Bài giảng Macroeconomics - Chapter 1: Introduction to economics - Nguyễn Thùy Dung

limited human wants 
in a world of limited resources 
Scarcity 
The Economic Problem? 
•Unlimited Wants 
•Scarce Resources – 
Land, Labour, Capital, 
Entrepreneurship 
•Choices - What we want 
(need) versus what we can 
give up (live without) 
HUTECH Institute of International Education Introduction to Economics 
What Economics Is All About? 
• Economics is the study of the choices 
people and societies make to obtain their 
unlimited wants, given their scarce resources. 
• In this subject we study how people make 
choices and interact in markets. 
HUTECH Institute of International Education Introduction to Economics 
Economics is the 
study of how society 
manages its scarce 
resources. 
What Economics Is All About? 
3 basic economic problems 
HUTECH Institute of International Education Introduction to Economics 
10 Principles of Economics 
HOW PEOPLE 
MAKE DECISIONS 
People face tradeoffs 
Opportunity cost 
Rational people think 
at a margin 
People respond to 
incentives 
HOW PEOPLE 
INTERACT 
Trade Can Make 
Everyone Better Off 
Market Organizes 
Economic Activity 
Governments Can 
Improve Market 
Outcomes 
  
HUTECH Institute of International Education Introduction to Economics 
10 Principles of Economics 
HOW THE ECONOMY AS A 
WHOLE WORKS 
A Country‟s Standard of Living Depends on 
Its Ability to Produce Goods & Services 
Prices Rise When the Government Prints 
Too Much Money 
Society Faces a Short-run Tradeoff 
Between Inflation and Unemployment 
 
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4 principles of 
HOW PEOPLE 
MAKE DECISIONS 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
• Choice involves sacrifice, meaning choosing 
one thing means leaving the other things. 
→ All decisions involve tradeoffs 
• Opportunity cost refers to the cost of an activity 
measured in terms of the best alternative 
forgone 
Principle #1: People Face Tradeoffs 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
• Important tradeoff: “efficiency” vs “equality” 
Efficiency: means that society is getting the 
maximum benefits from its scarce resources 
Equality: means that those benefits are 
distributed uniformly among society‟s members 
→ Tradeoff: To achieve greater equality, 
could redistribute income from wealthy to poor. 
But this reduces incentive to work 
Principle #1: People Face Tradeoffs 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
 Acknowledging life’s trade-offs is important 
because people are likely to make good 
decisions only if they understand the options 
that are available to them 
Principle #1: People Face Tradeoffs 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
• Making decisions requires comparing the 
costs and benefits of alternative choices. 
• The opportunity cost of any item is 
whatever must be given up to obtain it. 
• The cost of an action is not as obvious as it 
might first appear. 
Principle #2: The Cost of Something Is 
What You Give Up to Get It 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
• Examples: The opportunity cost of 
going to college for a year is not just the 
tuition, books, and fees, but also the foregone 
wages. 
seeing a movie is not just the price of the 
ticket, but the value of the time you spend in 
the theater. 
Principle #2: The Cost of Something Is 
What You Give Up to Get It 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
Rational people 
• who systematically and purposefully do the 
best they can to achieve their objectives. 
• Term “marginal changes” – a small incremental 
adjustments to an existing plan of action. 
• Rational people make decisions by comparing 
marginal benefits and marginal costs. 
Principle #3: Rational People Think at the Margin 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
Examples: 
• Considers whether to go to college for an 
additional year, you need to compares the 
fees & foregone wages to the extra income he 
could earn with the extra year of education. 
 A rational decision maker takes an action if 
and only if the marginal benefit of the action 
exceeds the marginal cost. 
Principle #3: Rational People Think at the Margin 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE MAKE DECISION 
 Incentive: something that induces a person to 
act, i.e. the prospect of a reward or 
punishment. 
 A higher price in a market provides an 
incentive for buyers to consume less and an 
incentive for sellers to produce more. 
 Public policy: change costs or benefits, and as 
a result, change people‟s behavior. 
