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Mankiw’s Principles of Macroeconomics - Chapter 1
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hi class and welcome to macroeconomics
this is the intro so what I would
suggest you do before you start is to
download the first interactive
note-taking guide because as you go
through this PowerPoint and you can
watch this as many times as you like you
will be able to take notes now you can
also take them using your reading
material which would be located on
cengage and then the instructions on how
to access the cengage are also on engage
under the mindtap instructions welcome
to economics economics is a science in
which pretty much you can find a
justification for most opinions however
most economists do tend to differ a
little bit but what you'll see and
you'll start to see as you go through
this class is there are some consistent
thoughts and what we're going to be
talking here about is the consistent
theories that all economists hold dear
to how they use these theories may
differ these are the same theories that
our Federal Reserve uses our central
bank as well as all the Federal
Reserve's in the world so what is
economics economics is a social science
and it is concerned with the way society
chooses to employ limited resources so
what are we talking about here we're
talking about resources that are limited
or limited
pretty much anything on the earth if you
think about it we always think about
resources as being things like water and
gas and trees and things such as that
but the resources are also limited such
as labor human beings are limited we are
limited in our abilities because there's
only so many of us every resource has an
alternative use you can use a resource
such as water for Mickey coca-cola or
you could use it for recreation you can
use a labor force for making an object
or you can use a labor force for
creating a space module to produce goods
and services we talked about goods
services what are services services are
things that are non
well sometimes but have equal value for
instance when you go to the doctor you
don't necessarily get something for that
you might get a prescription but in
general he's providing you with a
service or she for present and future
consumption in other words economics is
literally looking at how is a society
choose to employ our limited resources
they have many alternative uses to
produce goods and services today but
we're also looking at the future now
when we say society we're talking about
an economy and in the world today
the economies are mostly geared around
countries so for instance when we say
society we're usually referring to the
United States as one global society
local in terms of our parameters in
terms of where we are however we do also
have economic decisions that are made
within States right we as a state make
economic decisions we as a country make
economic decisions and then we as North
America North American Free Trade
Agreement NAFTA or whatever it's going
to be called next we make decisions in
the book chapter one talks about the ten
principles of economics and the reason
why the author does this is because he's
starting off letting us think through
what it is that economics defines and
when it is that economics explains we'll
keep coming back to these ten concepts
and these are kind of his reference
throughout his book so you keep seeing
these concepts reappear but if we can
understand these ten concepts it helps a
ton first concept is talking about
scarcity scarcity is a limited nature of
our resources and why are our resources
scarce because my limit
now scarcity in economics is not the
same scarcity as we think about when we
think about marketing when we think
about creating a scarcity marketing
we're trying to create a higher demand
than normal for instance when you
limited limit the number of Apple phones
being released in a particular day
you're creating a artificial
but what we're really talking about in
economics is literally the limited
nature of our resources how much water
we have economics is a study of how we
manage those resources how people decide
what to buy how much they want to work
how much they want to save how much they
want to spend how firms decide how much
to produce how many workers are they
gonna hire and then society needs to
decide how to divide those resources
between all the things that society
needs to give these people National
Defense consumer goods food production
protection of our environment the future
and other needs when we started to find
out what it is economics will set it
tends to look at those three groups
remember I just talked about people
firms a society so we're going to
starting with people there are some
principles behind how we as people make
decisions we tend to make decisions
based on trade-offs so principle one is
people face trade-offs all our decisions
are really based on trying to decide
between one thing and another now
granted there could be more than one
option but in general we always are
looking at the trade-offs if we go to a
party tonight before our midterm we have
less time to study it's a trade-off if
you have more money to buy stuff
requires that you work longer hours
which leaves less time for leisure
trade-offs if you practice environmental
requirements so the resources are being
saved or postponed that means that those
resources are no longer available to the
consumers to do what produce goods so
society when we faced with when we look
at trade-offs we have to look between
efficiency and quality because every
trade-off we make may be very efficient
we may be getting the most out of those
scarce resources from a society
and we as a society in general agree
that that's the way we want to use our
resources however it may not be equal
and equality means that the prosperity
is distributed uniformly among the
Society's members so there's a trade-off
