Macroeconomics

Dr. Karim Kobeissi

Arts, Sciences and Technology University in Lebanon
Chapt er 1: The Cor e I s s ues
Economics, Microeconomics & Macroeconomics
Economics is the efficient* allocation of the scarce factors of production
(resources) toward the satisfaction of abundant human wants.
Economics distinguishes between microeconomics and
macroeconomics.
- Microeconomics is the field of economics that studies the decisions
that people and businesses make regarding the allocation of
resources and prices of goods and services. This means also taking
into account taxes and regulations created by governments.
Microeconomics focuses on supply and demand and other forces that
determine the price levels seen in the economy.
- Macroeconomics is the field of economics that studies the behavior
of the economy as a whole and not just on specific companies,
but entire industries and economies. This looks at economy-wide
phenomena, such as Gross National Product and how it is affected by
changes in unemployment, national income, rate of growth, and price
levels.

The Central Fact of Economics: Scarcity
In very few words, economics is the study of how people use scarce resources:
- How do you decide how much time to spend studying?
- How does Amazon.com decide how many workers to hire?
- How does BMW decide whether to use its factories to produce sports utility vehicles
or sedans?
In every instance, alternative ways of using scarce resources (factors of production) are
available, and we have to choose one use over another.
The Central Fact of Economics: Scarcity (con)
In this first chapter we explore the nature of scarcity and the kinds of CHOICES it forces us
to make. Three core issues that confront every nation must be resolved:
1. WHAT to produce with our limited resources.
2. HOW to produce the goods and services we select.
3. FOR WHOM goods and services are produced (who should get them).
We should also decide who should answer these question. Should the marketplace or the
government decides what gets produced and how and for whom.
The Economy Is Us
The economy is simply an abstraction referring to the
aggregation of individual production and
consumption decisions: What we collectively
produce is what the economy produces; what we
collectively consume is what the economy
consumes.
The Factors of Production
The resources used to produce goods and services are called factors of production. The
four basic factors of production are:
1.Land
Land refers not just to the ground but to all natural resources, such as: crude oil, air,
water, and minerals.
2. Labor
Labor is not simply a question of how many bodies there are. When we speak of labor,
we refer to the skills and abilities to produce goods and services. Hence, both the
quantity and the quality of human resources are included in the Labor factor.

The Factors of Production (con)
3. Capital
In economics, the term capital refers to final goods produced for use in further
production, e.g., equipment, structures..
4. Entrepreneurship
The more land, labor, and capital available, the greater the amount of potential output. A
farmer with 10000 acres, 12 employees, and 6 tractors grow more crops (yield)
than a farmer with half those resources. But there is no guarantee that he will. The
farmer with fewer resources may have better ideas about what to plant, when to
irrigate, or how to harvest the crops:
- IT IS NOT JUST A MATTER OF WHAT RESOURCES YOU HAVE BUT ALSO
OF HOW WELL YOU USE THEM.
This is where the fourth factor of production Entrepreneurship comes in.

All economic choices taken by individuals or society
are costly and The correct way to measure the cost of
a choice is its Opportunity cost that which is given
up to make the choice.
The Principle of Opportunity Cost

Opportunity Cost (con)

Opportunity cost is always measured by how much you give
up of the next best alternative to get what you want. For
example:
A woman who is considering whether to stay home and take
care of her children or work at a job paying $9.50 per hour.
A landowner decides to farm his own land instead of renting it
to a neighbor for 20000$.


Opportunity Cost (con)

Even a so called free lunch has an
opportunity cost. In fact, the resources
used to produce the lunch could have been
used to produce something else.

