The subject of Microeconomics

1. The subject of Microeconomics • Theoretical relationship between prices, wages, interest • Theory of the consumer behaviour • Theory of the firm (costs, prices, structures) • Monetary theory?

2. The subject of Macroeconomics • „Index problems” – GDP, CPI, Unemployment Rate • Central macro institution; the government (budget and the central bank) • Relationship between various policies

3. Examples of macroeconomic problems • What is the nature of inflation? • What makes the GDP grow? • How government spending affects employment? • How monetary policy affects the welfare of citizens? • Is macroeconomics separate from microeconomics?

4. Macroeconomics and political sciences • Government as a central figure in macroeconomics • Also the central figure in political sciences, ideology and politics • Connection between those two

5. Positive Macroeconomics vs. Normative Economic Policies • Macro describes necessary connections between the magnitudes • Example: money printing leads to inflation • Politics says what should be done. • Example: we should print more money

6. Macroeconomics and macroeconomic history • Theory as set of economic laws describing how the economy works • Universal and applicable to different cases • Macroeconomic history is a study of particular time and place • Complementary, but separate

7. Model building • Models and causality • Exogenous and endogenous variables • Simple monetarist model of inflation • More M leads to more CPI increase. What is exogenous and endogenous?

8. Macroeconomics and the history of thought • The most common story – macroeconomics started with Keynes’s treatise Theory of Employment, Interest and Money. • Before that „classical economics” dominated and according to it no possible problems could arise. • Everything was to be solved by the movement in prices

9. Macroeconomics and the history of thought (continued) • However, many economists did deal with „macroeconomic problems” • There were macro theories of macro movements in aggregates.

10. Business cycle theory as the basic element in Macroeconomics • Theory of economic development (long run) • Theory of economic fluctuations (short run movements) • Boom/expansion and bust/recession

11. Keynes’s story of macroeconomic thought • The ambition to be Einstein of economics • Einstein’s division between specific theory and general theory in physics. • Keynes’s division between classical theory (special circumstances) and his theory (general one)

12. Great Depression of 1929 • Stock market crash • Banking system collapses and with it the investment activity • Radical increase in unemployment rate • Decrease in the standard of living

13. Supposed assumption of classical economics • Mechanism of supply and demand • Equilibrium model • Perfect adjustment of all prices to changing circumstances • No possibility of unemployment equilibrium

14. Keynes appears • Sticky prices and wages – lack of equilibration mechanism • Reasons for those and „solutions” proposed by the government

15. Facts about history of macroeconomics • Were there any competing theories or Keynes was the only one to describe reality? • Competing theories existed • Example: monetarist theory of money supply, or Hayek’s theory of cycles • One of major sources of Keynes’s success: well-thought marketing and great charisma

16. Different types of policies • Monetary policy and central banking • Fiscal policy, taxation and expenditures • Income and price planning • Trade policy • Regulations upon business • Industrial policy • Education policy etc. • Which are the most important ones for macro models?

17. Different theories of business cycle • Monetary theories • Demand theories • Supply theories • Monetary versus Real • Mixtures

18. Circular flow • Households and firms • Financial markets, the government, foreign trade • „Stocks” and „flows”