Principle #4: People respond to Incentives 
HUTECH Institute of International Education Introduction to Economics 
3 principles of 
HOW PEOPLE 
INTERACT 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE INTERACT 
 Trade allows each person to specialize in the 
activities he or she does best 
 Countries also benefit from trade & specialization: 
• Get a better price abroad for goods they produce 
• Buy other goods cheaper from abroad than goods 
could be produced at home 
Principle #5: Trade Can Make Everyone Better Off 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE INTERACT 
 Communist countries – central planners make 
all decisions, i.e. what, how and who goods and 
services were produced 
 Market economy - an economy that allocates 
resources through the decentralized decisions 
of many firms and households as they interact 
in markets for goods and services 
Principle #6: Markets Are Usually a Good 
Way to Organize Economic Activity 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE INTERACT 
Famous insight by Adam Smith in The Wealth of 
Nation (1776): 
 Households and firms act as if they are guided 
by an invisible hand” that leads them to 
desirable market outcomes. 
The invisible hand works through the price system 
Principle #6: Markets Are Usually a Good 
Way to Organize Economic Activity 
HUTECH Institute of International Education Introduction to Economics 
HOW PEOPLE INTERACT 
We need government: 
 Enforce rules and maintain institutions 
• Enforce property rights 
 Promote efficiency 
• Avoid market failure 
 Promote equality 
• Avoid disparities in economic well-being 
Principle #7: Governments Can Sometimes 
Improve Market Outcomes 
HUTECH Institute of International Education Introduction to Economics 
3 principles of 
HOW THE 
ECONOMY 
AS A WHOLE 
WORKS 
HUTECH Institute of International Education Introduction to Economics 
HOW THE ECONOMY AS A WHOLE WORKS 
 Huge variation in living standards across 
countries and over time 
 Explanation: differences in productivity - the 
amount of goods and services produced per 
unit of labor input 
 Productivity depends on the equipment, skills, 
and technology available to workers. 
Principle #8: A country’s standard of living depends 
on its ability to produce goods & services. 
HUTECH Institute of International Education Introduction to Economics 
HOW THE ECONOMY AS A WHOLE WORKS 
 Inflation: a situation of rapidly increasing in 
the general level of prices 
Principle #9: Prices Rise When the 
Government Prints Too Much Money 
 Excessive growth in 
the quantity of money 
causes the value of 
money to fall. 
HUTECH Institute of International Education Introduction to Economics 
HOW THE ECONOMY AS A WHOLE WORKS 
 In the short-run (1 – 2 years), many economic 
policies push inflation and unemployment in 
opposite directions. 
 Other factors can make this tradeoff more or 
less favorable, but the tradeoff is always 
present. 
Principle #10: Society Faces a Short-Run 
Trade-off between Inflation and Unemployment 
HUTECH Institute of International Education Introduction to Economics 
Ten Principles of Economics 
HUTECH Institute of International Education 
In this section, 
look for answers for these questions: 
What are economists‟ two roles? 
What are models? How do economists use them? 
What are the elements of the Circular-Flow 
Diagram? What concepts does the diagram 
illustrate? 
How is the Production Possibilities Frontier related 
to opportunity cost 
THINKING LIKE AN ECONOMIST 1.2 
Thinking like an Economist 
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Thinking like an Economist 
Economist as Scientist 
– try to explain the world 
Economist as Policy advisor 
– try to improve it 
Thinking like an Economist 
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Economist as Scientist 
 Economists employ the scientific method 
• Devise theories 
• Collect data 
• Analyze data Verify or refute theories 
 Make use of scientific method - 
observation, theory, and more observation 
 The interplay between theory and observation 
always occurs in economics 
Thinking like an Economist 
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Assumptions and Models 
 Economic model: a highly simplified 
representation of a more complicated reality. 
 Assumption: Judgments about features that 
can be ignored to make the world easier to 
understand. 
 Ceteris paribus assumption: All other things 
being equal. The term refers to holding all 
other variables constant when one variable is 
changed. 