that happens within society as well in
terms of trying to figure out whether
how to efficiently use those resources
and how to equally use those resources
so when you consider healthcare
healthcare in the United States may be
fairly efficient but it is not
necessarily equal where as our friends
south of the border 10 - let me start
north of the border tend to be more
about equality now does that mean there
are sufficient that's to be debated
isn't it so this trade-off to achieve
greater equality is always in the root
of most democratic societies democratic
societies excuse me we want to make sure
that the poor are the less fortunate are
getting their fair share so for instance
the notion of a progressive tax system
or social programs like food stamps or
unemployment insurance are trying to
make sure that we as society as we made
those trade-offs only made things fairly
efficient we still are taking into
account equality but those innocent
those incentivize people maybe not to
work or not to produce and this is what
society has to decide if you think to
yourself I'm not gonna work if the money
is going to somebody else
then what it's doing is it takes
everybody's situation and it starts
reducing the economic pie that's
available to the society so we have to
balance all of this together and this is
where economics is really fun but also
really frustrating because we have to
make sure that everyone is treated is we
think as a society they should be and
yet we don't want to do you incentivize
anybody from participating in society
because they feel so maybe their shares
being given to somebody else or maybe
they feel as though they're never going
to get their share so we have to play
around with those to make sure that they
really do come so people face trade-offs
we face trade-offs and that's the
principle number one principle number
two is the cost of something is what you
give up together now when you think of
costs you always pretty much and if
you're like me you think about money
until I took economics but it's not it's
about making decisions and when we make
a decision we actually are comparing the
cost and benefit of all those
alternative sources that we can look at
so an opportunity cost is a measurement
that takes a look at the opportunity the
cost of any item is whatever you give up
to obtain that's called your opportunity
cost because you gave up that
opportunity is the best way to remember
it so it's the relevant cost of making a
decision so here's some examples the
opportunity cost of going to college is
not just the tuition because of course
it does cost you physically tuition the
books the fees but also the fact that
you have to forego maybe some wages you
might have earned had you not gone to
college if you go see a movie you give
up obviously the price of the ticket but
your opportunity cost is the value of
the time you spent at the movie theater
what else could you have done with that
time that is the second principle the
third principle is all about rational
people now you may never think about
that and say oh my gosh no one's
rational but economically in general
people are rational we think of the
margin because we systematically and
purposefully do the best that we can to
achieve our objectives we make decisions
by evaluating the cost and the benefit
of the marginal changes the incremental
adjustments to existing the existing
plan if you kind of think about the way
you make your decisions you realize that
we do we make sometimes feel as though
somebody's irrational based on what we
think they should do but they
systematically purposefully didn't make
those decisions to achieve whatever
their goal is whether we agree with
their goal or not so examples of this
are when a constant considers whether to
go to college for an additional year you
have to compare the fees and the forgone
wages to the extra income you could earn
with the extra year of Education you're
thinking at the margin you're not
looking at everything that happened in
the past that's gone that's gone as
something cost that's what we call it
just gone what we're saying is I'm going
to go to college and because I do this I
go for maybe an associate's degree to a
bachelor's degree gonna go stay in
college to get that bachelor's degree
I'm yes I forego in certain wages and
I'm for going but situation I have to
pay but I'm hoping I'm thinking at the
margin but the extra year is gonna give
me extra income in the future when a
manager considers increasing his output
it has to say okay I'm gonna make more
of this so what do I need to make more
of this I need to have additional
material how much more materials I need
to make that how much more labor do I
need to make that and how much more
revenue will I do if I get that and you
have to make the decision at that margin
because that's the part that makes that
decision what it's not all the other
stuff although that is an accounting
issue but from an economic perspective
we really aren't making a decision based
on what we did in the past we're making
decision on whether or not that
additional output is worth it and we
respond to setups I know that this is
shocking this happens from the day we go
to kindergarten right we in general find
that if somebody gives us an incentive
it induces us that and vice versa if we
get a punishment or less likely to do it
a disincentive we in general as human
beings live with incentives and non-deceptive
non-deceptive
and instead of don't have to necessarily
be monetary it can be emotional they can be
be
based on how your of judgments are and
how your core feels about things so
rational people respond to incentives so
if the gas prices rise people
immediately buy more hybrids why because
the incentive to buy the hybrid is
higher because now is going to save you
their gas and they're going to buy less
of the things that use that gas so we
basically respond to incentives we
