Econ 111 Principles of Macroeconomics

Summer 2017

Department of Economics Lecture 1: Introductory

College of Business Remarks
Administration and chapter 1
Kuwait University
 Calm down: Economics is common sense
111 has Macroeconomics
basic concepts and easy ideas

Looks at the economic

performance at the
macro level (at society
and state scale)
All what you need is to concentrate
during our short lectures, write notes,
ask questions and read your
textbook.
Instructor: Dr. Abbas Almejrin
Office: Department of Economics
Office Hours: Monday & Tuesday 3:30 4:30
or by Appointment
Office T: 2498-8491
Sec. T: 2498-8425
Email: cbakukw@gmail.com
Class Time: Section 2:20 3:20 PM
Location: Shuwaikh Room 304
Application TA: Mahmood Al-Shemri
Time: Monday & Wedensday 3:40 4:40
Room: 306
Respect the time of your classmates
Attend on time
Be in the classroom
not in the corridor if I
am not there yet
do not exchange
conversation or talk
to your classmate
during lecture
do not have your
mobile switched on
calculators
Simple calculator, not
scientific or geometric or
advanced calculator, is
needed in the exams.
Devices with advanced
scientific features, memory,
translation capacity or
dictionary capabilities is not
allowed during quizzes and
exams.
Tips for success
Write
lecture
notes during
lectures

Read from your text book

Follow the TA applications
Solve relevant problems
Ask questions if there something unclear during lecture
Ask whenever you need help
Do not leave think to the last minute
Text book
McConnell,
Campbell, Stanley
Brue & Sean Flynn,
Economics:
Principles,
Problems, and
Policies,
McGraw-Hill,
International Edition
18, 19, or 20.
Course Materials
* Textbook:
McConnell, Brue & Flynn, Economics: Principles, Problems, and Policies,
20th Edition (Global Edition), 2014, McGraw-Hill.
ISBN: 13: 978-0078021756
Study Guide for Economics Paperback, 2014 by William Walstad
* Online Materials:
http://connect.customer.mheducation.com/products/connect-for-mcconnell-
microeconomics-19e/
Request Access
Sign In
Purchase Access
How to Register
Courtesy Access

* Applications Memorandum
Course Materials
* Free Student Resources:
http://highered.mheducation.com/sites/0025694212/student_view0/index.html

Economics (McConnell), 18th Edition

Welcome to the Economics
(McConnell), 18th Edition Online
Learning Center for students!
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Evaluation
Midterm:
Thursday 13 July 2017 (25 30 %)
Quizzes:
The Final 4 quizzes - selection of best 3 (15 %)
Monday Final
7 August 2017
Time:
Monday 7 August 2017 (45 50%)
5:00 7:00 PM Assignments and Class Participation
Counts to 45 Impact the entire grade and
50%
performance (10 +)
Grading Scale
Letter grades will be
assigned as follows:
94 100 % A
90 93.99 % A-
86 89.99 % B+
83 85.99 % B
80 82.99 % B-
78 79.99 % C+
73 77.99 % C
70 72.99 % C-
66 69.99 % D+
60 65.99 % D
59.99 or below F
Makeup's
No makeup exams
or makeup quizzes
Fair weight will be
assigned in case of
emergency.
Emergency absence must be documented
and assessed on case-by-case basis
Attendance
Regular attendance is
required
You are responsible for
information in class
Attendance earns extra
credit.
 Text Book Edition 19 & 18: Chapters Required

Ed. 18 Ed. 19 Ed. 19

Ed. 18 Chapter Title
Ch. No. Ch. No. Pages
1 Pages Limits, Alternatives, and Choices 1 39 - 55
2 7-18 The Market System and the 2 65 -77
30 34, Measuring Domestic Output and National
24 27 589 - 604
39-42 Income
25 Economic Growth 28 609 - 618
480-495 Business Cycles, Unemployment, and
26 29 630 - 647
Inflation
27 Basic Macroeconomic Relationships 30 651 - 668
Lecture
28 The Aggregate Expenditure Model 31 671 - 689
Notes
29 521-537 Aggregate Demand and Aggregate Supply 32 693 - 710
30 542-558 Fiscal Policy, Deficits, and Debt 33 717 - 724
33 562-579 Money, Banking, and Financial Institution 34 740 - 747
Notes 584-600 Money Creation 35 759 - 771
Notes 608-614 Interest Rates & Monetary Policy 36 774 - 797
 Text Book Edition 19 & 18: Chapters Required

