Lecture # 2 (23.01.2017) @ ibt macro goals

Editor's Notes

• #4: Forest vs. trees. Macroeconomics is study of the forest. Microeconomics is study of individual trees. Aggregate - (n) a total, a mass or amount, brought together. (v) to collect or form into an aggregate. Aggregate demand represents the total spending on all final goods and services in an economy by all consumers. Problem with aggregation of preferences. Could add pro-con votes as in an election. But, how do you account for differences in intensity of preferences?
• #5: List of goals is not exhaustive. Many other economic goals such as: equitable distribution of income balanced government budget balanced international trade low real interest rates
• #8: Economic Growth - distinction between short-run and long-run. Short-run changes in economic growth described by business cycle models. The business cycle represents fluctuations in economic growth around a long-run trend. the long-run trend is determined by such factors as investment, productivity, changes in technology, etc.
• #9: Are high economic growth and low inflation conflicting goals? Not necessarily if your policy action is to increase productivity then you could increase economic growth while maintaining low inflation. Because of conflicting goals economics has been described as the “Dismal Science”
• #11: Real capital - human-made resources used to produce final goods and services. Requires foregoing current consumption. Financial capital - not included as an economic resource
• #12: Scarcity: - if the good or service were free, the quantity supplied would exceed the quantity demanded at a zero price. - scarcity requires both limited resources and unlimited wants. Each is necessary but not sufficient by itself to have scarcity. Choice: in a world of scarcity we must make choices regarding the allocation of scarce resources. Opportunity Cost: each choice involves a cost - something must be given up. You plan on attending class but start thinking about how nice it would be to skip and stay at home. How can an instructor influence your estimate of the net benefit of attending class, or increase the opportunity cost of staying home? Reduce costs of attending class: make class shorter Increase benefit of attending class: tell you what will be on exams give good lectures require attendance Why do parents and teachers complain that students do not study enough? Students face relatively certain opportunity costs but uncertain future benefits for attending class. Perception is that students discount the expected benefits too heavily because of the uncertainty, while parents and teachers view the future benefits with more certainty.
• #13: Additional characteristics - given identical conditions, people will consistently make the same choices. - (not in text) if A is preferred to B, and B is preferred to C, then A is preferred to C. Does a 5 year-old ever exhibit rational self-interested behavior? Consider a child who is an angel at home but a terror at the supermarket. When at a store the benefit of misbehaving (the potential payoff of pestering Mom or Dad for candy) is greater than at home. Also, because the parent is less likely to punish the child as severely in public, the costs are lower as well. We don’t think the child is actually making this calculation, but behaves as if he is. Why do people contribute to public radio and television? Problem of free-riding. Public TV fundraisers often provide something for the contribution, like a video of the program. Refer to lecture notes for relationship between rational self-interest and opportunity cost.
• #15: Why do economists disagree even over positive theories? Economics is a social science, like psychology, anthropology, and political science. It is concerned with reaching generalizations about human behavior. Human behavior is more variable and often difficult to predict. But, probably more important, humans too often can’t explain their true motivations. Economics assumes people are rational self-interest maximizers. All that we can really claim is that people act as if they are rational. Social scientists don’t have laboratories to conduct controlled repeatable experiments to test theories like physical scientists. We can’t manipulate the economy simply to test our theories
• #16: Why do economists disagree even over positive theories? Economics is a social science, like psychology, anthropology, and political science. It is concerned with reaching generalizations about human behavior. Human behavior is more variable and often difficult to predict. But, probably more important, humans too often can’t explain their true motivations. Economics assumes people are rational self-interest maximizers. All that we can really claim is that people act as if they are rational. Social scientists don’t have laboratories to conduct controlled repeatable experiments to test theories like physical scientists. We can’t manipulate the economy simply to test our theories