ECN 102 Principles of Macroeconomics Dr.

Ahmed Fekri
Fall 2010

Lecture Notes One

INTRODUCTION

The following eleven topics were covered in class:

1. Scarcity (inability to satisfy all our wants)

2. Incentive (reward/penalty that encourages/discourages an action)
3. Economics (…social science…choices…scarcity…incentives…)
4. Microeconomics vs. Macroeconomics:

5. Economic decisions provide answers for 3 basic questions:

1 - What to Produce?
Goods vs. Service
Output Question
Consumption vs. Capital goods

Agricultural vs. Industrial goods.

2- How to Produce?

Input Question Labor (skilled / unskilled; physical / mental)

Physical capital (machines, equipments)

Capital
Land Financial capital (funds to acquire physical
Entrepreneurship capital)
Human Capital (remember it's not HR!)

3 - For Whom to Produce?

Wages
Interest
Distribution Question

Profits/Loss Rents

1
ECN 102 Principles of Macroeconomics Dr. Ahmed Fekri
Fall 2010

6. The Market Economy:

• The circular flows model: 2 sectors & 2 markets
o Goods and services and factors of production flow in one direction.
o Money flows in the opposite direction.
o Prices coordinate decisions in markets.
7. Production Possibilities Frontier (PPF):
• Definition
• Attainable vs. unattainable points.
• Downward-sloping curve, why?
• Full employment vs. unemployment.

8. Economic Growth:
• Economic growth represents an expansion in PPF and shifts the PPF
outward.
• Economic growth more production new job opportunities
higher incomes greater ability to spend better lving standard
• Technological advances and capital accumulation (including human
capital) lead to economic growth.
• The cost of economic growth is the foregone /sacrificed current
consumption so that resources could be devoted to developing technology
or accumulating capital needed for economic growth. That is to say, the
decrease in current consumption is the opportunity cost of economic
growth which leads to eventual increase in future consumption.

9. Demand

The law of demand states that other things

remaining the same, the higher price of a
good, the smaller is the quantity demanded;
and the lower the price of a good, the greater
the quantity demanded.

• Any ∆ P leads to ∆ Qd, and results in a movement along the demand curve.
• Factors affecting "Demand", causing the curve to shift rightward in case of
increase, and leftward in case of decrease are:

Demand on normal good

1- Income
Demand on inferior good

2
ECN 102 Principles of Macroeconomics Dr. Ahmed Fekri
Fall 2010
2- Price of a substitute Demand for the good

3- Price of a complement Demand for the good

4- Expected future price Demand for the good

5- Population Demand for the good

10. Supply
The law of supply states that other things
remaining the same, the higher the
price of a good, the greater is the
quantity supplied; and the lower the
price of a good, the smaller the quantity
demanded.

• The law of supply is due to the fact that as the Qs of a good rises,
the marginal cost is increasing as well. So the price must rise in
order to induce firms to increase the quantity they produce.
• Any ∆ P leads to ∆ Qs, and results in a movement along the supply curve.
• Factors affecting "Supply", causing the curve to shift rightward in case of
increase, and leftward in case of decrease are:

1- Costs of production (prices of inputs) supply of the good

2- Price of a substitute in production supply of the good

3- Price of a complement in production supply of the good

4- Expected future prices supply of the good

5- Number of suppliers supply of the good

6- Technology (better tech. = higher productivity) supply of the good

11. Market Equilibrium

Market equilibrium occurs when the quantity demanded equals the quantity supplied;
that is, when purchasing plans match selling plans. Graphically, it occurs when the
demand curve and the supply curve intersect.

3
ECN 102 Principles of Macroeconomics Dr. Ahmed Fekri
Fall 2010

• The Role of the Price as the Market’s Automatic Regulator

a. If the price is above the equilibrium price, there is a surplus; i.e., the
quantity supplied exceeds the quantity demanded, and as a result the price
falls.
b. If the price is below the equilibrium price, there is a shortage; i.e., the
quantity demanded exceeds the quantity supplied, and as a result the price
rises.
c. At the equilibrium price, there is no tendency for the price to change, and
this is why it's called the market-clearing price.

• Predicting Changes in Equilibrium Quantity (Q*) & Price (P*)

1. Effects of Changes in Demand:

i) Effects of an increase in demand
ii) Effects of a decrease in demand

2. Effects of Changes in Supply:

i) Effects of an increase in supply
ii) Effects of a decrease in supply
3. Effects of Changes in Both Demand and Supply:
i) Increase in Both Demand and Supply
ii) Decrease in Both Demand and Supply
iii) Increase in Demand and Decrease in Supply
iv) Decrease in Demand and Increase in Supply

• All of the above effects are summarized in the following table.

Increase in Decrease in
Δ's in Demand No Change Demand Demand
Δ's in Supply
Q* P* Q* P* Q* P*

No Change --- ---

Increase in Supply ??? ???

4
ECN 102 Principles of Macroeconomics Dr. Ahmed Fekri
Fall 2010

Decrease in Supply ??? ???