Pr oduc t i on Pos s i bi l i t i es
The production possibilities are the alternative
combinations of final goods and services that could be
produced in a given time period with all available
resources and technologies.
The Production Possibilities Curve
The Production possibilities curve (PPC)
Describes the various output combinations that
could be produced in a given time period with
available resources and technology.
The Production possibilities curve represents a
menu of output choices an economy confronts.
The Production Possibilities Curve (con)
The production possibility curve illustrates the
principle of opportunity cost for an entire economy.
-- it shows all possible combinations of goods and
services available to entire economy.
A Production Possibilities Curve
A
B
C
D
E
F
O
U
T
P
U
T

O
F

T
R
U
C
K
S

5
4
3
2
1
0 1 2 3 4 5
OUTPUT OF TANKS
Point
Total
Labor
Truck
Output x
Labor per
Truck =
Total Labor
Required
Labor Not
Used for
Trucks
Potential
Output of
Tanks
Increase in
Tank Output
A 10 5 2 10 0 0
B 10 4 2 8 2 2 + 2
C 10 3 2 6 4 3 + 1
D 10 2 2 4 6 3.8 + 0.8
E 10 1 2 2 8 4.5 + 0.7
F 10 0 2 0 10 5 + 0.5
Truck Production Tank Production
The Production Possibilities Curve (con)
The production possibility curve Illustrates Two Essential
Principles:

1- Scarce resources: Production is limited by available
resources and technology.
2- Opportunity costs: Can obtain additional quantities of a
good only by reducing production of another The Low
of Increasing Opportunity Cost.
The Low of Increasing Opportunity Costs
We must give up ever increasing quantities of other
goods and services in order to get more of a
particular product.
Step 1: give up one truck
Step 2: get two tanks
Step 3: give up another truck
Step 4: get one more tank
A
B
C
D
E
F
O
U
T
P
U
T

O
F

T
R
U
C
K
S

5
4
3
2
1
0 1 2 3 4 5
OUTPUT OF TANKS
Law of Increasing Opportunity Costs
The Low of Increasing Opportunity Costs (con)
Why do opportuni ty costs i ncrease?
Resources do not transfer perfectly from the production of
one good to another. It is easy to transform trucks to tanks
on a blackboard. In the real world, however, resources
dont adapt so easily.
For instance, resources used for truck production are not
ideally suited for producing tanks: workers who assemble
trucks may not have the same skills for tank assembly (we
lose some efficiency in the productions transfer ).
Efficiency
Efficiency: Maximum output of a good from
the resources used in production.
Every point on the production possibilities
curve is a point of efficiency
Points Inside the Curve
A production possibilities curve shows potential
output

Actual output can be less than potential due to:
Inefficiency: Resources not being used to maximum
potential (e.g., waste in raw materials or use of an aged
technology in the production of output).
Unemployment: Some resources are inactive (e.g.,
unemployed workers).
OUTPUT OF TANKS
A
B
C
Y
5
4
3
2
1
0
1 2 3 4 5
O
U
T
P
U
T

O
F

T
R
U
C
K
S


Some resources are unemployed
or used inefficiently
A Point Inside the Curve
Market Failure
At point Y we have a market failure:
When our resources are not allocated efficiently, we
have market failure .
Points Outside the Curve
Any point outside the production possibilities
curve is unattainable with available resources
and technology.
A Point Outside the Curve
OUTPUT OF TANKS
A
B
C
X
5
4
3
2
1
0
1 2 3 4 5
O
U
T
P
U
T

O
F

T
R
U
C
K
S

Currently not attainable
Economic Growth
Economic growth: An increase in output due
to an expansion of production possibilities
Production possibilities increase with more
resources or better technology
The production possibilities curve shifts
outward

Economic Growth
0
PP
1
PP
2
OUTPUT OF TANKS
O
U
T
P
U
T

O
F

T
R
U
C
K
S


The Mechanism of Choice
An economy is largely defined by how it
answers the WHAT, HOW and FOR WHOM
questions
Continuing Debates
The core of most debates is some variation of
the WHAT, HOW, or FOR WHOM questions
Conservatives favor Adam Smiths laissez-faire
approach
Liberals think government intervention is likely to
improve market outcomes
A Mixed Economy
Countries answer the questions differently
Mixed economy: An economy that uses both
market signals and government directives to
allocate goods and resources.