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SECTION 1:
INTRODUCTION TO MACROECONOMICS
MICROECONOMICS:
Examines the behavior of individual consumers,
workers, firms and industries
MACROECONOMICS
Examines the behavior of the overall US economy

EMPLOYMENT ACT OF 1946

It is the continuing policy and responsibility of the Federal
Government to use all practicable meansto promote
maximum employment, production, and purchasing power
MAJOR MACROECONOMIC POLICY GOALS
1. Promote maximum production (Economic growth)
2.

Promote maximum purchasing power (Stable prices)

3.

Promote maximum employment

4.

Smooth out business cycle fluctuations

ECONOMIC POLICY:
Government actions to influence the economy
1. FISCAL POLICY:
a. Tax laws
b. Government spending
Determined by Congress and the President
2. MONETARY POLICY:
a. Influence the money supply
b. Influence interest rates
Conducted by the Federal Reserve System

TYPES OF ECONOMIC STATEMENTS

DESCRIPTIVE STATEMENTS:
Economic facts or data
POSITIVE STATEMENTS:
Statements or theories about how the economy works
NORMATIVE STATEMENTS:
Value judgments about what is good or bad
Policy statements about what courses of action should
or ought to be taken

COMMON ERRORS IN ECONOMIC REASONING

FALLACY OF FALSE CAUSE:
post hoc, ergo propter hoc
after this, therefore because of this
EXAMPLE: President Reagan lowered taxes during the
1980s and the economy grew rapidly. Thus, decreasing
taxes caused economic growth.
President Clinton raised taxes during the 1990s and the
economy grew rapidly. Thus, raising taxes caused economic
growth.

FALLACY OF COMPOSITION:
What holds for one person does not necessarily hold for
everybody
EXAMPLE:

THE PARADOX OF THRIFT

CETERIS PARIBUS FALLACY

The other things being equal fallacy
THEORY:
Cet. par., an increase in interest rates will lead to
decreased borrowing.
THEORY:
Ceteris paribus, if gasoline prices increase, people will
switch to smaller cars

GOOD SOURCES OF ECONOMIC DATA

1. Economic Report Of The President
The 2014 Economic Report of the President has 26 data
tables:
http://www.gpo.gov/fdsys/browse/collection.action?
collectionCode=ERP&browsePath=2014&isCollapsed=false
&leafLevelBrowse=false&isDocumentResults=true&ycord=0
Earlier editions had 112:
http://www.gpo.gov/fdsys/browse/collection.action?
collectionCode=ERP&browsePath=2013&isCollapsed=false
&leafLevelBrowse=false&isDocumentResults=true&ycord=0
2.
3.
4.
6.

Statistical Abstract Of The United States

Wall Street Journal
New York Times
Bureau of Labor Statistics website: www.bls.gov

ECONOMIC DECISION MAKERS

1.
2.
3.
4.

Households
Business firms
Governments
Foreigners

1.

HOUSEHOLDS
Goal:
Maximize their UTILITY

UTILITY = level of satisfaction, sense of welll-being, overall

happiness
Households act in their own RATIONAL SELF INTEREST
People choose actions which they perceive to be in their
own best interests
Meaning of rational:
For a given cost, they try to maximize the benefits
For a given benefit, they try to minimize the cost

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2.

FIRMS
Goal: maximize profits
Main types of business firms
Sole proprietors
Partnerships
Corporations

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3. GOVERNMENTS
Why do we need any government interference in the
economy?
1.
2.
3.
4.
5.
6.
7.
8.

Protect private property (police)

Enforce contracts (judicial system, courts of law)
Promote competition
Regulate natural monopolies (electricity, water)
Provide PUBLIC GOODS
Deal with EXTERNALITIES
Promote MACROECONOMIC GOALS
Provide for the disadvantaged and disabled

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PRIVATE GOODS VS. PUBLIC GOODS

Private goods are RIVAL in CONSUMPTION
The amount consumed by one person is not available
to others
Private goods are EXCLUSIVE in SUPPLY
The SUPPLIER can exclude people who do not pay
EXAMPLE:

Pizza

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PUBLIC GOODS
NON-RIVAL in CONSUMPTION
One persons benefit does not diminish the amount available
to others
NON-EXCLUSIONARY in SUPPLY
Suppliers cannot easily prevent consumption by those who
fail to pay (FREE RIDERS)
National defense, clean air, dams

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EXTERNALITY
A cost or benefit that affects people not involved in an activity
or market transaction and is therefore ignored by the
individuals involved in the activity or market transaction
NEGATIVE externalities impose costs on third parties:
noise, polluted air, litter, auto emissions, polluted water,
unkempt yards, bright headlights, bald tires on snowy
mountain roads
Government uses laws, regulations, fines and taxes to limit
negative externalities

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POSITIVE externalities confer benefits on third parties:

Good schools, educated citizens, medical improvements
Governments promote positive externalities through
subsidies and tax reductions

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MAJOR MACROECONOMIC GOALS

(EMPLOYMENT ACT OR 1946)
Full employment
Price stability
Economic growth
Additional major goal: smooth out the business cycle

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SOME MINOR GOALS

Provide for the disadvantaged
Redistribute income to help the poor via taxes and transfer
payments

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