respond to things that get us to do
certain things now as you can imagine
governments can use this tour of their
advantage because they can create subtle
incentives economically that make us
decide to or not to do things for
instance way back in time when they
wanted more Americans to buy homes they
developed away the 30-year mortgage in
which everyone could afford to buy a
home it incentivized us to want to part
of what also incentivizes at a time was
we could deduct the costs of the
interest that we were paying to the bank
to own the home cigarette tax this is
the negative incentive and this is
actually is equally as important when
you decide that you don't want somebody
to do things you make it more expensive
or harder for them to do things for
instance by increasing the cigarette tax
you make it more costly to smoke this is
sense advising people from smoking and
smoking will fall now there is a study
and we can look at this later on in
which what ends up happening is they
just could other things but those are
the vices to happen and the cons do have
to look at the longer term and in terms
of okay yes you did this to cigarettes
what happens with other substances such
as marijuana and all so the principles
of how people make decisions are for we
face trade-offs the cost of any action
is measured in terms of foregone
opportunities otherwise known as the
opportunity cost rational people make
decisions by comparing the marginal cost
I was just going to cost me at that
margin at that point versus the marginal
benefits how much am I going to get
and people respond to incentives those
are the economic principles that explain
how people make decisions now let's put
some this into terms so you're selling a
Mustang it's a 1996 Mustang you've
already spent $1,000 on repairs at the
last minute transmission just gives that
you can pay $600 to have it repaired or
sell the car as is in each of the
following scenarios should you have the
transmissions repaired the first
scenario we're going to talk about is
all about the Blue Book value so in
which we're talking about the Blue Book
value and how much it's worth
so the Blue Book value of the car is
worth 6500 is the transmission works and
510 I'm sorry 5700 if it doesn't the
second one's still in the Blue Book but
now you can see the Blue Book isn't
quite as hot so the Blue Book if it
works is only 600 and if it doesn't work
it's 55 so what are you gonna do well we
know the costing the fix of the
transmission is 600 and then we know
what the Blue Book value is so now what
is the benefit of fixing the
transmission well it's a six hundred
sixty-five hundred which is what you're
gonna get for it - what you could get
for if you don't fix it so what would
you get when you fix it what would you
do when you don't fix it subtract the
two that's gonna give you the benefit of
fixing the transmission in this case
it's eight hundred dollars if it only
cost you six hundred dollars to fix this
transmission you should fix it okay now
let's look at the same thing now the
Blue Book value is only six thousand and
it's 55 if it doesn't work now taking
that same equation what are you going to
do you're going to take the six thousand
you're going to subtract the fifty-five
it's only gonna benefit you five hundred
dollars to fix it but we know it cost
you six hundred dollars so now what are
you doing you're not gonna pick so
we are looking at the margin it doesn't
matter how much you paid in the past to
get the car repaired
what matters is what whether you should
make that decision what is the marginal
benefit in the first case $800 versus
the marginal cost 600 is it worth it
second case your marginal benefit is
only 500 your marginal cost is 600 don't
fix it when you paid the thousand
dollars just remember that's not in the
equation so whatever you're doing
problems you're considering economics
when we're talking about margin we're
talking about marginal cost and benefits
at that time things you did in the past
do not affect your marginal cost and
benefits so how do people interact well
people interact in such a way the train
makes us better off I wish I had a rock
I wish I had a stick switch everybody's
better rather than being self-sufficient
people who specialize in producing one
good or service in exchanging it for
another good are better off I am an
economist I am a t-shirt I do that well
I am a terrible auto mechanic it makes
sense for me to do what I do and for an
auto mechanic to do what he does and for
us to trade those services I go out into
the general population and I saw my
service he goes out and tells his
service I get money for my service I go
pay him for his service makes sense
countries can also benefit from trade
the specialization you get a better
price abroad for goods they produce
because maybe somebody else can't
produce as well as we can we produce a
ton of wheat in the United States other
countries have less land they can't
produce as much wheat and make sense the
United States reproduce wheat and we
exported to countries that don't produce
wheat in turn countries that can't
produce wheat but maybe can produce
something else more economically than we
can with olives or olive oil should then
in turn send the two of the United States
markets so that was principle five
person well 6 is markets are a good way
to organize economic activity what's the
market it's a group of people buyers and
sellers you're just the seller it
doesn't matter whether they're all in
place if they're virtual think about all
the virtual things we do today right
it's just bringing people together
Amazon is kind of a market isn't it
great spot spring silicon spiders pre
source organized economic activity
basically means that you've determined
what comics you're gonna produce how you
gonna produce them how much you're gonna
produce and who gets them and this is
where economics and marketing come
together why because if you think about
