Principles of Macroeconomics Introduction Ariel Singerman January 14, 2008 Ariel Singerman () Principles of Macroeconomics January 14, 2008 1/7 Introduction Introductory Questions Basic questions: What is Economics? How do we study Economics? What is the difference between Microeconomics and Macroeconomics? Ariel Singerman () Principles of Macroeconomics January 14, 2008 2/7 Introduction What is Economics? Definition Economics is the study of the choices made by individual agents and societies regarding the alternative uses of scarce resources that are employed to satisfy needs. Scarcity is understood as a situation in which the amount of something available is insufficient to satisfy the desire for it. In general, scarcity is either of time or money. So, scarcity forces us to make choices because we must allocate limited resources to satisfy unlimited needs. Ariel Singerman () Principles of Macroeconomics January 14, 2008 3/7 Introduction How do we study Economics? Economists use models to explain real world phenomena. Definition A model is a simplified representation of reality that dispenses us from irrelevant details to the study of the topic under analysis An economic model illustrates, generally in mathematical terms, relationships among variables. Ariel Singerman () Principles of Macroeconomics January 14, 2008 4/7 Introduction What is the difference between Micro and Macroeconomics? Definition Microeconomics is the study of how households and firms make decisions and how these decision makers interact in the market. The central principle is that individual agents optimize, i.e.: they do the best they can for themselves given their objectives and constraints. Ariel Singerman () Principles of Macroeconomics January 14, 2008 5/7 Introduction What is the difference between Micro and Macroeconomics? (cont'd) Definition Macroeconomics is the study of the effects of choices made by individuals, firms and governments on the national economy. It focuses on the aggregate outcome. Microeconomic decisions underlie all economic models, but in macroeconomics the optimizing behavior of households and firms is implicit rather than explicit (their decisions are left on the background because we focus on the aggregate) Ariel Singerman () Principles of Macroeconomics January 14, 2008 6/7 Introduction Macroeconomic Goals When macroeconomists study an economy, they first look at three variables: Output: the level of production of the economy as a whole and its rate of growth Unemployment rate: the proportion of workers in the economy who are not employed and are looking for a job Inflation rate: the rate at which the average price of the goods in the economy is increasing over time Ariel Singerman () Principles of Macroeconomics January 14, 2008 7/7