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Introductory Lecture
Branches and methods of economics:
Microeconomics versus Macroeconomics
and models
Economics can be seen as divided into two main
branches:
Microeconomics and macroeconomics.
Microeconomics deals with parts of the economy.
Macroeconomics views the economy as a whole.
Microeconomics...
sees the economy as composed of...
a very large number of...
very small parts.
Parts:

Producers, firms, companies

Households, workers, investors

Governments, municipalities

Markets (market for cars, market for peanuts, ...)
… and
it tries to answers questions like:
How do economic agents (firms, households,
governments) take decisions?
How are the quantity produced and sold over a
given period of time and the price of each good or
service within that period of time are determined?
Macroeconomics...
sees the economy as composed of...
a very small number of...
very large parts.
Parts:

Market for goods and services

Market for labor

Market for money

Market for financial securities
… and
it tries to answers questions like:
How are

inflation

unemployment

economic growth

interest rates...
determined?
Microeconomics and macroeconomics can feel
very different from each other, but they do have
certain common aspects:
They both refer to markets.
They both use demand and supply analysis.
They both try to explain real events by
constructing and using models.
What is a “model”?
What is a “model”?
A model is a set of simple ideas that capture the
most important aspects of a class of
phenomena, and that can be used to describe,
understand, or explain those phenomena.
These ideas are put in the form of propositions,
laws (as in “laws of nature”), or equations,
usually expressing some causation or relation between
different aspects of what we try to understand.
A model doesn’t fully or exactly represent the reality it
tries to explain because it gives a simplified picture of
the reality by reducing it to its essentials,...
but it does help us to see what essentially happens and
how it happens in reality when something happens that
would be too complex to discuss in all of its realistic
details.
Example: The subway map of a city
Subway lines in the shape of complex curves are
drawn in the form of straight lines preserving only the
order of stations along them and the crossing points
between different lines.
A model consists of

assumptions

relationships between causes and effects

propositions that are extracted by analyzing those
relationships
Example: The assumption underlying the subway
map
Subway lines are straight.
As economists are constructing and using models
to understand and explain how economic events
affect or cause each other,
they are dealing with causes and effects, when
and how and why things happen as they
happen, how things are.
In this case we say that they are doing “positive
economics.”
Here the term “positive” is not to be contrasted with
“negative” but with “normative.”
Economists could also make propositions about
how things should be or, rather, what we should
do in order to make them as they should be.
In this case economists will go from their value
judgements and we say they are doing
“normative economics.”
In short, positive economics is about answering
the question of “what happens if...” and
normative economics is about stating “what
should be done.”
For example, if an economist studies the effects of
increasing minimum wages and finds out when
and how and why unemployment is caused to
increase by an increase in minimum wages,
then he or she is making a positive statement.
But if he or she defends the position that minimum
wages should be increased, then that would be
a normative statement.
Or, as another example, if we study the effects of
abolishing all taxes other than the tax on land
ownership, then we are doing positive
economics.
But if we assert that all taxes other than the tax on
land ownership should be abolished, then we
are doing normative economics.
Consequently, economists can disagree on two
grounds:
They either disagree on their analyses and
explanations of economic events (disagreement
on positive propositions),
Or the disagree on their value judgements and
assertions about what should be done
(disagreement on normative propositions).