Presentation on theme: "LOGO. Microeconomics is the study of how households and firms make decisions and how these decision makers interact in the broader marketplace. In microeconomics,"— Presentation transcript:
Microeconomics is the study of how households and firms make decisions and how these decision makers interact in the broader marketplace. In microeconomics, an individual chooses to maximize his or her utility subject to his or her budget constraint. Macroeconomic events arise from the interaction of many individuals trying to maximize their own welfare. Because aggregate variables are the sum of the variables describing individuals’ decisions, the study of macroeconomics is based on microeconomic foundations.
The value of goods and services produced in a country in a given period of time, measured using a constant price level. How many people in the labour force are unemployed in a given period of time, in percentage. The percentage change of the general level of prices from one period to another. Important Aggregate Variables Gross Domestic Product, Output (GDP) Unemployment rate Inflation in the cost of living (CPI)
GDP: Observations 1. Long ‐ term upward trend. 2. Short ‐ run disruptions in the trend: recessions.
Inflation: Observations 1. Inflation can be negative. 2. Often high when GDP high, but not always.
Unemployment: Observations 1. Unemployment always positive. 2. Fluctuations related to GDP: unemployment higher during recessions.
Why to learn Macroeconomics? Macroeconomics is the branch of economics that deals with a nation’s economy as a whole and affects the well- being of societies. Macroeconomics explains why economies grow and change and why economic growth is sometimes interrupted.
Macroeconomic tools mainly consist of fiscal policy and monetary policy. Fiscal policy Fiscal policy refers to government policies concerning taxes and expenditures. Monetary policy Monetary policy consists of tools used by the central bank to control the money supply.
The variables in the model are: - quantity of cars that buyers demand - quantity that producers supply P - price of new cars Y - aggregate income - price of steel (an input) Demand equation: Supply equation: The equilibrium in the market is given when demand is equal to supply
in income Y What happens to the equilibrium if there is an increase in income Y An increase in Y income increases the quantity of cars consumers demand at each price, which increases the equilibrium price and quantity. Result: both price and quantity are higher.
in the price of steel What happens to the equilibrium if there is an increase in the price of steel An increase in the price of steel increases the costs of suppliers, and therefore increases the final price charged by the suppliers. Result: price rise, quantity falls.
2004 Exogenous Variables Text 2005 MODEL Endogenous Variables models Economists use models to understand what goes on in the economy. Two important points about models: endogenous variables and exogenous variables. Endogenous variables are those which the model tries to explain. Exogenous variables are those variables that a model takes as given. In short, endogenous are variables within a model, and exogenous are the variables outside the model. In our model the endogenous variables were: and P While the exogenous variables were: Y and