Introduction to Macroeconomics

What economists do?

• Economists are extremely influential to direct policy (e.g. the carbon tax, interest rates...)
• Economists use models to make predictions and identify trends within data that may involve
economic variables of interest (such as GDP)
• Insights from economists based on their analysis informs decision making
Some advantages of being able to use economic data and thinking like an economist include:
• Knowing how the economic policy works. This can give you an extra competitive edge in the
workplace
• Sound economic judgment can enhance your own decision-making capability. E.g. People
doing well in the stock market know how to read macroeconomics data
Basic Economic Principles – Scarcity
Scarcity refers to the limited nature of society’s resources. For example, Hasan wished he had more
time to study but his time was a scarce resource. What are society’s resources?
- Natural Resources
- Capital (physical and human)
- Labour (how we allocate our time)
- And in a market economy add entrepreneurship
We encounter scarcity in every decision we make. For example, a household must decide who does
the chores and how to allocate its scarce resources.
Likewise, society must decide what jobs will be done and who will do them. It must also allocate the
goods and services that are produced.
Scarcity exists at individual levels, firm levels, government level, and societal levels.
Management of society’s resources is important because we cannot produce all the goods and services
people wish to have.  Hence decisions need to be made. These decisions are economic decisions.
Economics is a social science about decision making in the face of constraints (scarcity
constraints).
Economics
Economics is the study of how society manages its scarce resources. For example, economics helped
Jing to understand the production, consumption and transfer of wealth.
In most societies, resources are allocated through the combined choices of millions of households and
firms.  Forces of demand and supply and price signals that guide decision making processes.
Economists study how people make decisions: how much they work, what they buy, how much they
save and how they invest their savings. Economists also study how people interact with one another.
For instance, economists examine how the buyers and sellers of a good interact to determine the price
at which the good is sold and the quantity that is sold.
Opportunity Cost
Opportunity cost is the best alternative that must be given up to obtain some items. For example, my
opportunity cost of sitting through this lecture is reading a book and enjoying an espresso at a local
café.
Decisions require comparing costs and benefits of alternatives. E.g. whether to go to university or to
work, or whether to go to lectures or sleep in.
The opportunity cost of an item is what you give up to obtain that item.  the value of the best
alternative that is foregone when an action is chosen.  efficient decision making involves weighing
up the alternatives and minimising opportunity cost by choosing what provides you the greatest
benefit relative to cost.
*What you give up/what you gain

The economist as a scientist

Economists try to approach problems with a scientist’s objectivity. Observations inspire economic
theory. In turn, economic theory is tested by comparing theoretical predictions against data gathered
in the real world.
While it is difficult to conduct economic experiments, events in the real world give rise to natural
experiments that can be studied by economists.
The role of assumptions in economics
Many economic models involve simplifying assumptions (or abstractions). For instance, there are
only two goods in the world, or that the firms and consumers in a market are only concerned with
what they buy and sell today.
Assumptions help us to simplify complex situations, focusing our attention on the details that are most
relevant to the problem at hand. Using assumptions, we can construct economic models to learn about
the world. Our models typically consist of diagrams and equations.
The circular flow diagrams

The distinction between microeconomics and macroeconomics

Microeconomics is the study of how households and firms make decisions and how they interact in
markets. For example, microeconomics focuses on individual markets, examining how incentives and
trade-offs influence buyer and seller behaviour.
Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment and
economic growth. Macroeconomics is a branch of economics dealing with the performance,
structure, behaviour, and decision-making of an economy as a whole. This includes national, regional,
and global economies. E.g. the setting of monetary policy depends primarily on macro factors.
The economist as a policy advisor
Economists are experts. (But they don’t always make accurate predictions and they may disagree with
each other). In government, the advice of economists can have a significant impact on the
development of public policy. In business, the advice of economists is important for formulating
corporate strategy.
Economists may be asked to explain the causes of economic events, or to recommend policies to
improve economic outcomes.
In the first instance the economist is taking a positivist approach, in the second the economist may be
more normative. Both positive and normative approaches are valid and which approach used depends
upon what the task at hand is that is economist is contributing to.
Positive statements
Positive statements are claims that attempt to describe the world as it is. An example of a positive
statement is ‘minimum wage laws create unemployment’. This can be tested.
Normative statements are claims that attempt to prescribe how the world should be. An example of a
normative statement is ‘the minimum wage should be raised’. This is subjective and can’t be tested.
There will be arguments for and against this proposition.
Why economists disagree
Economists do disagree about facts from time to time. These are disagreements about scientific
judgement used in obtaining facts. Normative statements depend on both facts and values. It is in
normative areas economists most often disagree (e.g. free market economists in the Austrian
tradition versus Keynesian economists).
A disagreement about public policy can come about when economists hold different values, such as
the appropriate trade-off between equity and efficiency.