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

Introduction to Macroeconomics
1. What Is Macroeconomics?

• Microeconomics - study of behavior of

individual economic agents.

• Macroeconomics - study of aggregate

measures of the economy

Introduction to Macroeconomics
2. Macroeconomic Goals

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

Introduction to Macroeconomics
2. Macroeconomic Goals
Low Unemployment
25%
Great Depression
(1929 - 1933)

20%
Unemployment rate, %

World War II
(1941 - 1945)
1981 - 1982
15% recession
1973 - 1975 1990 - 1991
recession recession

10%
U.S.

5%

Fairfax Co., VA.

0%
1930 1940 1950 1960 1970 1980 1990 2000
Source: Bureau of Labor Statistics
Introduction to Macroeconomics www.bls.gov
2. Macroeconomic Goals
Price Stability

Introduction to Macroeconomics
2. Macroeconomic Goals
Economic Growth

Introduction to Macroeconomics
2. Macroeconomic Goals
Complementary and Conflicting Goals

• Complementary Goals
– Low unemployment and high economic
growth

• Conflicting Goals
– Low unemployment and low inflation

Introduction to Macroeconomics
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

Introduction to Macroeconomics
3. Key Principles of Economics
Scarcity, Choice, and Opportunity Cost

The Production Process

Inputs Outputs
• Nonhuman • Goods
Resources • Services
– Natural Resources
– Real Capital
• Human Resources

Introduction to Macroeconomics
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

Introduction to Macroeconomics
 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

Introduction to Macroeconomics
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

Introduction to Macroeconomics
4. Economic Theory in Practice

• Economic Theory and Models

• Fallacy of Composition

• Normative vs. Positive Economics

Introduction to Macroeconomics
4. Economic Theory in Practice
Economic Theory and Models

What makes a good model?

• Accurately explains history

• Makes reasonable predictions

about the future

Introduction to Macroeconomics
4. Economic Theory in Practice
Economic Theory and Models

Keep models simple

• Occam’s Razor - eliminate

complicating details that don’t
significantly contribute to the model

• Ceteris Paribus - other things being

equal

Introduction to Macroeconomics
4. Economic Theory in Practice
Fallacy of Composition

You can’t generalize to the aggregate

based on the expected behavior of
a single person acting alone.

Introduction to Macroeconomics
4. Economic Theory in Practice
Normative versus Positive Economics

• Positive Economics - explains what

will happen under certain conditions

• Normative Economics - explains what

should happen

Introduction to Macroeconomics