Ms.

NudratSabah
FURC
Bs- VI (A & B)
Course code : ECO-241
Course Title : Fundamentals of Economics
 ORIGIN OF ECONOMICS :
• 'Economics' is derived from the Greek word

• 'Oikonomia‘: Its meaning is 'household management'.

• Oiko :House & Nomia: Management
• Economics was first read in ancient Greece.
• Aristotle, the Greek Philosopher termed Economics
“ As a science of ‘household management”

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 What is Economics?
Economics is a social science that examines how
people choose among the alternatives available to them.
It studies the “economy of a country”

 It is social because it involves people and their

behavior.

It is a science because it uses a scientific approach in

its investigation of choices.

Studies theproduction,distribution,consumption
and distribution of goods and services. 3
 DIVISION OF ECONOMICS

Economics is broadly divided into two parts:

• Microeconomics.

• Macroeconomics
 MICRO-ECONOMICS
• Term “micro” derived form Greek word “micros” means
“small”.
• DEFINITON :
Study of economic system by parts.
(OR)
Is the study of individuals, households and firms'
behavior in decision making and allocation of
resources

• FIELD OF STUDY :
It studies the behaviour of individual agents &
consumers and markets/firms/industry.
• PROBLEMS:
It deals with the micro economic problems such as
:determination of price of a commodity, factor of
production, consumer satisfaction etc.

• NATURE:
It is based on disaggregation of units.

• OBJECTIVES:
maximize utility, profit. And minimize cost
INTRODUCTION TO MACROECONOMICS
 MACRO-ECONOMICS:
• Term “macro” derived form Greek word “macros” means
“Large”

• DEFINITON :
Macroeconomics is the study and analysis of an
economy as whole. (large –scale working)

• FIELD OF STUDY :
It studies national aggregates such as: national income
,national output, general price level ,level of employment
• PROBLEMS:
Deals with problems at a macro level: inflation,
un/employment, trade cycle, international trade,
economic growth, economic development, economic
planning etc.

• NATURE:
It is based on aggregation of units. Aggregate
behavior:The behavior of all households and firms
together.

• OBJECTIVES:
Full employment, control Inflation, Price stability,
High economic growth, Balance of payment etc.
Conclusion :

Macroeconomics deals with the performance,

structure, and behavior of the entire
economy, in contrast to microeconomics, which
is more focused on the choices made by
individual actors in the economy (like people,
households, industries, etc.).
ECONOMICS SCHOOL OF THOUGHTS:

Three well known school of thoughts:

• Classical school of thoughts led by Adam

Smith

• Neo-classical school of thoughts led by Alfred

Marshall

• Modern school of thoughts led by Lionel

Robbins

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History of Macroeconomics:

It was not always this way. In fact, from the late 18th century until the
Great Depression of the 1930’s, economics was economics.

During the Great Depression, existing classical and neoclassical economic

theories were unable either to explain the causes of the severe worldwide
economic collapse or to provide a solution to jump-start production and
employment.

The severe and prolonged global collapse in economic activity( high

unemployment and high inflation) that occurred during the Great
Depression changed all. The division take place.

Economics= micro and macro

Macroeconomics concept was given by John Maynard Keynes

And the publication of his book The General Theory of

Employment, Interest and Money in 1936.

Keynes offered an explanation for the fallout from the Great

Depression: when goods remained unsold and workers
unemployed.
MACRO-ECONOMICS SCHOOL OF THOUGHTS:

Keynesian Economics:
John Maynard Keynes.

Keynes’s masterpiece: The General Theory of

Employment, Interest and Money, in 1936.

 Its main concern is the instability of aggregate variables.

He was the important economist of the 20th Century.
Keynesians focus on aggregate demand , unemployment and
the business cycle, inflation. Keynesian economists believe that
the business cycle can be managed by active government
intervention through fiscal and monetary policy
Monetarist
Milton Friedman
Monetarism, which became influential from the
1970’s to the 1980’s.
Monetarist economists believe that the role of
government is to control inflation by controlling the
money supply.

