Chapter0 - Chapter 0 Representative Agent Macroeconomics...

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© Sanjay K. Chugh 13 Spring 2008 Chapter 0 Representative Agent Macroeconomics Modern macroeconomics is built explicitly on microeconomic foundations. That is, the modern study and analysis of macroeconomics begins by considering how the microeconomic units, namely consumers and firms, in an economy make their decisions and then considers how the choices of these great many individuals interact with each other to yield economy-wide outcomes. This approach sounds quite reasonable because after all it is individuals in a society that ultimately make decisions. However, it may surprise you that macroeconomics was not always studied this way. Indeed, much of the evolution of macroeconomic theory occurred without any reference to its microfoundations. We, however, will consider the microeconomic foundations of macroeconomics – as such, our consideration of macroeconomics will mostly be a “modern” one. The two most fundamental microeconomic units in any economy are consumers and firms. In introductory microeconomics, you studied how these individual units make their decisions. Under economists’ usual assumption of rational behavior, the posited goal of consumers is to maximize their utility and the posited goal of firms is to maximize their economic (as opposed to accounting) profits. Concepts such as marginal utility, marginal revenue, and marginal cost should be familiar to you from your introduction to microeconomics, and they will provide the foundation of our consideration of macroeconomics. In modern industrialized economies, consumption activity (that is, purchases of goods and services by individuals) constitutes the largest share of all macroeconomic activity. For example, in the United States, consumption accounts for roughly 70% of all economic activity. As such, understanding how consumers make decisions and the factors, especially government policies, that affect these decisions will be of prime importance in our study of macroeconomics. We
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This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

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Chapter0 - Chapter 0 Representative Agent Macroeconomics...

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