Macroeconomics Theory Dr.

Mosaad El Gayish

Principles of:

Economics
Prof. Dr. M. Abdel-Gany

And

Doctor Mosaad

Mohamed El Ghayish

Vice Dean Faculty of Politics & Economics

Beni Suef University

Table of Contents

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 Macroeconomics Theory Dr.
Mosaad El Gayish

PART ONE ------------------------------------------------------------- 3

1.WHAT IS ECONOMICS? ---------------------------------------- 3
1.1 Definition of Economics ----------------------------------------- 3
1.2 Microeconomics --------------------------------------------------- 3
1.3 Macroeconomics -------------------------------------------------- 3
1.4 Three Big Microeconomic Questions ------------------------- 4
1.5 Three Big Macroeconomic Questions ------------------------ 6
1.6 The Economic Way of Thinking ------------------------------- 9
1.6.1 Choices and Tradeoffs ----------------------------------------- 9
1.6.2 Microeconomic Tradeoff ------------------------------------ 10
2. THE ECONOMIC PROBLEM ------------------------------- 13
2.1 Definition of Economic problem: ---------------------------- 13
2.2 Production Possibilities (PPF) ------------------------------- 13
2.3 Production Efficiency ------------------------------------------ 14
2.4 Tradeoff along the PPF ---------------------------------------- 15
2.5 Opportunity Cost ----------------------------------------------- 15
2.6 The PPF and Marginal Cost ---------------------------------- 17
2.7 Economic Growth----------------------------------------------- 18
2.8 The Cost of Economic Growth ------------------------------- 19
3. DEMAND ------------------------------ .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
3.1 Law of demand ---------------------- .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
3.2 What determines the quantity an individual demands?
----------------------------------------------- .‫معرفة‬
ّ ‫خطأ! اإلشارة المرجعية غير‬
3.4 Shifts in the demand curve-------- .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
4. SUPPLY -------------------------------- .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
4.1 What determines the quantity an individual supplies?
----------------------------------------------- .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
4.2 The supply schedule and the supply curve ------- ‫خطأ! اإلشارة‬
.‫معرفة‬
ّ ‫المرجعية غير‬
4.3 Shifts in the supply curve --------- .‫معرفة‬
ّ ‫خطأ! اإلشارة المرجعية غير‬
5. EQUILIBRIUM ---------------------- .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
5.1 Supply and demand together ----- .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
5.2 Three steps to analyzing changes in equilibrium ‫خطأ! اإلشارة‬
.‫معرفة‬
ّ ‫المرجعية غير‬

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 Macroeconomics Theory Dr.
Mosaad El Gayish

5.3 Shifts in Curves versus Movements along Curves ----- !‫خطأ‬

.‫معرفة‬
ّ ‫اإلشارة المرجعية غير‬
6. PRICE DETERMINATION AND ELASTICITY ------ !‫خطأ‬
.‫معرفة‬
ّ ‫اإلشارة المرجعية غير‬
6.1 Perfectly Elastic Demand Curves .‫معرفة‬
ّ ‫خطأ! اإلشارة المرجعية غير‬
6.2 Perfectly Inelastic Demand Curves --- ‫خطأ! اإلشارة المرجعية غير‬
.‫معرفة‬
ّ
6.3 Straight-Line Demand Curves (Seemingly Simple) --- !‫خطأ‬
.‫معرفة‬
ّ ‫اإلشارة المرجعية غير‬
6.4. Unit-Elastic Demand Curves ---- .‫معرفة‬ ّ ‫خطأ! اإلشارة المرجعية غير‬
References --------------------------------- .‫معرفة‬
ّ ‫خطأ! اإلشارة المرجعية غير‬

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 Macroeconomics Theory Dr.
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Part One

1.What is Economics?

1.1 Definition of Economics

Economics is the social science that studies the
choices that we make as we cope with scarcity and
the institutions that have evolved to influence and
reconcile our choices.

1.2 Microeconomics
Microeconomics is the study of choices made by
individuals and businesses, the way these choices
interact, and the influence that governments exert
on them.

1.3 Macroeconomics
Macroeconomics is the study of the effects on the
national and global economy of the choices that
individuals, businesses, and governments make.

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1.4 Three Big Microeconomic Questions

Goods and services are the objects that people
value and produce to satisfy wants.
Microeconomics seeks to
understand what determines:
 What goods and services are produced
 How goods and services are produced
 For whom goods and services are produced

The facts about what we produce raise the deeper

question:
What determines the quantities of houses and
apartments, DVD players, and corn that we
produce?
Microeconomics provides some answers to these
questions.

