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

1. What Is Macroeconomics?

• Microeconomics - study of behavior of individual economic agents.

• Macroeconomics - study of aggregate measures of the economy

2. Macroeconomic Goals

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

Complementary & Conflicting Goals

• Complementary Goals– Low unemployment and high economic growth

• Conflicting Goals– Low unemployment and low inflation

3. Key Principles of Economics

• Limited Resources, Unlimited Wants, Scarcity, and Opportunity Cost

• Rational Self-Interest

• Relationship Between Opportunity Cost and Rational Self-Interest

• Decisions Are Made at the Margin

Production Process

Inputs

• Nonhuman Resources– Natural Resources– Real Capital

• Human Resources

Outputs

• Goods• Services

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

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

4. Economic Theory in Practice

• Economic Theory and Models

• Fallacy of Composition

• Normative vs. Positive Economics

What Makes a Good Model?

• Accurately explains history

• Makes reasonable predictions about the future

Keep Models Simple

• Occam’s Razor - eliminate complicating details that don’t significantly contribute to the model

• Ceteris Paribus - other things being equal

Fallacy of Composition

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

Positive vs. Normative Economics

• Positive Economics - explains what will happen under certain conditions

• Normative Economics - explains what should happen