it marketing kind of helps you decide
those problems but basically by
organizing that into an economic
activity you have determined what you're
going to create a market economy
allocates those resources through
decentralized activities and how firms
act now a market economy assumes free
trade so we in the United States have a
market economy now communists separate
the concept of democracy which is a
political concept from the concept of an
open market situation which is what we
do have in the United States so we have
a democracy and we do have an open
market situation there are countries
that have socialist governments but
still have open markets so do not temper
the fact that they're political with
their economic okay just kind of say no
such all right famous person in 1776
that was arson in consequential time in
the United States a Scottish economist
at the very time with a very long book
it's called the wealth a nation and I
don't know where my copy is but it's
somewhere around here a little dry in
which she discovers and says that each
house on a firm act is it's led by an
invisible hand to promote the general
economic outcome what is he saying
well I'm going to show you a video right
here you can stop stop and you can go
out and watch this separately but I'm
just going to put this right in here
we're all going to watch is here in 18th
century Adam Smith used the metaphor of
an invisible hand to describe how
individuals making self-interested
decisions and collectively and
unwittingly engineer an effective
economic system that's in the public
interest this is how the invisible hand
is usually understood today well there's
not buying whatever they can to get the
best deal but out of their
self-interested choices in the free
market and efficient economy emergence
and this allegedly the superior to any
system with state villages more recent
enthusiasts of free market switches
Friedrich Hayek and Milton Friedman have
invoked the idea of an invisible hand as
an argument against restrictions on
trade what everyone sees the invisible
hand is benevolent though those who are
poorly paid or out of work as a result
force operations so as you can see the
invisible hand is a concept in which
what we're trying to say is if the
markets are left to their own solution
you can and will be able to do what come
to an equilibrium the market powers that
are selling and the market powers are
buying we'll work together to come up
with a price that works for both of them
unfortunately as you well saw the other
problem that we run into the visible
hand if sometimes this can be painful
and because politicians have to be
rehired on a regular basis they don't
really like that so the invisible hand
sometimes gets manipulated by government
and other things I did include the
YouTube tie-in in case you didn't see it
to see that you'd like to see that again
oh my that was not what I meant to do
sorry about that let's get back to the pound
ok so we've now are up to this whole
notion of principle 6 which is what we
were talking about with just a slow
motion of markets and how they are good
way to organize so we talked about the
visible hand and we talked about the
fact the visible hand is working through
the price system and it's the
interaction between the people selling
stuff and the people buying stuff it
determines the price because if Nolan
wants it then the sellers selling
something that you know it's going to
have to be sold in a very low
and if everybody wants it the seller can
sell it at a higher price so this is
where you start to get these
artificially high prices where things
are in high demand
Kovach 19 being a classic example of
this in toilet paper each price reflects
the goods value to the buyer how much we
as buyers consumers and the cost of
producing the good now we want this to
be something that's fairly equal and
fairly representative the price guys
self-interested people such as ourselves
and firms to make decisions and we
should by doing these thinking these
decisions and based on the fact that we
as a society have agreed to a common
goal these decisions will basically
government's governments can sometimes
improve market outcomes now in general
economists are not thrilled with the
notion of political development they
would like in general for governments to
stay out of the Congress but in general
they do believe that the government has
a role in things like property rights
why because if you can't ensure that you
have a right to own what you're
producing is very difficult to get
people to want to produce so enforcement
of things like property rights is so
damn important if you can if you create
a factory and you think you own the land
and the next week somebody comes and
says no that's my land and there's no
way for you to have any recourse what's
the incentive to produce anything in a
factory people are less inclined to work
produce and best if they have a big risk
of losing decent a market failure is
when the market fails to allocate the
resources effectively and they can be
things like we call them externalities
things like pollution when we pollute we
have bottom may be happy and the seller
may be happy what they thought and then
may be fine to both of them that that
polluted but there's a third party the
person down the stream from the polluted
river or the person whose air gets polluted
polluted
that is now part of the equation that
the supply and demand hasn't gotten
involved with those are called
externalities there's a third party that
is involved and is affected by this
particular market failure the other one
is a market power market failure when
one particular firm holds all of the
power so now you can't let the visible
hand work because seller is not going to
negotiate the seller doesn't have the
buyer doesn't have ability to go
anywhere else for the product so then
the seller basically because all of the