Thinking like an Economist 
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Our first model 
 The Circular-Flow Diagram 
Thinking like an Economist 
• The Circular-Flow Diagram: a visual model of the 
economy, shows how dollars flow through markets 
among households and firms 
• Two types of “decision makers”: 
– Firms: produce goods and services using factors of production 
– Households: consume all the goods and services 
• Two markets: 
– The market for goods and services 
– The market for “factors of production” 
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 The Circular-Flow Diagram 
Thinking like an Economist 
Households: 
Own the factors of production, 
sell/rent them to firms for income 
 Buy and consume goods & services 
Households 
Firms 
Firms: 
 Buy/hire factors of production, use 
them to produce goods and services 
 Sell goods & services 
HUTECH Institute of International Education Thinking like an Economist 
FIGURE 1: The Circular-Flow Diagram 
Markets for 
Factors of 
Production 
Households Firms 
 Income Wages, rent, profit 
Factors of 
production 
Labor, land, 
capital 
 Spending 
Goods & 
Services sold 
Revenue 
Markets for 
Goods & 
Services 
Goods & 
Services bought 
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Our second model 
The Production Possibilities Frontier 
Thinking like an Economist 
• The Circular-Flow Diagram: a visual model of the 
economy, shows how dollars flow through markets 
among households and firms 
• Two types of “decision makers”: 
– Firms: produce goods and services using factors of production 
– Households: consume all the goods and services 
• Two markets: 
– The market for goods and services 
– The market for “factors of production” 
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• The PPF is a curve that show the possible 
combinations of two goods that can be 
produced with available technology and 
resources per unit of time 
• In production, opportunity cost is the quantity 
of one product need to sacrifice to product one 
unit of other product 
The Production Possibilities Frontier 
Thinking like an Economist 
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(unit) Y 
X (unit) 
If economy„s output is at 
C, to increase 10 units of 
X, output of Y will have to 
decrease 30 units (at D) 
(not 10 units) 
M 
N 
The Production Possibilities Frontier 
Thinking like an Economist 
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Example: 
• Two goods: computers and wheat and one 
resource: labor (measured in hours) 
• Economy has 50,000 labor hours per month 
available for production. 
- Produce 1 computer requires 100 hours labor 
- Produce 1 ton of wheat requires 10 hours labor. 
The Production Possibilities Frontier 
Thinking like an Economist 
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The Production Possibilities Frontier 
Thinking like an Economist 
Employment of labor hours Production 
Computers Wheat Computers Wheat 
A 50,000 0 500 0 
B 40,000 
C 25,000 
D 10,000 
E 0 
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The Production Possibilities Frontier 
Thinking like an Economist 
Employment of labor hours Production 
Computers Wheat Computers Wheat 
A 50,000 0 500 0 
B 40,000 10,000 400 1,000 
C 25,000 25,000 250 2,500 
D 10,000 40,000 100 4,000 
E 0 50,000 0 5,000 
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The Production Possibilities Frontier 
Thinking like an Economist 
Point 
on 
graph 
Production 
Com-
puters 
Wheat 
A 500 0 
B 400 1,000 
C 250 2,500 
D 100 4,000 
E 0 5,000 
0
1,000
2,000
3,000
4,000
5,000
6,000
0 100 200 300 400 500 600
Computers
Wheat 
(tons)
A 
B 
C 
D 
E 
G 
F 
HUTECH Institute of International Education Thinking like an Economist 
Points on the PPF (like A – E) 
 possible 
 efficient: all resources are fully utilized 
Points under the PPF (like F) 
 possible 
 not efficient: some resources underutilized 
(e.g., workers unemployed, factories idle) 
Points above the PPF (like G) 
 not possible 
The PFF: what we know so far 
HUTECH Institute of International Education Introduction to Economics 
Micro- and Macroeconomics 
• Macroeconomics deals with this problem at 
the aggregate (total) level. It focuses on the 
economy as a whole – ie. the “big picture” 
• Microeconomics deals with the problem at 
the level of individual units within the 
economy such as consumers and firms. 
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Economist as Policy advisor 
 As scientists, economists make positive 
statements, which attempt to describe the 
world as it is. 
 As policy advisors, economists make 
normative statements, which attempt to 
prescribe how the world should be. 
 Positive statements can be confirmed or 
refuted, normative statements cannot. 
 Government employs many economists for 
policy advice. 
Thinking like an Economist 
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QUICK CHECK 
A point inside the production possibilities frontier is 
 efficient, but not feasible. 
  feasible, but not efficient. 
 both efficient and feasible. 
  neither efficient nor feasible.