ECON125 - Aliyah Amisha Ali Principles of Macroeconomic- ECON125- Co2 Mr.

Aliyah Amisha Ali
Principles of Macroeconomic- ECON125- Co2 Mr. Wayne Bissoo
College of Science, Technology and Applied Arts of Trinidad and Tobago
UNIT 1 - INTRODUCTION/REVIEW LEARNIN OUTCOMES
Upon successful completion of this unit, the participant will be able to:
- Explain economics as a social science and distinguish between the sub-disciplines between
micro and macro economics.
- Discuss the importance of microeconomics as the foundation of macroeconomics.
- Identify and outline the major macroeconomic issues/objectives (Controlling inflation &
unemployment, Stimulating growth & development and maintaining positive balances on the
balance of payments).
- Use the circular flow of model to explain and illustrate aggregate demand, aggregate supply,
& aggregate output
- Discuss the linkages between the major components of the economy (The firms, households,
government and the rest of the world)
Chapters 1 and 13, pgs 3 to 30 and pgs 367 to 394, in John Sloman, 2006
Chapter 1- Introducing Economics
Introduction Economics
Economics has a lot to do with money: with how much money are paid; how much they spend;
what it costs to buy various items; how much money firms earn; how much money there is in
total in the economy. But despite the large number of areas in which our lives are concerned
with money, economics is more than just the study of money.
It is concerned with the following:
 Production of goods and services: how much the economy produces, both in total and of
individual items; how much each firm or person produces; what techniques of
production; how many people are employed.
 Consumption of goods and services: how much the population as a whole spends ( and
how it saves); what the pattern of consumption is in the economy; how much people buy
of particular items; what particular individuals choose to buy; how people’s consumption
is affected by prices, advertising, fashions and other factors.

Aliyah Amisha Ali
Principles of Macroeconomic- ECON125- Co2 Mr. Wayne Bissoo
College of Science, Technology and Applied Arts of Trinidad and Tobago
The Problem of Scarcity
Scarcity is the excess of human wants over what can be produced. Because of scarcity, various
choices must be made between alternatives.
*The central economic problem mainly has to do with scarcity. Given that there is a limited
supply of factors of production (land, labor, and capital), it is impossible to provide everyone
with their wants. Potential demands exceed potential supplies.
At any one time the world can only produce a limited amount of goods and services. This is
because the world only has a limited number of resources. These resources, or factors of
production as they are often called, are of three broad types:
• Human resources: labor. The labor force is limited both in number and in skills.
• Natural resources: land and raw materials. The world’s land area is limited, as are its raw
materials.
• Manufactured resources: capital. Capital consists of all those inputs that have each had to be
produced in the first place. The world has a limited stock of capital: a limited supply of
factories, machines, transportation, and other equipment. The productivity of capital is limited
by the state of technology.
DEFINITIONS
Production- The transformation of inputs into outputs by firms in order to earn profit (or meet
some other objective).
Consumption- The act of using goods and services to satisfy wants. This will normally involve
purchasing the goods and services.
Factors of production (or resources) The inputs into the production of goods and services: labor,
land and raw materials, and capital.
Labor- All forms of human input, both physical and mental, into current production.
Land and raw materials- Inputs into production that are provided by nature: e.g. unimproved
land and mineral deposits in the ground.
Capital- All inputs into production that have themselves been produced: e.g. factories, machines
and tools.

Aliyah Amisha Ali
Principles of Macroeconomic- ECON125- Co2 Mr. Wayne Bissoo
College of Science, Technology and Applied Arts of Trinidad and Tobago
Demand and Supply
Demand and supply and the relationship between them lie at the very center of economics.
Demand is related to wants. If good and services were free; people would simply demand
whatever they wanted.
Supply, on the other hand, is limited. It related to resources. The amount that firms can supply
demand on the resources and technology available.
Given the problem Scarcity, given the human wants exceed what can actually be produced,
potential demand with exceed potential supplies.
Dividing up the subject
Economics is traditionally divided into two main branches- microeconomics and
macroeconomics, where ‘macro’ means big, and ‘micro” means small
Macroeconomics is concerned with the economy as a whole. It is thus concerned with aggregate
demand and aggregate supply.
 Aggregate Demand- The total level of spending in the economy.
 Aggregate Supply- The total amount of output in the economy.
Microeconomics is concerned with the individual parts of the economy. It is concerned with the
demand and supply of particular goods and services and resources: cars, butter, clothes and
haircuts; electrician, secretaries, blast furnaces, computer and oil.
Macroeconomics
Definition- Macroeconomics
The branch of economics that examines the behavior of aggregates- income, employment,
output, and so on- on a national scale.
Because things are scare, societies, and concerned that their resources should be used fully as
possible, and that over time their national output should grow. Macroeconomics problems are
closely related to the balance between aggregate supply and aggregate demand. If aggregate
demand is too high relative to aggregate supply, inflation and trade deficits are likely to result.

Aliyah Amisha Ali
Principles of Macroeconomic- ECON125- Co2 Mr. Wayne Bissoo
College of Science, Technology and Applied Arts of Trinidad and Tobago
Rate of Inflation refers to a general rise in the level of prices throughout the economy. It is the
percentage increase in the level of prices over a 12-month period. If aggregate demand rises
substantially, firms are likely to respond by raising their prices.
Balance of Trade deficits are the excess of imports over exports. If aggregate demand rises,
people are likely to buy more imports.
Recession is where output in the economy decline: in other words, growth becomes negative. A
recession is associated with a low level of consumer spending.
Unemployment is likely to result from cutbacks in production. If firms are producing less, they
will need to employ fewer people. *Note that there is much debate as to who should officially be
counted as unemployed.
The major macroeconomic issues/objectives that governments attempt to address in the economy
are:
 Control inflation rates in the country
 Manage unemployment levels, especially of labor resources
 Stimulate economic growth & economic development in the country
 Maintain positive balances on the balance of payments and the balance of trade
The government uses various strategies that will be further discussed. In order to setup these
strategies governments need information about the performance of the economy in terms of
demand, supply and output.
Aggregate Demand, Supply and Output
Definition- Aggregate Demand (AD)
Measures the total demand for all goods and services in a country over a period of time (Daily,
Weekly, Monthly or Yearly)
Definition- Aggregate Supply (AS)
Measures the total amount of goods and services supplied in a country for a period of time
( Daily, Weekly, Monthly, Yearly)
Definition- Aggregate Output
Measures the total amount of goods that are produced in a country for a period of time ( Daily,
Weekly, Monthly or Yearly)