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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. 1. What Is Macroeconomics?.
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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 Great Depression (1929 - 1933) World War II (1941 - 1945) 1981 - 1982 recession 1973 - 1975 recession 1990 - 1991 recession U.S. Fairfax Co., VA. Source: Bureau of Labor Statistics www.bls.gov Introduction to Macroeconomics
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
Inputs Nonhuman Resources Natural Resources Real Capital Human Resources Outputs Goods Services 3. Key Principles of Economics Scarcity, Choice, and Opportunity Cost The Production Process 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