power this is called a monopoly in these
two cases
economists feel that market power and
externalities are things that are
considered and good enough market
failures that the government should be
involved so property rights and law and
order and market failures are two roles
in the principles of economics that the
all right so what are we done we've done
how people interact and then how people
interact with buyers and sellers and now
we're going to talk about how the
principally a country's living standard
depends on its ability to produce goods
and services so there's a huge variation
if you think about it in the world of
living students we as Americans are
fairly fortunate there are many
countries that are not fortunate why
because of our ability to produce goods
and services the average income in our
rich countries can be ten times when it
is in poor countries our standard of
living right now is eight times when it
was a hundred years ago our standard of
living and our ability to produce goods
gets to the term productivity
productivity is one of the most
important determinants on our ability to
live and live well it determines our
standard of living and productivity is
the amount of goods and services
produced per unit of labour so usually a
you know
laborious person so what we're saying is
countries that have the ability to
produce more goods and services per
person are going to have higher standard
of living than countries that have lower
amounts of goods and services produced
per person now there are a lot of
variables that affect productivity
equipment skills technology and skills
require two things one is general skills
the two is you have to have the
education because if you do not have the
education to use the equipment and the
technology you can't you don't have the
skills to you because education is a
skill other factors are things like
labor unions competition from abroad but
they don't really affect living
standards to the same extent as just our
raw ability and our amount of goods and
services produced per person principle
not home was done price rises when
government prints too much money and
you're all like boy inflation is what
it's called and it's increase in the
general price level so we will come back
to this believe it or not of course we
will because inflation is a big macro
thing in the long run inflation is
always caused by excess gross growth in
the quantity of money which causes the
value of money to fall yeah what am I
saying what I'm saying is if you have
more money then you had a year ago in
the general supply then each one of
those pieces of money paper coins is
going to be worth less than it was a
year ago
so as government's print money they
cause inflation now the central bank of
the United States of America knows this
and this is part of the reason why no
matter what you hear we don't
willy-nilly print money however as you
can probably imagine it's not all
true and there will be cases we'll talk
about in which this has happened this
will ten society has a short-term
trade-off between inflation and
unemployment basically in two years
strands one to two year so the principle
of inflation price is going up and some
of us for printing money and someone
who's just natural and unemployment
people not working push each other back
and forth another which when you have
high inflation you tend to have low
unemployment when you have high
unemployment you tend to have low inflation
inflation
up until the recent Kelvin pandemic we
actually had low unemployment and low
inflation now there is some reasons
behind that only its unemployment we
will talk about that more in depth
because it does to matter how we define
unemployment but in general this is
where we're trying to place this
trade-off and the Federal Reserve which
will talk about it further as a mandate
to keep these yin and yang so to speak
in line in order to keep our economy and
our us as people well off and allocate
our resources as best as possible all
right so I've given you ten principles
the first three we're all about this is
making people face trade-offs the cost
of inaction is measured in terms of for
grant opportunities rational people make
decisions by comparing marginal cost and
marginal benefits say back to the
Mustang with transmissions and we all
respond to service then we talked about
interactions we talked about trade and
the notion that trade can be beneficial
we talked about the fact that markets
are good way of coordinating treat
because it allows people to discuss and
to do things everybody did it
individually in the world's no market
there was no economy it would be very
difficult to do governments potentially
improve marketing outcomes if there's a
market failure
or the market outcome is inequitable so
what are we talking about here we're
talking about market failures like what
externalities like pollution we're
talking about market failures like
monopolies we're talking about market
failures such as not having property
rights there is where economists will
say the government can get involved now
as an economy as a whole
productivity is the ultimate source of
living standards in other words the more
that an economy can produce of goods and
services per unit of labor people
working people the better off their
United States a case in point growth is
the ultimate source of inflation money
growth so you don't want to grow your
money supply too fast or that's your hot
inflation and we'll be into the money
supply most about week six or seven and
we'll talk a little bit about how that's
affected by inflation and what the
Federal Reserve does in the United
States to counter that central banks in
other countries Society will base that
trade-off because they want if
unemployment to stay low but they also
don't want inflation to go high so it's
always a trade-off that is chapter one
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