How are Goods and Services Produced?

Factors of production are the resources that
businesses use to produce goods and services.
They are grouped into four categories:
 Land

 Labour

 Capital

 Entrepreneurship

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The “gifts of nature” that we use to produce goods

and services are land.
The work time and effort that people devote to
producing goods and services is labour. The
quality of labour depends on human capital, which
is the knowledge and skill that people obtain from
education, on-the-job training, and work
experience.
The tools, instruments, machines, buildings, and
other constructions that are used to produce goods
and services are capital.
The human resource that organizes land, labour,
and capital is entrepreneurship.

The facts about how we produce raise the deeper

question:
What determines the quantities of capital, labour,
and other resources that get used to produce goods
and services?
Microeconomics provides some answers to this
question.

For whom are Goods and Services Produced?

Who gets the goods and services depends on the
incomes that people earn.
Land earns rent.
Labour earns wages.
Capital earns interest.
Entrepreneurship earns profit.

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The facts about for whom raise the deeper

question:
What determines earnings and the distribution of
Income that in turn determine who gets the goods
and services produced?
Microeconomics provides some answers to this
question.

1.5 Three Big Macroeconomic Questions

Macroeconomics focuses on three big questions:
 What determines the standard of living?
 What determines the cost of living?
 Why does our economy fluctuate?
1.5.1 What Determines the Standard of Living?
The standard of living is the level of consumption
that people enjoy on the average and is measured
by average income per person.

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Figure 1.1
Figure 1.1 shows income per person per day in a
number of countries and regions.
The United States has one of the highest standards
of living, and the developing nations of Asia and
Africa have the lowest.
Macroeconomics seeks to explain differences in the
standard of living across countries.
Macroeconomics also seeks to explain the rate at
which the standard of living changes.

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1.5.2 What Determines the Cost of Living?

The cost of living is the amount of money it takes
to buy the goods and services that a typical family
consumes.
The cost of living in Egypt is the number of Pound
it takes to buy the goods and services that a typical
family consumes.
A rising cost of living is called inflation.
A falling cost of living is called deflation. Inflation
brings a shrinking value of the dollar and deflation
brings a rising value of the dollar.
Macroeconomics seeks to explain the forces that
determine the cost of living and the inflation (or
deflation) rate.

1.5.3 Why Does Our Economy Fluctuate?

The business cycle is the periodic but irregular
upand-down movement in production and jobs in
an economy.
During the 1990s and 2000s, the Canadian
economy enjoyed a prolonged expansion—
production and jobs increased.
Canada’s last recession shrinking production and
jobs occurred in 1991.
Figure 1.2 on the next slide illustrates the phases
and turning points of a business cycle.

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Mosaad El Gayish

Figure 1.2
Economists remain unsure about the sources of
economic fluctuations and about the actions that
might be taken to smooth the economy.
But in your study of macroeconomics, you will learn
what economists have discovered about economic
fluctuations.

1.6 The Economic Way of Thinking

1.6.1 Choices and Tradeoffs

The economic way of thinking places scarcity and
its implication, choice, at center stage.

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You can think about every choice as a tradeoff an

exchange giving up one thing to get something
else.
The classic trade-off is “guns versus butter.” “Guns”
and “butter” stand for any two objects of value.

1.6.2 Microeconomic Tradeoff

The three microeconomic questions become
sharper when we think in terms of trade-off.
“What?” Tradeoffs arise when people choose how
to spend their incomes, when governments choose
how to spend their tax revenues, and when
businesses choose what to produce. “How?”
Tradeoffs arise when businesses choose among
alternative production technologies.
“For Whom?” Tradeoffs arise when choices change
the distribution of buying power across individuals.
Government redistribution of income from the rich
to the poor creates the big trade-off the trade-off
between equality and efficiency.
Standard of Living Tradeoffs arise when we choose
between current consumption and activities that
increase our standard of living.
Activities such as saving and investing, education,
and research increase future production and
consumption possibilities, which increases the
standard of living.

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An Output-Inflation Trade-off arises when

policymakers choose how much inflation to endure
in order to maintain a high level of production.
An output-inflation trade-off arises because a
policy action that lowers inflation also lowers output
and a policy action that boosts output increases
inflation.

1.6.3 Opportunity Cost

Thinking about a choice as a tradeoff emphasizes
cost as an opportunity forgone.
The highest-valued alternative that we give up to
get something is the opportunity cost of the
activity chosen.

