Download Day One - Macro

Econ 202
Fall 2015
Introduction to Macroeconomics
Economics?
• Two major branches of economics
1. Microeconomics
• Study of how individual markets operate
– How/why consumers and producers of goods interact to determine
» What is produced, how much, at what price
2. Macroeconomics
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Focuses on the performance of the national economy ( sum of
all markets)
Gross National Product (aggregate of all goods)
Unemployment/employment, inflation, interest rate
Other major factors affecting them (Fed’s monetary policy,
taxes, budget surpluses/deficits, international trade – exchange
rates)
What We Are Modeling in Micro
Circular Flow – Micro (1 Market) Model of the Economy
A Model of Consumer Demand
First Law of Demand: As Price of Good X Decreases Quantity
Demanded of Good X Increases (and vice versa) – other factors held
constant
A Model of a Firm’s Supply Decision
First Law of Supply: Quantity Supplied Increases as Price
Increases (other factors held constant)
A Micro Model
Demand & Supply – 1 good
Macro
Macroeconomics, on the other hand, looks at the big picture (hence "macro").
It focuses on the national economy as a whole and provides a basic knowledge of
how things work in the business world.
For example, people who study this branch of economics would be able to interpret
the latest Gross Domestic Product figures or explain why a 6% rate of unemployment
is not necessarily a bad thing.
Thus, for an overall perspective of how the entire economy works, you need to have
an understanding of economics at both the micro and macro levels.
http://www.investopedia.com/terms/m/microeconomics.asp
Macro Modeling
A Bit More Complex
Macro’s Demand and Supply Model
Keynesian Aggregate Demand & Supply (Hick’s)
Effects of an Economic Recession
AD = C + I + G + NX
Or In Equation Form
Basic Microeconomic Models
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Demand for a Product
Supply of a Product
Market Demand/Supply and Equilibrium
Production Function
Cost Function
Production Possibilities Frontier
How Do We Do It?
https://www.boundless.com/economics/textb
ooks/boundless-economicstextbook/principles-of-economics-1/economicmodels-43/economic-models-160-12258/
http://www.econmodel.com/classic/
Basic Macro Models
• Aggregate Demand (Nominal GNP or GDP)
• Function of Individual/National Income
• Nominal = calculated in current year $
Basic Macro Models
• Consumption (all Consumer Goods)
– Measures all goods produced in the economy
• C = a + b*Y(Income) C increase as Y
• b = marginal propensity to consume (.8(rich).95(med))
Basic Macro Models
• Investment (I) = f(real interest rate)
Basic Macro Models
• Government Expenditures (G)
Basic Macro Models
Net Exports (NX) = Exports - Imports
Basic Macro Models
Changes in AD Affect Unemployment
Stimulative Fiscal Policy (G) lowers U