Introduction to Macroeconomics

1
Introduction to Macroeconomics

• Chapter 1. An Overview of Macroeconomics

2
An Overview of Macroeconomics

• 1. What is Macroeconomics
• 2. Macroeconomic Goals
• 3. Key Principles of Economics
• 4. Economic Theory in Practice

3
1. What Is Macroeconomics?

• Microeconomics - study of behavior of individual
  economic agents.
• Macroeconomics - study of aggregate measures of
  the economy

4
2. Macroeconomic Goals

• Low Unemployment
• Price Stability
• Economic Growth
• Complementary and Conflicting Goals

5
2. Macroeconomic Goals Low Unemployment
Great Depression (1929 - 1933)
World War II (1941 - 1945)
1981 - 1982 recession
1973 - 1975 recession
1990 - 1991 recession
U.S.
Fairfax Co., VA.
Source Bureau of Labor Statistics
www.bls.gov
6
2. Macroeconomic Goals Price Stability
7
2. Macroeconomic Goals Economic Growth
8
2. Macroeconomic Goals Complementary and
Conflicting Goals

• Complementary Goals
• Low unemployment and high economic growth
• Conflicting Goals
• Low unemployment and low inflation

9
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

10
3. Key Principles of Economics Scarcity,
Choice, and Opportunity Cost
The Production Process

• Inputs
• Nonhuman Resources
• Natural Resources
• Real Capital
• Human Resources

• Outputs
• Goods
• Services

11
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

12
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

13
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

14
4. Economic Theory in Practice

• Economic Theory and Models
• Fallacy of Composition
• Normative vs. Positive Economics

15
4. Economic Theory in Practice Economic
Theory and Models

• What makes a good model?
• Accurately explains history
• Makes reasonable predictions about the future

16
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

17
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.

18
4. Economic Theory in Practice Normative
versus Positive Economics

• Positive Economics - explains what will happen
  under certain conditions
• Normative Economics - explains what should happen