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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

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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