Principles of macroeconomics
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This document summarizes key concepts from Lecture 2 of a macroeconomics course. It defines theory as a framework for understanding relationships between cause and effect. Economic models are then introduced as simplified representations of how parts of the economy function, relying on assumptions and economic variables that can take different values. Rational behavior and marginal concepts are explained, showing how rational actors make decisions by weighing marginal costs against marginal benefits. Finally, principles of economics are outlined regarding how individuals make decisions, interact in markets, and how the overall economy works.
Principles of macroeconomics
- 1. Lecture 2 Macroeconomics abdul-Ghaffar Institute of Management Sciences, HayatAbad 1
- 2. Lecture 2 Theory: Theory is a framework that helps you understand relationships between cause and effect Theory is a simplification of an actual relationship A theory explains the causes of a phenomenon. 2
- 3. Lecture 2 Economic Variables: Quantities that can have more than one values e.g; Price, interest rate, income etc Economic models: Simplified way of expressing how some sectors of the economy functions - Economic models are abstracts (caprture important and not ALL details relevant to the phenomenon) - Economic models rely on assumptions - It is in the form of logic, graphs or mathematics 3
- 4. Lecture 2 - A good economic model is like a schematic diagram. It accurately sets the relationship or cause and effect among variables - An economic model is a tool that helps you understand the consequences of a theory - A good model not only explains phenomena better but, also, has the ability to predict changes in the economic variables 4
- 5. Lecture 2 Rational Behaviour: Ways of acting for which the extra benefit exceeds (greater than) the associated extra cost When your actions are such that the extra benefits are exceeding (more than) additional expenditures it means you are showing a rational behaviour 5
- 6. Lecture 2 Marginal Benefit: The monetary value (rupees or dollars or any other currency you are dealing in) placed on the satisfaction obtained from another unit of an item Marginal Cost: The sacrifice made to obtain an additional unit of an item A Rational Person continues purchasing (marginal cost) an item to the point at which there is no additional net gain (marginal benefit) 6
- 7. Lecture 2 Graphs Origin: On a set of axes, the point designated by zero (0) at which variables X and Y both take on zero values Coordinates: A pair pf numbers that sorresponds to values for X and Y when plotted on a set of axes e.g; (X,Y) 7
- 8. Lecture 2 Curve: A straight or curved line drawn to connect points plotted on a set of axes Positive Relationship: Indicates that variable Y increases whenever X variable increases. It is represented by an upward sloping curve Negative Relationship: Indicates that Y decreases whenever X increases. Downward sloping curves 8
- 9. Lecture 2 Slope: measures the rate at which Y changes with every change in X variable = change in Y/Change in X Intersection: The point at which two (2) curves cross each other 9
- 10. Lecture 2 Ten (10) Principles of Economics: How People make Decisions? 1) - People face Tradeoffs 2) - The cost of something is what you give up to get it 3) - Rational People Think at the Margin 4) - People Respond to Incentives 10
- 11. Lecture 2 How People Interact? 5) – Trade can make everyone betteroff 6) – Markets are usually good way to organise Economic Activity 7) – Governments can sometimes improve market Outcomes 11
- 12. Lecture 2 How The Economy as a Whole Works? 8) – A country’s standard of living Depends on its ability to produce goods and services 9) – Prices rise when governments print too much money 10) – Spcoeity faces a short run tradeoff between Inflation and Unemployment 12
- 13. Questions? End of Lecture 2 Thank you all (for not sleeping!!!) 13