Chapter 1. An Overview of Macroeconomics

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Oct 28, 2013 (4 years and 16 days ago)

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Introduction to Macroeconomics

Chapter 1. An Overview of
Macroeconomics

Introduction to Macroeconomics

An Overview of Macroeconomics

1. What is Macroeconomics


2. Macroeconomic Goals


3. Key Principles of Economics


4. Economic Theory in Practice

Introduction to Macroeconomics

1. What Is Macroeconomics?


Microeconomics

-

study of behavior of
individual economic agents.



Macroeconomics

-

study of
aggregate

measures of the economy

Introduction to Macroeconomics

2. Macroeconomic Goals


Low Unemployment


Price Stability


Economic Growth


Complementary and Conflicting Goals

Introduction to Macroeconomics

2. Macroeconomic Goals


Low Unemployment

U.S.

Fairfax Co., VA.

1973
-

1975

recession

1981
-

1982

recession

1990
-

1991

recession

Great Depression

(1929
-

1933)

World War II

(1941
-

1945)

Source: Bureau of Labor Statistics


www.bls.gov

Introduction to Macroeconomics

2. Macroeconomic Goals


Price Stability

Introduction to Macroeconomics

2. Macroeconomic Goals


Economic Growth

Introduction to Macroeconomics

2. Macroeconomic Goals


Complementary and Conflicting Goals


Complementary Goals


Low unemployment and high economic
growth



Conflicting Goals


Low unemployment and low inflation

Introduction to Macroeconomics

3. Key Principles of Economics


Scarcity, Choice, and Opportunity Cost



Rational Self
-
Interest



Relationship Between Opportunity Cost
and Rational Self
-
Interest



Decisions Are Made at the Margin

Introduction to Macroeconomics

3. Key Principles of Economics


Scarcity, Choice, and Opportunity Cost

Inputs



Nonhuman
Resources


Natural Resources


Real Capital


Human Resources

Outputs



Goods


Services

The Production Process

Introduction to Macroeconomics

3. Key Principles of Economics


Scarcity, Choice, and Opportunity Cost


Limited Resources


Unlimited Wants


Scarcity

-

resources, goods and services
are limited relative to the wants and desires
for them


Choice


Opportunity Cost

-

the highest valued
alternative foregone in making any choice

Introduction to Macroeconomics

3. Key Principles of Economics


Rational Self
-
Interest


Rational


Individuals are able to estimate benefits and costs
(net benefit) of a particular action


They are able to compare the net benefits of
alternative actions



Self
-
Interest


Only engage in that activity if the net benefit is
greater than zero


Engage in the activity that yields the greatest net
benefit

Introduction to Macroeconomics

3. Key Principles of Economics


Decisions Are Made at the Margin


Marginal Benefit


the increase in total benefit from the production
or consumption of one additional unit of a good
or service



Marginal Cost


the increase in total cost from the production or
consumption of one additional unit of a good or
service

Introduction to Macroeconomics

4. Economic Theory in Practice


Economic Theory and Models



Fallacy of Composition



Normative vs. Positive Economics

Introduction to Macroeconomics

4. Economic Theory in Practice


Economic Theory and Models

What makes a good model?



Accurately explains history



Makes reasonable predictions
about the future

Introduction to Macroeconomics

4. Economic Theory in Practice


Economic Theory and Models


Keep models simple



Occam’s Razor

-

eliminate
complicating details that don’t
significantly contribute to the model



Ceteris Paribus

-

other things being
equal

Introduction to Macroeconomics

4. Economic Theory in Practice


Fallacy of Composition

You can’t generalize to the aggregate
based on the expected behavior of
a single person acting alone.

Introduction to Macroeconomics

4. Economic Theory in Practice


Normative versus Positive Economics


Positive Economics

-

explains what
will happen under certain conditions



Normative Economics

-

explains what
should

happen