Macroeconomics

LEARNING OBJECTIVES:

By the end of this chapter, students should understand:

➢ Differentiate between Microeconomics and Macroeconomics.

➢ Explain economics as the study of allocation of scarce resources.

➢ Explain how individuals face trade-offs.

➢ Explain opportunity cost.

➢ Explain the Production Possibilty Curve, Growth and Unemployment.

➢ Explain the circular flow of income.

1. INTRODUCTION

a. The word “economy” comes from the Greek word oikonomos meaning “one who manages a household.”

b. This makes some sense because in the economy we are faced with many decisions (just as a household is).

c. Fundamental economic problem: we live in a world of scarcity; resources are scarce therefore decisions must be made as to how the scarce resources should be allocated.

d. An economy is a group of people dealing with one another as they go about their lives.

e. Economics studies how people make decision and the factors that affect people’s decisions.

2. Microeconomics and Macroeconomics

a. Microeconomics is a study of how households and firms make decision and how they interact with the markets.

b. It examines the smaller units of the economy e.g. decisions of household in a specified market.

c. For example micro-economists might study the effects of rent control on housing in Kuala Lumpur or New York City, impact of foreign competition on the Malaysian auto industry.

3. Macroeconomics looks at the nation’s economy as a whole.

a. Macroeconomic examine the economy in aggregates individual households, firms are aggregated into gross private consumption and gross private investment.

b. Macroeconomic measures how factors like the total output of goods and services, price level, unemployment, exchange rate interest rate, international trade affects the consumption, investment & government.

c. Microeconomics and Macroeconomics are closely intertwined because the changes in...