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Chapter+1+macro+split+7-28-08 - 1Macroeconomics as a Second...

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1 Macroeconomics as a Second Language Chapter 1: Economics Tools – Math and Graphing Martha L. Olney [email protected] July 28, 2008 1 Economics studies the behavior of the economy. Microeconomics studies the behavior of individuals within the economy. Macroeconomics studies the economy as a whole. This book and its companion volume, Microeconomics as a Second Language , highlight the language of economics. Both books are designed to be supplements to standard principles textbooks. This chapter begins with an overview of macroeconomics. Mathematical tools used in studying economics are the second focus of this chapter. Key terms and concepts Microeconomics Macroeconomics Aggregate Positive economics Normative economics 1 - 1
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Empirical evidence Social Science Economic models Functional notation Variables Dependent variable Independent variable ∆ means change Rate of change Two-dimensional graphs Horizontal axis Vertical axis Truncated axis Curve Slope Directly (or, positively) related Inversely (or, negatively) related Straight line Linear curve Nonlinear curve Convex to the origin 1 - 2
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Concave to the origin Move along a curve Shift of a curve 1 Economics is divided into microeconomics and macroeconomics. Microeconomics deals with questions about the behavior of individuals: individual people, individual firms, individual markets. Questions in microeconomics include: What determines the price of some product? How much output will a firm produce? What determines the wage rate in a labor market? Macroeconomics deals with questions about the behavior of groups of people, about the entire economy. Economists sometimes use the phrase aggregate to describe any such group. Macroeconomics is usually applied to a national economy such as the United States economy. But the tools of macroeconomics can be applied to any aggregate economy: a region, a state, a county, a city. Questions in macroeconomics include: What determines the economy’s inflation rate? What determines the economy’s unemployment rate? What determines the total income of an economy? 1 - 3
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Economic analysis – whether it is microeconomic or macroeconomic analysis – can be divided into two categories: positive economics and normative economics. Positive economics answers questions that are usually phrased as “How does this thing affect that thing?” How does a drop in spending by households affect the number of jobs in an economy? Normative economics answers questions that are usually phrased as “Should this action be taken?” Should the federal government raise taxes? Most economic analysis is positive economic analysis. Positive economics requires analysis of a question, but no judgment as to what is best for society. Normative economics requires a value judgment. When offering a normative analysis – should this action be taken – it is necessary to state what goal(s) we are trying to achieve.
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