If Adam Smith is the father of economics, John Maynard

Keynes is the founding father of macroeconomics.
 Macroeconomics involve the study of :
• Aggregates like:
• Total employment
• Total output & Total investment
• Total consumption & Total savings
• National income
• Aggregate demand & Aggregate supply
• General price level
• Inflation
• Economic growth & planning
• Banking System
• International trade
• Public finance/private finance
“Aggregates covering the entire economy”
SCOPE OF MACRO-ECONOMICS
Scope of macroeconomics lies in the study of analysis
of the following:
• Theory of employment
• Income theory
• Theory of price level
• Theory of growth
• Distribution Theory
• Theory of national income

• NOTE: Since macro-economics deals with aggregates, it is

also known as theory of income and employment or
income analysis.
CHARACTERISTICS OF MACRO-ECONOMICS

• It is a study of national aggregates.

• Studies economic growth.

• It ignores individual differences between

aggregates.
IMPORTANCE OF MACRO ECONOMICS

• It helps to understand working of the whole economy.

• It helps in formulation of macro economic and

global economic policies.

• It studies and analysis growth and development in

an economy.
• It helps in development of micro-economic
theories.
• It is a multi-dimensional study.
• Deals with monetary policies and growth policies

• Focuses on the problems of Business cycle (inflation,

recession and deflation) and their solution by
adopting monetary, fiscal and direct control
measures.

• Determination of general level of prices

• It helps in understanding the determination

of income and employment.
MACRO-ECONOMICS CONCERNS:

Three of the major concerns of macroeconomics:

 Improve Output growth:

Business cycle
Aggregate output

 low Unemployment

Control Inflation and deflation

Business cycle: ups and downs in the economy or
in its economic activity.

Aggregate output: The total quantity of goods and

services produced in an economy in a given period.

Unemployment: The % of the labor force that is

unemployed.

Inflation: rise/increase in the overall price level

Deflation: fall/decrease in the overall price level

Components of the Macroeconomics:
Macroeconomics focuses on four groups:
 Households
 Firms
 Government
 Rest of the world

The Circular Flow of income

Income received and payments made by each sector of the
economy.
MARKETS IN MACRO SECTION:

The three market arenas are:

Goods-and-services market

 Labor market

 Money (financial) market

GOVERNMENT IN THE MACROECONOMICS:

Fiscal policy :
Tax and expenditure control

Monetary policy
Quantity of Money supply control

Growth or supply-side policies

Aggregate demand and aggregate supply
MACRO-ECONOMICS VARIABLES:

• Economic output/Economic Growth

• GDP/GNP/NNP
• Unemployment and Employment
• Inflation
• Interest rates
• Government budget balances and finance
(BOP)
• International trade
• Labor Productivity
Variables:
• Economists also use models to understand the
world economy.

• Model is made of symbols and equations.

• Economic models (often in mathematical terms)

that represent :the relationships among the
variables.

• Models have two kinds of variables:

• endogenous variables
• exogenous variables.
• Endogenous variables are those variables that a model tries
to explain.

• Exogenous variables are those variables that a model takes

as given.

• “How the exogenous variables affect the endogenous Variables”

KEY EXOGENOUS VARIABLES:
Key Exogenous Variables
• Fiscal Policy
• Monetary Policy
• Other Government Policies

Demand-side Policy Variables

• Demand-side policy is generally short-run

Supply-side Policy Variables

• Supply-side policy is generally long-run.
Demand Side Policy Variables
• Fiscal Policy:
• Government spending (ΔG)
• Tax rates(Δt)

• Monetary Policy:
• Money supply, ΔM
• Interest rates (r or Δr)

• Other Government Policies:

• International Trade & Exchange Rates
Supply Side Policy Variables
• Fiscal Policy:
• Tax reform
• Tax incentives
• Spending reform

• Other Government Policies:

• International Trade
• Privatization/Denationalization
MACROECONOMICS GOALS:

• High Growth Rate/Economic growth

• Full Employment (no unemployment or low
unemployment)
• No/low Inflation
• Less Inequality in incomes
• No Recession