Macroeconomics

LECTURE 1
Basic Economic Concepts
Instructor: Dr. Rehman
 Unit 1 – Basic Economic
Concepts
Chapter 1
 Objectives:
- For students to understand the basic economic
problem.
- - For students be able to make rational
economic choices.
- For students to be able to explain the factors of
production.
- For students to understand the Circular Flow
Model
 Topics to be discussed
 What is Economics
 Basic Economics Question
 Circular Flow
 Inflation/Recession
 Opportunity Cost
 3 Basic Questions
 4 Factors of Production
 Micro and Macro Economics
 What is Economics – Quiz
Choose the correct answer
 Economics is the political science that deals with
unemployment, inflation, taxes, business cycles,
money, supply, and trade.
 Economics is the social science that studies
money and banking
 Economics is the social science that examines
the interaction of demand and supply
 Economics is the social science concerned with
the problem of scarcity
 And the answer is…
 Economics is the social science concerned
with the problem of scarcity
 What is Scarcity?
 Not enough resources to meet demand
 Why do you think scarcity is a problem?
 What else is Economics?
 Economics is common sense made confusing.
 Economics is the science of decision making.
 Economics?
 The social science concerned with how
individuals and societies decide how to
satisfy there unlimited wants given our
limited resources.
 I can’t buy a car if I don’t have an income!
 The science of decision making
 How to make decisions
 “The Economic Problem”
 Scarcity… What is it?
 Limited resources but unlimited wants
 Unlimited wants VS Limited Resources
 You can’t buy 10 candy bars if the store only has
5 candy bars to sell.
 Can’t buy 3 burgers if you only have enough
money for 1.
 What are some things that you “want” to have?
Do you have the resources to purchase them?
 Needs VS Wants
 What are some of your needs…wants.
 Scarcity means…
 We must use things efficiently in order to
maximize the number of goods and
services we can produce.
 Don’t waste…
 The Economic Problem (Scarcity)–
 We can’t have everything we want!!
 Because of this… we need to make choices.
 What we want (need) VS what we can give up
(live without)
How does scarcity impact you?
 Have you ever wanted something you
couldn’t afford to buy?
 Did a store ever run out of the item that
you wanted?
 Has anyone ever wanted you to do
something that you didn’t have time to
do?
 Production Possibilities Curve
 Graph showing the maximum
combinations of goods and services that
can be produced from a fixed amount or
resources in a given period of time.
 Because resources are limited we are only
able to use so much of them to produce
certain goods.
Resources – Factors of Production
 Natural resources (Land)– “free gifts of nature”
 Land, minerals, oil, forests, air, and timber
 Capital Resources – “manufactured aids to production”
 Tools, machines, equipment, factories
 Things used in producing goods and services and getting them
to consumers.
 Human Resources (Labor)– “mankind’s physical and
mental talent”
 These are the skills people have that are used to produce goods
and services.
 Entrepreneur – the individual who combines the factors
of production in order to produce a good or service.
 Risk taker, policy maker, and innovator
 Would it be possible to start a
business without one of these
factors?
 If you would create any type of business
you wanted what would it be and what
would you need to get started?
 Opportunity Cost
 The true cost of choosing one alternative
over the other.
 Trade offs – giving up one thing in order to
obtain another.
 The one that you give up when the choice
is made.
 Give an example of a time when you had to
make an economic choice. What was the
opportunity cost?
 “Opportunity cost is the opportunity lost”
 College Vs. Work
 What are you planning on doing after you
finish high school?
 College or work
 What factors did you consider when
making this decision?
 money now or money later
 Family
 How will this decision impact your future?
 What are the trade offs of this decision?
Opportunity cost?
 Recap
 What is the basic economic problem?
 As consumers what do we need to weigh
when making economic choices?
 What are the four factors of production?
 What is economics?
 How do trade offs lead to opportunity
costs?
 Let’s keep on moving…
“Economics is common sense made
confusing,” so if you are confused you are
likely not alone!!