Ed. 18 Ed. 19 Ed. 19

Ed. 18 Chapter Title
Ch. No. Ch. No. Pages
1 Pages Limits, Alternatives, and Choices 1 39 - 55
2 7-18 The Market System and the 2 65 -77
30 34, Measuring Domestic Output and National
24 27 589 - 604
39-42 Income
25 Economic Growth 28 609 - 618
480-495 Business Cycles, Unemployment, and
26 29 630 - 647
Inflation
27 Basic Macroeconomic Relationships 30 651 - 668
Lecture
28 The Aggregate Expenditure Model 31 671 - 689
Notes
29 521-537 Aggregate Demand and Aggregate Supply 32 693 - 710
30 542-558 Fiscal Policy, Deficits, and Debt 33 717 - 724
33 562-579 Money, Banking, and Financial Institution 34 740 - 747
Notes 584-600 Money Creation 35 759 - 771
Notes 608-614 Interest Rates & Monetary Policy 36 774 - 797
Scarcity, and Choice
Scarcity
Situation in
which the
amount of
resources
or goods is
insufficient
to satisfy
the need
for it.

17
The Economic Problem
 The Economic Problem

The economic problem is scarcity of resources. The world finite

natural resources available are limited and insufficient to satisfy
all human wants and needs. The problem then becomes how to
rationalize the use of these resources?, and how to determine
what is to be produced and how the resources are to be
allocated between different products?. Economics concerns
about methods and possibilities to solve the economic problem
of scarcity.
 Rationality
In Economics we
assume that a human
(a consumer or a
producers) is rational:

Care about his/her own

interest.
Wants to maximize
his/her own utility.
 Macroeconomics
study the economy as a whole.
Explains economic changes
that affect the whole society
at once.
Microeconomics
study the behavior of individual
consumer and producer.
Explains economic changes that
affect certain individual or firm.
 Positive Economics
Vs.
Normative Economics
In economics, a positive statement tells a fact, or tells
what "is", "was", or "will be", and has no sign of
approval or disapproval.

A normative statement, on the other hand, is a

statement that has an opinion or make a personal value
judgment.
Examples of positive statements:
A fall in incomes will lead to a decrease in demand for
unnecessary goods and services.
If the government imposes a tax on restaurant meals, this
will lead to a fall in profits of restaurants.
A rise in average temperatures will increase the demand
for ice-cream.

Examples of normative statements:

Unemployment is more harmful than inflation.
The price of gasoline in Kuwait is too high.
The government of Kuwait can earn more income from a
tax on oil exports.
Individuals Economic Problem
Individual has unlimited
wants

But limited Income

 Societys Economic Problem
Society has unlimited wants
But limited resources
John Travolta
 SCARCE RESOURCES
1- LAND
2- CAPITAL
3- LABOR
4 - ENTREPRENEUR
- Having the idea
- Setting up the plan
- Innovates
- Bear the risk.
Resources are also known as
factors of Production
 RESOURCE PAYMENTS

LAND RENT

CAPITAL INTEREST

LABOR WAGES

ENTREPRENEUR PROFIT
 When faced with SCARCITY of
resources, decisions have to be made
about how to use those resources

Trade-offs
 Trade-Offs
This is the decision occurring in your mind about everything
you do!

Shall I go to the University or go find a full time job?

Shall I buy an iPad or a Mac book?
Shall I buy an iPhone6 or a Galaxy S6?

Each and every decision you make has a cost!! Not

necessarily a cost in dinar, but a cost in that you must give
up something in order to get something else. We call this
cost Opportunity Cost
 Opportunity Cost
The price you pay for each decision you
make is called the OPPORTUNITY COST.

The amount of a good or service that must

be sacrificed (given up) in order to obtain
more of the next alternative good or service
 To illustrate the
Opportunity Costs Concept
we use the
Production Possibilities Curve
or
Production Possibilities Frontier
 Conditions of Production Possibilities Model

1- Full Employment
2- Fixed Resources
3- Fixed Technology
4- Two Goods
Assume a society that produces 2 goods

1- A Consumer Good
2- A Capital Good
This Society Can only produce a maximum of:

400,000 Pizzas & 0 Robots

or
10,000 Robots & 0 Pizza
Want some robots, must give up some of
the 400,000 pizzas!
 Production Possibilities
PIZZA 0 1 2 3 4
(in hundred thousands)

ROBOTS 10 9 7 4 0
(in thousands)
 Graph the Data

PIZZA 0 1 2 3 4
(in 100,000)
ROBOTS 10 9 7 4 0
(in 1000)

PIZZA 0 1 2 3 4
(in 100,000)

(thousands)
ROBOTS 10 9 7 4 0 Robots
(in 1000)

Pizzas (hundred thousands)

