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The Science of Macroeconomics: 1 Chapter One

Economists use models to understand what goes on in the economy. Endogenous variables are those which the model tries to explain. Exogenous are variables that a model takes as given.

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Ameen Moroojo
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61 views9 pages

The Science of Macroeconomics: 1 Chapter One

Economists use models to understand what goes on in the economy. Endogenous variables are those which the model tries to explain. Exogenous are variables that a model takes as given.

Uploaded by

Ameen Moroojo
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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CHAPTER 1 The Science of Macroeconomics

Presented by:Sabiha Abid.

Chapter One

President Barack Obama and the State of the Economy


When President Obama moved into the White House in 2009, the economy was in a state of turmoil. Mortgage defaults and a drop in housing prices were the major culprits. The crisis affected other sectors of the economy, pushing the economy into another recession. Some liken the situation to that of the Great Depression which occurred in the 1930s.
Chapter One 2

Economists use models to understand what goes on in the economy. Here are 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.

Price P*

Supply
This is the most famous economic model. It describes the ubiquitous relationship between buyers and sellers in the market. The point of intersection is called an 3 equilibrium.

Demand
Chapter One

Q * Quantity

Market clearing is an alignment process whereby decisions between suppliers and demanders reach an equilibrium. Heres how it works. Lets say you begin with a demand and supply curve for CDs. Remember that the demand curve slopes downward meaning that as you increase the price (by moving along the demand curve), the quantity demanded decreases. Conversely, the supply curve slopes upward implying that as the price increases (by moving along the supply curve), the amount supplied will increase. The center point A is where market D D S P decisions reach an equilibrium. B Now, suppose that there is a sudden P A increase in the demand for CDs. P* Demand will shift from D to D. The increase in demand places upward pressure on the price to point B since the original price, P* no longer clears 4 the Chapter One Q Q* Q market. Notice the shortage.

S SHIFTS IN DEMAND: Suppose your income


rises? Your demand for a given product, for example, pizza, will also increase. This translates into a rightward shift in the demand curve from D to D'. Result: D' both price and quantity are higher. D

SHIFTS IN SUPPLY: A fall in the price of materials increases the supply of pizza; at any given price, pizzerias find that the sale of pizza is more profitable, and thus the supply of pizza rises. This translates into a rightward shift in supply from S to S'. Result: price falls, quantity rises.
Chapter One

S S'

D Q
5

Economists typically assume that the market will go into an equilibrium of supply and demand, which is called the market clearing process. This assumption is central to the pizza example on the previous slide. But, assuming that markets clear continuously, is unrealistic. For markets to clear continuously, prices would have to adjust instantly to changes in supply and demand. But, evidence suggests that prices and wages often adjust slowly.

So, remember that although market-clearing models assume that wages and prices are flexible, in actuality, some wages and prices are sticky. Market-clearing models may not describe every instant in an economy, but they do depict the equilibrium toward which the economy gravitates.
Chapter One 6

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.
Chapter One

The modules mirror the sequencing of the text, Macroeconomics, 7th ed. There are six parts and a total of nineteen chapters with a module written for each chapter. Enjoy! Introduction Classical Theory, The Economy in the Long Run

Growth Theory, The Economy in the Very Long Run


Business Cycle Theory: The Economy in the Short Run Macroeconomic Policy Debates More on the Microeconomics Behind Macroeconomics
Chapter One 8

Macroeconomics Real GDP Inflation and deflation Unemployment Recession Depression Models Endogenous variables Exogenous variables Market clearing Flexible and sticky prices Microeconomics
Chapter One 9

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