1.6.4 Margins and Incentives

People make choices at the margin, which means
that they evaluate the consequences of making
incremental changes in the use of their resources.
The benefit from pursuing an incremental increase
in an activity is its marginal benefit.
The opportunity cost of pursuing an incremental
increase in an activity is its marginal cost.
Marginal benefit and marginal cost act as an
incentive an inducement to take a particular action.
For any activity, if marginal benefit exceeds
marginal cost, people have an incentive to do more

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of that activity
If marginal cost exceeds marginal benefit, people
have an incentive to do less of that activity.
Economists seek to predict choices by looking at
changes in incentives.

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2. The Economic Problem

For many people, life is good and getting better.
But we all face costs and must choose what we
think is best for us.
This chapter sharpens the concepts of scarcity and
opportunity cost.
It introduces the idea of economic efficiency.

2.1 Definition of Economic problem:

 Unlimited needs and limited resources.

 Productions that can be obtained by the full
utilization of all resources are not sufficient to
satisfy our needs.

2.2 Production Possibilities (PPF)

The production possibilities frontier (PPF) is the
boundary between those combinations of goods
and services that can be produced and those that
cannot.
To illustrate the PPF, we focus on two goods at a
time and hold the quantities of all other goods and
services constant.
That is, we look at a model economy in which
everything remains the same except the two goods
we’re considering.

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Figure 2.1
Figure 2.1 shows the PPF for “guns” and “butter,”
which stand for any pair of goods and services.
Points inside and on the frontier, such as points A,
B, C, D, E, F, and Z are attainable.
Points outside the frontier are unattainable.

2.3 Production Efficiency

We achieve production efficiency if we cannot
produce more of one good without producing less
of some other good.

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Mosaad El Gayish

Points on the frontier are efficient.

Any point inside the frontier, such as point Z, is
inefficient.
At such a point it is possible to produce more of one
good without producing less of the other good. At
Z, resources are either unemployed or
misallocated.

2.4 Tradeoff along the PPF

Every choice along the PPF involves a tradeoff. On
this PPF, we must give up some guns to get more
butter or give up some butter to get more guns.

2.5 Opportunity Cost

The PPF makes the concept of opportunity cost
precise. If we move along the PPF from C to D …
the opportunity cost of the increase in butter is the
decrease in guns.

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Figure 2.2
A move from C to D, increases butter production by
1 ton.
Guns production decreases from 12 units to 9 units,
a decrease of 3 units.
The opportunity cost of 1 ton of butter is 3 units of
guns. One ton of butter costs 3 units of guns. A
move from D to C, increases guns production by 3
units. Butter production decreases by 1 ton. The
opportunity cost of 3 units of guns is 1 ton of butter.
One unit of guns costs 1/3 of a ton of butter. Note
that the opportunity cost of guns is the inverse of
the opportunity cost of butter. One ton of butter
costs 3 units of guns. One unit of guns costs 1/3 of
a ton of butter.
Because resources are not all equally productive in
all activities, the PPF bows outward—is concave.

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Mosaad El Gayish

The outward bow of the PPF means that as the

quantity produced of each good increases, so does
its opportunity cost.
All the points along the PPF are efficient.
To determine which of the alternative efficient
quantities to produce, we compare costs and
benefits.

2.6 The PPF and Marginal Cost

The marginal cost of a good or service is the
opportunity cost of producing one more unit of it.

Figure 2.3

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Figure 2.3 illustrates the marginal cost of butter.

As we move along the PPF in part a (shown here)
the opportunity cost and the marginal cost of butter
increases.
In Figure 2.4 the blocks illustrate the increasing
opportunity cost of butter.
The black dots and the line labeled MC show the
marginal cost of butter.

Figure 2.4

2.7 Economic Growth

The expansion of production possibilities and
increase in the standard of living is called
economic growth.
Two key factors influence economic growth:

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Mosaad El Gayish

 Technological change

 Capital accumulation

Technological change is the development of new

goods and of better ways of producing goods and
services.
Capital accumulation is the growth of capital
resources, which includes human capital.

2.8 The Cost of Economic Growth

To use resources in research and development and
to produce new capital, we must decrease our
production of consumption goods and services.

Figure 2.5

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Mosaad El Gayish

Figure 2.5 illustrates the trade-off we face. We can

produce butter or butter making machines along
PPF0.

By using some resources to produce butter making

machines, the PPF shifts outward in the future.

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Mosaad El Gayish

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