes Goods and services The circular flow of goods and incomes Goods and services £ Consumer expenditure The circular flow model Goods and services £ Consumer expenditure Factors of production: Land, labor, capital, The circular flow model Goods and services £ Consumer expenditure Rent, Wages, Interest Profit £ factors of production:land, labor, capital, Ceteris Paribus (“other things constant”) When focusing on key economic variables, other variables are held constant This is important for model building As economic models become more complex, fewer and fewer variables will be held constant Common Mistakes Fallacy of Composition The belief that what is true of one is true of the whole. "Every player on the team is a superstar and a great player, so the team is a great team." This is fallacious since the superstars might not be able to play together very well and hence they could be a lousy team. More Examples: http://www.nizkor.org/features/fallacies/composit ion.html Post-Hoc Fallacy Correlation Causation SAT scores and College GPA Presidential Election winner and Height The reach of Economic Research Economists have done research into areas not normally considered economics, by asking questions such as Why are Americans so obese? What is more dangerous a gun or a pool? Is the death penalty efficient? What’s in a name? Leavitt & Dubner: FREAKONOMICS” “
