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
Unemployment rate, %
25%
Great Depression
(1929 - 1933)
20%
World War II
(1941 - 1945)
1981 - 1982
recession
15%
1973 - 1975
recession
1990 - 1991
recession
10%
U.S.
5%
Fairfax Co., VA.
0%
1930
1940
1950
Introduction to Macroeconomics
1960
1970
1980
1990
Source: Bureau of Labor Statistics
www.bls.gov
2000
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
• Nonhuman
Resources
– Natural Resources
– Real Capital
• Human Resources
Introduction to Macroeconomics
Outputs
• Goods
• Services
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