Introduction to Macroeconomics

Chapter 1. An Overview of 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

25%
Great Depression (1929 - 1933)

Unemployment rate, %

20%

World War II (1941 - 1945) 1981 - 1982 recession 1973 - 1975 recession 1990 - 1991 recession

15%

10%
U.S.

5%
Fairfax Co., VA.

0% 1930 1940 1950 1960 1970 1980 1990 2000

Introduction to Macroeconomics

Source: Bureau of Labor Statistics www.bls.gov

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

The Production Process

Inputs
Nonhuman Resources
Natural Resources Real Capital

Outputs
Goods Services

Human Resources

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 Occams Razor - eliminate

complicating details that dont significantly contribute to the model

Ceteris Paribus - other things being

equal

Introduction to Macroeconomics

4. Economic Theory in Practice Fallacy of Composition

You cant 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

Introduction to Macroeconomics