Lecture 1 Essay

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Today’s Topics:

ECON7020
Macroeconomics for Business

 Introduction  the issues macroeconomists study  the tools macroeconomists use  some important concepts in macroeconomic analysis

LECTURE 1
Introduction to Macroeconomics

 Text treatment: Mankiw 8th (& 7th) edition, Ch. 1-2
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Outline of the course:
 Introductory material (Chaps. 1, 2 & 3)  Growth Theory (Chaps. 8-9) The standard of living and its growth rate over the very long run  Classical Theory contd (Chaps. 4, 5 & 6) How the economy works in the long run, when prices are flexible  Business Cycle Theory (Chaps. 10-11) How the economy works in the short run, when prices are sticky (closed economy)

Outline of the course:
 Business Cycle Theory contd (Chap. 13) How the economy works in the short run, when prices are sticky (open economy)  The Financial System (Chap. 20) An overview of the financial system; Minsky’s Financial Instability Hypothesis

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Important issues in macroeconomics
Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.:  What causes recessions? What is “government stimulus” and why might it help?  How can problems in the housing market spread to the rest of the economy?  What is the government budget deficit? How does it affect workers, consumers, businesses, and taxpayers?
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Important issues in macroeconomics
 Why does the cost of living keep rising?  Why are so many countries poor? What policies might help them grow out of poverty?  What is the trade deficit? How does it affect the country’s well-being?

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Why study macroeconomics?
1. The macroeconomy affects society’s well-being. 2. The macroeconomy affects your well-being. 3. The macroeconomy affects election outcomes.

Economic models
…are simplified versions of a more complex reality
 irrelevant details are stripped away

…are used to
 show relationships between variables  explain the economy’s behavior  devise policies to improve economic performance

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Example of a model: Supply & demand for new cars
 shows how various events affect price and quantity of cars  assumes the market is competitive: each buyer and seller is too small to affect the market price Variables
Qd = quantity of cars that buyers demand Qs = quantity that producers supply P = price of new cars Y = aggregate income Ps = price of steel (an input)
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The demand for cars demand equation: Q d = D (P,Y )  shows that the quantity of cars consumers demand is related to the price of cars and aggregate income specific functional form:

D (P,Y ) = 60 – 10P + 2Y
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The market for cars: Demand demand equation:

The market for cars: Supply supply equation:

Q d = D (P , Y )

Price of cars

P

Q s = S (P , P S )

Price of cars

P
S

The demand curve shows the relationship between quantity demanded and price, other things equal.

D
Quantity of cars

Q

The supply curve shows the relationship between quantity supplied and price, other things equal.

D
Quantity of cars

Q

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The market for cars: Equilibrium
Price of cars

Endogenous vs. exogenous variables
S

P

 The values of endogenous variables are determined in the model.  The values of exogenous variables are determined outside the model: the model takes their values & behavior as given.
Q

equilibrium price

D
Quantity of cars

 In the model of supply & demand for cars, endogenous: exogenous:

P, Qd, Qs Y, Ps
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equilibrium quantity

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The effects of an increase in income (Y) demand equation:

The use of multiple models
S

Q d = D (P , Y )
An increase in income increases the quantity of cars consumers demand at each price… …which increases the equilibrium price and quantity.

Price of cars

P

P2 P1 D1 Q1 Q2 D2

 So we will learn different models for studying different issues (e.g., unemployment, inflation, long-run growth).  For each new model, you should keep
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