introduction - Notes on Principles of Macroeconomics Vijaya...

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Notes on Principles of Macroeconomics Vijaya Raj Sharma, Ph.D. INTRODUCTION AND BASIC CONCEPTS ECONOMICS Economics is about making efficient uses of scarce resources. This is about learning how people in their daily lives make decisions of allocating scarce amount of resources – time and budget – they possess, to meet their numerous desires. At occasions many of you may have wished you had more income and more time. For example, during finals students wish they had more time to prepare for exams. Unfortunately, income and time are not plenty, they are scarce. But, the number of wants that one seeks to satisfy from his/her limited income or time are numerous or unlimited. The scarcity of resources, therefore, forces everyone to make choices from their long list of wants. MICROECONOMICS versus MACROECONOMICS Microeconomics is a study of the behavior of individual households and firms as to how such economic entities choose to allocate scarce resources among different alternative wants. Macroeconomics is a study of the behavior of economic aggregates like inflation, unemployment rate, and the total output of a country. These economic aggregates are the outcomes of the choices individual households and firms make in an economy. The difference between microeconomics and macroeconomics lies in the difference between the words ‘micro’ and ‘macro.’ In microeconomics the focus is on small economic entities, like an individual or household or firm, whereas in macroeconomics the focus is on the whole economy. RESOURCES A fundamental premise in economics is that ‘resources are scarce.’ Resources are those goods and services that can be used to produce other goods and services. Mostly cited examples are labor and human resources (time, skill, and knowledge of labor), capital resources (physical capital and technology), and land and natural resources. Very often firms combine these three forms of resources to produce a good or service. If you accept that resources are scarce, then you must also accept that all goods and services that are produced by using the scarce resources must also be scarce. SCARCITY How does one know whether something – a good, service, or resource – is scarce? If the quantity or amount of something actually available to you (the supply) is less than the quantity or amount that you like to have of this thing if made available free-of-cost
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(demand), then this thing is ‘scarce’ for you. On the level of a society or economy, if the naturally available quantity of a resource falls short of the quantity of this resource the people in this society or economy like to have at free-of-cost, then this resource is scarce. Forests are scarce resources. If they were not scarce, we would not have been concerned with deforestation. Because non-scarcity implies that there are sufficient numbers of trees to satisfy everybody’s wish of having trees (for different purposes). If you find that people are willing to pay a price for having a good or resource, that is
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introduction - Notes on Principles of Macroeconomics Vijaya...

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