The opportunity cost of each additional pizza is
increasing. The curve is concave because of this.
PIZZA 0 1 2 3 4
Q 14
13 ROBOTS 10 9 7 4 0
Connect the Points
12
This curve is called
11 A B
Robots (thousands)
the production possibilities
10 C curve
9
8
D
7
6
5
4
3
2
1 E

1 2 3 4 5 6 7 8 Q
Pizzas (hundred thousands)
PRODUCTION POSSIBILITIES
A full-employment society,
must sacrifice some of
product X to obtain more
of product Y.
PRODUCTION POSSIBILITIES
Attainable
Q 14 but
13
12 Inefficient Unattainable
11 A B
Robots (thousands)
10 C R
9 W
8
D
7
6 Z Attainable
5
4 & Efficient
3
2
1 E

1 2 3 4 5 6 7 8 Q
Pizzas (hundred thousands)
The production possibilities curve may shift up (economic growth)
because of one of three reasons:

Notes...
Economic Growth
1 Increase in
resource supplies

2 Better resource
quality

3 Technology
Improvement
production possibilities curve

14 A
These points were
13
B unattainable but now they
12
are attainable
11
A
10
B C
9
8
C
Economic
Robots

7
6
Growth
D
5
D
4
3
2 Attainable
1 E E
0 1 2 3 4 5 6 7 8 9 Pizzas
Scarcity Key Terms
Opportunity cost Factors of production
Economic Resources Consumer goods
Labor Capital goods
Land Production
Capital Possibilities Curve
Entrepreneur
Increasing
Microeconomics opportunity costs
Positive economics
Economic Growth
Normative economics
Economizing problem
Econ 111 Principles of Macroeconomics
Summer 2017

Department of Economics Chapter 2:

College of Business Economic Systems
Administration
Kuwait University
 ECONOMIC SYSTEMS
What is an Economic System
The way a society produces
goods & services

The way a society

distributes goods & services
to people
 ECONOMIC SYSTEMS
Three types of economic
systems
1- Market System
2- Command System
3- Mixed System
 1- Market System
Respect individual rights to own
Respect private ownership of
business
Profit is the motive of business
Little government intervention and
control
Supports competition
Freedom to choose
Known as capitalism
 2- Command System
All resources and businesses are
owned and operated by government
Strong governmental control
No competition
Permits little opportunity to choose
Known as communism or socialism
 3- Mixed System

A mixed economic system has

characteristics of both market and
command systems.
Allows private ownership.
Allows for governments to interfere
in economic activities in order to
achieve social goals.
CIRCULAR FLOW MODEL

RESOURCE
RESOURCE
MARKET
MARKET

BUSINESSES HOUSEHOLDS
SECTOR SECTOR

GOODS & GOODS &

SERVICES SERVICES

PRODUCT
MARKET
CIRCULAR FLOW MODEL

RESOURCE
RESOURCE
MARKET
MARKET

RESOURCES RESOURCES

BUSINESSES HOUSEHOLDS
SECTOR SECTOR

GOODS & GOODS &

SERVICES SERVICES

PRODUCT
PRODUCT
MARKET
MARKET
 CIRCULAR FLOW MODEL
wages, rent, interest wages, rent, interest
RESOURCE
MARKET

RESOURCES RESOURCES

BUSINESSES HOUSEHOLDS
SECTOR SECTOR

GOODS & GOODS &

SERVICES SERVICES

PRODUCT
MARKET
 CIRCULAR FLOW MODEL
wages, rent, interest wages, rent, interest
RESOURCE
MARKET

RESOURCES RESOURCES

BUSINESSES HOUSEHOLDS
SECTOR SECTOR

GOODS & GOODS &

SERVICES SERVICES

PRODUCT
MARKET
 CIRCULAR FLOW MODEL
wages, rent, interest wages, rent, interest
RESOURCE
MARKET

RESOURCES RESOURCES

BUSINESSES HOUSEHOLDS
SECTOR SECTOR

GOODS & GOODS &

SERVICES SERVICES

PRODUCT
MARKET
Value of goods Value of goods
and services and services
 The circular flow model
The circular flow model of income considers a simple
(closed)* economy consisting solely of two sectors
businesses and households. In this simple economy,
households provide the resources (labor, land and capital)
that enable businesses to produce goods and services. These
activities are represented by the red lines in the diagram.
Businesses provide households with income (in the form of
compensation for the resources: wages, rents and interests).
That income is, in turn, spent on the goods and services that
businesses produce. These money activities are represented
by the black lines in the diagram above.
__________________________________
* Closed means this economy has no export or import of goods or services.
 Key Terms
Socialism Economic Systems
Communism Market System
social goals Command System
Circular Flow Model Mixed System
Resource Market Private Ownership
Product Market Government Intervention
Households Sector Competition
Business Sector Freedom to Choose
Capitalism