ECON 2102 I: Intermediate
Macroeconomics
Lecture 1: Introduction (Ch. 1)
Mariko J. Klasing slide 0
Announcements
Xiaonan’s office hours: Th., 9:30-10:30am, Loeb-A-800
Ian’s office hours: T., 11:30am-12:30pm, Loeb-D881
Mariko’s office hours: Wed.,10:00am-noon, Loeb A-808
The first assignment will be posted this weekend and is
due on Oct. 4 at the beginning of the TA section or at
11:30am in the Economics Department (drop box)
First TA section: W., 10/04 (discussion of homework
#1), 11:35am-12:25 pm, Mackenzie Building 3275
Mariko J. Klasing slide 1
Learning Objectives
This lecture introduces you to
the issues macroeconomists study
the tools macroeconomists use
some important concepts in macroeconomic
analysis
Remark: You should be familiar with this material
from ECON 1000.
Mariko J. Klasing slide 2
Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
What causes recessions?
Can the government do anything to combat recessions?
Should it?
Mariko J. Klasing slide 3
Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
What is the difference between economic growth and
business cycles?
40,000
30,000
Growth=long-run
20,000 upward trend
10,000 Business Cycles =
short-run
fluctuations
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Mariko J. Klasing slide 4
Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
Why does the cost of living keep rising?
Mariko J. Klasing slide 5
Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
Why are millions of people unemployed?
What is the government budget deficit? How does it affect
the economy?
Mariko J. Klasing slide 6
Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
Why are so many countries poor?
What policies might help them grow out of poverty?
Mariko J. Klasing slide 7
Important issues in
macroeconomics
Macroeconomics, the study of the economy as a
whole, addresses many topical issues:
Why does the U.S. have such a huge trade deficit?
What is the trade deficit? How does it affect the country’s
well-being?
Mariko J. Klasing slide 8
Why learn macroeconomics?
The macroeconomy affects well-being.
5
In most years, wage growth falls 5
percent change from 12 mos earlier
4 when unemployment is rising.
change from 12 mos earlier
3
3
1
2
1 -1
0
-3
-1
-5
-2
-3 -7
1965 1970 1975 1980 1985 1990 1995 2000 2005
Marikounemployment
J. Klasing rate inflation-adjusted mean wage (right scale) slide 9
Why learn macroeconomics?
The power of economic growth
In just one century, the U.S. economy has been completely
transformed
Life expectancy: 1900 = 50 years, today = 78 years
Education: in 1900 fewer than 10% of adults had completed
high school; today the overwhelming majority of people has at
least a high school degree
Child mortality: in 1900 one out of every 10 children born died
before the age of one; today more than 90% of children born
survive
Enormous increase in living standards: electricity, refrigerators,
cell phones, airplanes, dishwashers, …
Mariko J. Klasing slide 10
Economic models
Unlike physicists, macroeconomists cannot conduct
controlled experiments in a lab.
Using data that history provides we have observed that
economies differ from one another and that they change
over time.
This observation has provided the motivation for
developing macroeconomic models (theories).
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Economic models
…are simplified versions of a more complex reality
irrelevant details are stripped away
…are used to
show relationships between variables (often in
mathematical terms)
explain the economy’s behavior
derive policies to improve economic performance
Mariko J. Klasing slide 12
Example of a model:
Supply & demand for new laptops
shows how various events affect price and
quantity of laptops
assumes the market is competitive: each buyer
and seller is too small to affect the market price
Variables:
Q d = quantity of cars that buyers demand
Q s = quantity that producers supply
P = price of new laptops
Y = aggregate income
P C = price of chips (an input)
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The demand for laptops
demand equation: Q d = D (P ,Y )
shows that the quantity of laptops consumers
demand is related to the price of laptops (P) and
aggregate income (Y)
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Economic Models: Notation
General functional notation
shows only that the variables are related.
Q d = D (P,Y )
A list of the
variables
that affect Q d
A specific functional form shows
the precise quantitative relationship.
Example:
D (P,Y ) = 60 – 10P + 2Y
Mariko J. Klasing slide 15
The market for laptops: Demand
demand equation: P
Price
Q d
= D (P ,Y ) of laptops
The demand curve
shows the relationship
between quantity D
demanded and price, Q
holding other things Quantity
equal. of laptops
Mariko J. Klasing slide 16
The market for laptops: Supply
supply equation: P
Price
Q s = S (P ,P C) of laptops S
Q
The supply curve
shows the relationship
between quantity D
supplied and price, Q
other things equal. Quantity
of laptops
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The market for laptops: Equilibrium
P
Price
of laptops S
equilibrium
price
D
Q
Quantity
of laptops
equilibrium
quantity
Mariko J. Klasing slide 18
The effects of an increase in income
demand equation: P
Q d = D (P ,Y ) Price
of laptops S
An increase in income
increases the quantity P2
of laptops consumers P1
demand at each price… D2
D1
Q
…which increases Q1 Q2
Quantity
the equilibrium price of laptops
and quantity.
Mariko J. Klasing slide 19
The effects of a chip price increase
supply equation: P S2
Q s = S ( P , P C) Price
of laptops S1
An increase in P C
reduces the quantity of P2
laptops producers P1
supply at each price…
D
Q
…which increases the Q2 Q1
market price and Quantity
of laptops
reduces the quantity.
Mariko J. Klasing slide 20
Endogenous vs. exogenous
variables
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.
Exogenous: Y, PC Endogenous: P, Qd, Qs
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A multitude of models
No one model can address all the issues we
care about.
e.g., our supply-demand model of the laptop
market…
can tell us how a fall in aggregate income
affects price & quantity of laptops
cannot tell us why aggregate income falls.
Mariko J. Klasing slide 22
A multitude of models
So we will learn different models for studying
different issues (e.g., unemployment, inflation,
long-run growth).
For each new model, you should keep track of
its assumptions
which variables are endogenous,
which are exogenous
the questions it can help us understand,
and those it cannot
Mariko J. Klasing slide 23
Prices: flexible vs. sticky
Market clearing: An assumption that prices are
flexible, adjust to equate supply and demand.
In the short run, many prices are sticky –
adjust sluggishly in response to changes in
supply or demand. For example,
many labor contracts fix the nominal wage
for a year or longer
many magazine publishers change prices
only once every 3-4 years
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Prices: flexible vs. sticky
The economy’s behavior depends partly on
whether prices are sticky or flexible:
If prices are sticky, then demand won’t always
equal supply. This helps explain
unemployment (excess supply of labor)
why firms cannot always sell all the goods
they produce
Long run: prices flexible, markets clear,
economy behaves very differently
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Summary
Macroeconomics is the study of the economy as
a whole, including
growth in incomes,
changes in the overall level of prices,
the unemployment rate.
Macroeconomists attempt to explain the
economy and to devise policies to improve its
performance.
Mariko J. Klasing slide 26
Summary
Economists use different models to examine
different issues.
Models with flexible prices describe the economy
in the long run; models with sticky prices
describe the economy in the short run.
Macroeconomic events and performance arise
from many microeconomic transactions, so
macroeconomics uses many of the tools of
microeconomics.
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