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 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.

Macro Modeling A Bit More Complex

Macro’s Demand and Supply Model Keynesian Aggregate Demand & Supply (Hick’s) AD = C + I + G + NX Effects of an Economic Recession

Or In Equation Form

Basic Microeconomic Models 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? ooks/boundless-economics- textbook/principles-of-economics-1/economic- models-43/economic-models /

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