If you have any questions on the material

that we just covered please stop me here
and we will review a bit on what you are
having a tough time with.
 Types of Economics
 Macroeconomics – branch of economics that
deals with economic theory and the economic
decisions of large bodies like the government.
 Theories of Economics
 Countries and their governments
 Trade between countries
 Microeconomics – branch of economics that
deals with behavior and decisions of smaller
unit like individuals and businesses.
 Families, businesses, and communities
 Domestic economies
Circular flow of income and
output
 What does the circular flow model show
us?
 Why is a relationship between the factor
market and the product market necessary
for the economy to stay strong?
Business Cycle
 Parts of the Business Cycle
 Peak (boom)– Highest point in the
economic cycle.
 Economy is at its best and will likely begin to
contract.
 Recession (contraction)– decline in the
economies performance that could lead to
depression.
 Not long term and does not always impact
other economies
 Trough (depression)– A sustained
economic downturn that impacts our
economy and that of other countries.
 Lowest economic point
 Recovery (expansion)- Economic activity
begins to pick up and depression begins to
end.
 Economic growth occurs
 3 Basic Economic Questions
 What to produce?
 With limited resources, deciding what is
needed the most is often a factor in
determining what will be produced. What is
the need or want of this product?
 What is the point of making a product that no
one is going to buy. Businesses need to
make money…so they choose products that
people want.
 3 Basic Questions Cont…
 How should it be produced?
 Technology, labor, capital, ect.
 getting the lowest cost to make the product.
 Are we going to make the product from
scratch or will a machine be making the
product.
 What will each option cost?
 Will having new technology allow us to lower
our expenses?
 3 Basic Questions Cont…
 Whom should it be produced for?
 Who is going to use this product?
 Did Apple market the ipod to the large population
of elderly people in the U.S. or the youth? Why?
 Most goods and services are distributed to
individuals through a price system.
 If you want it and can afford to buy it…you will.
 Products can also be distributed through other
means; force, first come, lottery, majority,
ect.
 Recap
 What are the three basic economic
questions?
 Compare and contrast micro and macro
economics.
 Explain the circular flow of income and
output as it relates to the economy.
 Describe the business cycle.
 Inflation
 The rate at which the general level of
prices for goods and services is rising,
and, subsequently, purchasing power is
falling.
 As inflation rises, every dollar will buy a
smaller percentage of a good. For example, if
the inflation rate is 2%, then a $1 pack of
gum will cost $1.02 in a year.
 Recession
 A significant decline in activity across the
economy, lasting longer than a few months.
 It is visible in industrial production, employment, real
income and wholesale-retail trade. The technical
indicator of a recession is two consecutive quarters of
negative economic growth as measured by a
country's gross domestic product (GDP).
 A recession generally lasts from six to 18 months, and
interest rates usually fall in during these months to
stimulate the economy by offering cheap rates at
which to borrow money.
 Recession is a normal (albeit unpleasant) part of the
business cycle; however, one-time crisis events can
often trigger the onset of a recession. The global
recession of 2008-2009 brought a great amount of
attention to the risky investment strategies used by
many large financial institutions, along with the truly
global nature of the financial sytem. As a result of
such a wide-spread global recession, the economies
of virtually all the world's developed and developing
nations suffered extreme set-backs and numerous
government policies were implemented to help
prevent a similar future financial crisis
 What is the connection between
Inflation and Recession?
 Which came first the chicken or the recession?
 In many cases the causes of recession can be
confusing. Can inflation cause/worsen a recession?
Or does a recession cause/worsen inflation?
 Both…a recession does not always have a single cause,
but can be caused by many factors. Once a recession
begins, it’s impact is usually felt all over the economy,
including inflation. Inflation occurs without a recession,
but a dramatic change in the value of money can push an
unstable economy into a recession.
 In Short…
 Economics is common sense made
confusing

 We can’t have everything that we want, so we have to make

choices with our money.
 Businesses have to make choices with their products.
 Society has to make choices about how it should or will function.
 The Government makes choices about laws and expenses.
 Just to name a few!!!
 Chapter Review
 What is the basic Economic question?
 What does a production possibilities curve show
us?
 What are the four factors of production?
 What are trade offs and opportunity costs?
 What are the three basic economic questions?
 Define microeconomics and macroeconomics.
 What are inflation and recession?
 How does the circular flow of income and output
impact the economy?