PGP Presentation

Time: 75 Minutes
Slides: 9
Introduction to
Macroeconomics

Session 01
Introduction to Macroeconomics

Rupika Khanna
Economics and Public Policy
Indian Institute of Management Rohtak
Contact: +1262-228545 (O)
What is Macroeconomics?

 Microeconomics examines the behavior of individual decision-

making units — business firms and households.

 Macroeconomics deals with the economy as a whole; it

examines the behavior of economic aggregates such as
aggregate income, consumption, investment, and the overall
level of prices.

 Aggregate behavior refers to the behavior of all households

and firms together.
What is Macroeconomics?
 We wonder why some countries are growing faster than others
and why inflation fluctuates

 Why recessions occur, why economies boom?

 Macroeconomics deals with the performance, structure, behavior

and decision-making of the entire economy

 Study of macroeconomics is important because the state of the

entire economy (macro-economy) affects everyone in many ways

 It plays a significant role in the political sphere while also

affecting societal well-being
Issues in Microeconomics and Macroeconomics
Examples of Microeconomic Issues
• How consumers react to changes in
product prices
• How firms decide what prices to charge
for the products they sell
• Which government policy would most
efficiently reduce obesity
• The costs and benefits of approving the
sale of a new prescription drug
• The most efficient way to reduce air
pollution
Examples of Macroeconomic Issues
• Will tomorrow’s world be more
prosperous than today?
• Why do recessions occur?
• Will jobs be plentiful?
• Will the cost of living be stable?
• Will the government go into deficit
again?
• Why, over the long run, some economies
have grown much faster than others?
Why isn’t microeconomics enough?
 Aggregate outcomes are just the sum of microeconomics
decisions
 Why not just use microeconomic models?

Why do we need macroeconomics?

 Complexity of a microeconomic approach to macroeconomics

 Millions of decision makers, thousands of markets and their interaction gives
macroeconomic outcomes
 This is not manageable at a practical level

 The behaviour of an economy as a whole is often more than the

simple sum of individual actions and market outcomes
Non-Obvious Outcomes in Macroeconomics
 It is not JUST scaling up
 Rational individual behaviour may not always end up in
optimal macroeconomic outcomes

For example:
 Each one standing up in the stadium to get a better view of
a play  nobody gets a better view!
 Farmers producing more output to earn higher profit
simultaneously  price falls!
 Policy making  tight rope walking
Non-Obvious Outcomes in Macroeconomics
 Example: An increase in the money supply
 Individual receives more money and is richer! (micro)
 Aggregate: everyone has more money, all prices rise – no one is richer!

 Example: Paradox of thrift

 Families and businesses are worried about possible hard times and
prudently cut spending and save more
 The reduction in spending depresses the economy as consumers spend less
and business react with layoffs
 Aggregate result: Families and businesses may end up worse off than if
they had not acted prudently by cutting their spending!
Tools of Macroeconomics
 Aggregate Demand: Money and prices, spending and taxes, other
forces determine demand

 Aggregate Supply: Prices and costs, potential output, resources (K,

L, Technology) determine total production

 Aggregate supply and demand curves are more complex than simple
market supply and demand curves of microeconomics

AS ≡ AD
An ideal economic condition
AD and AS schedules

The interaction of AS and AD determines output, employment,

prices, inflation, foreign trade and overall economic situation in a
country.