Microeconomics is the study of how households and firmsmake decisions and how these decision makers interact in thebroader marketplace. In microeconomics, an individual chooses tomaximize his or her utility subject to his or her budget constraint.Macroeconomic events arise from the interaction of manyindividuals trying to maximize their own welfare. Becauseaggregate variables are the sum of the variables describingindividuals’ decisions, the study of macroeconomicsis based on microeconomic foundations.
What is Macroeconomics? Microeconomics v/s macroeconomics Macroeconomics is concerned withaggregates and average of the entireeconomy, such as national income,aggregate output, total employment, totalconsumption, savings and investments,aggregate demand, aggregate supply,general level of prices etc. In macroeconomics we study how theseaggregates and averages of the economyas a whole are determined and whatcauses fluctuations in them
Macroeconomics is concerned with the behavior ofthe economy as whole…with booms andrecessions, with economy’s total output of goodsand services, the growth of output, the rate ofinflation and unemployment, the balance ofpayment, and exchange rate Macroeconomics focuses on the economicbehavior and policies that affects consumption andinvestments, trade balance, determinants of wagesand prices, monetary and fiscal policies, the moneystock, budget, interest rate and national debt
Important issues inmacroeconomics Why does the cost of living keep rising? Why are millions of people unemployed, even whenthe economy is booming? What causes recessions? Can the government doanything to combat recessions? Should it? What is the government budget deficit? How does itaffect the economy? Why are so many countries poor? What policies might help them grow out of poverty?Macroeconomics, the study of the economy asa whole, addresses many topical issues:
Economic models…are simplified versions of a more complexreality irrelevant details are stripped away…are used to Make testable predictions that can, when proven,… … explain the economy’s behavior devise policies to improve economic performance
Economists use models to understand what goes on in the economy.Here are two important points about models: endogenous variablesand exogenous variables. Endogenous variables are those which themodel tries to explain. Exogenous variables are those variables that amodel takes as given. In short, endogenous are variables within amodel, and exogenous are the variables outside the model.PriceDemandQ*PSupplyQuantity*This is the most famous economicmodel. It describes the ubiquitousrelationship between buyers andsellers in the market. The point ofintersection is called an equilibrium.
Macroeconomic Analysis Helps in understanding the complicatedeconomic system Formation and understanding of nationaleconomic policy Tool for the solution of economic problemsrelated to output, employment, and nationalincome Individual are ignored Individual differences are overlooked
Issues and Problems in Economics What to produce Allocation of resources How to produce For whom to produce Problems of efficiency and growth
Goals of Macroeconomic Policy Full employment High standard of living Price stability Reduction of economic inequality andremoval of poverty Rapid economic growth External balance v/s overall balance ineconomic relations with the rest of theworld
Objectives of MacroeconomicPolicies High and rising per capita incomes Avoiding excessively high inflation Efficient use of human and non-humanresources with minimum possibleunemployment of labour Poverty removal and removal of extremeinequalities of income Avoidance of persistent imbalance inforeign trade and excessive resorts toforeign capital
Review Questions What is macroeconomic? What is the difference betweenmicroeconomics and macroeconomics? What are the major issues in macroeconomicanalysis? Why do we need to study macroeconomics? What is macroeconomics model? Why do weuse macroeconomic models? What are the objectives of macroeconomicpolicies?