Iqra ea-introduction-2011


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  • Dear Colleague, Thank you for trying these PowerPoints. I have worked hard to make them useful, accurate, and interesting in hopes of saving you prep time and contributing to an effective classroom experience for your students. To help you get the most from these slides, I have prepared a README file with User Instructions, and I have annotated many individual slides with notes – visible only to you – that appear in this area of your screen. I will be preparing minor updates about once a year between major revisions of the text, to update the data and correct typos, etc. If you find a typo or have a suggestion, please email it to me and I will consider it for the next update. My email address is Sincerely, Ron Cronovich
  • This slide and the next contain a list of some topical issues that macro can help students understand. Feel free to substitute others as new issues emerge.
  • It might be useful to briefly define the unemployment rate so that students will be able to understand this and the next few slides. Source: Barry Bluestone and Bennett Harrison, The Deindustrialization of America (New York: Basic Books, 1982), Chapter 3, cited in Robert J. Gordon, Macroeconomics, 4 th edition (Boston: Little, Brown and Company), p.334. If you know of more recent estimates, please email me so I can update this slide!!! Thanks! (My email address is
  • Students will realize that the auto market is not competitive. However, if all we want to know is how an increase in the price of steel or a fall in consumer income affects the price and quantity of autos, then it’s fine to use this model. In general, making unrealistic assumptions is okay, even desirable, if they simplify the analysis without affecting its validity.
  • We often aren’t concerned with the exact quantitative relationship between variables, so we will often just use the general functional notation.
  • Iqra ea-introduction-2011

    1. 1. <ul><li>Economic Analysis </li></ul>
    2. 2. Course Objectives <ul><li>The objectives of this course are to provide students with a basic understanding of the macroeconomic analysis and application of microeconomic theory. The course is designed to equip students with the skills necessary for decision making and policy analysis. </li></ul>
    3. 3. Tentative Course Outline <ul><li>Introduction to Basic Concepts </li></ul><ul><li>Measurement of the Macroeconomic Statistics </li></ul><ul><li>Aggregate Supply, Aggregate Demand and Equilibrium </li></ul><ul><li>Money Demand, Money Supply and Inflation </li></ul><ul><li>International Flows of Capital and Goods </li></ul><ul><li>Nature and Causes of Unemployment </li></ul><ul><li>Introduction to Economic Fluctuations </li></ul><ul><li>Keynesian Model of Income Determination </li></ul><ul><li>Fiscal and Monetary Policy Analysis </li></ul><ul><li>Application of Microeconomics </li></ul>
    4. 4. Recommended Books <ul><li>1. Mankiw, N. G. (2007). Macroeconomics . </li></ul><ul><li>6th Edition, Worth Publishers. </li></ul><ul><li>2. Pindyck, R. S., Rubinfeld, D. L. and </li></ul><ul><li>Mehta, P. L. (2008). Microeconomics . </li></ul><ul><li>6th Edition. Pearson Prentice Hall. </li></ul><ul><li>3. Parkin M. (2003). Microeconomics . 6th </li></ul><ul><li>Edition. Addison Wesley. </li></ul>
    5. 5. Learning Strategies <ul><li>In addition to in-class quizzes and homework assignments, </li></ul><ul><li>each student will undertake a project. They will be required </li></ul><ul><li>to present the results of their analyses in the class and </li></ul><ul><li>submit it in the form of a term paper. Grading plan will be </li></ul><ul><li>as follows: </li></ul><ul><li>Mid-Term Exam 30 Marks </li></ul><ul><li>Final Term Exam 50 Marks </li></ul><ul><li>Term Paper & Presentation 20 Marks </li></ul>
    6. 6. Design of Term Paper Title Introduction Analysis Conclusion Recommendations References
    7. 7. <ul><li>Any questions so far? </li></ul><ul><li>Any comments? </li></ul><ul><li>Short introduction of participants </li></ul>Your Input
    8. 8. The Science of Macroeconomics 1
    9. 9. Important issues in macroeconomics <ul><li>Why does the cost of living keep rising? </li></ul><ul><li>Why are millions of people unemployed, even when the economy is booming? </li></ul><ul><li>What causes recessions? Can the government do anything to combat recessions? Should it? </li></ul>Macroeconomics , the study of the economy as a whole, addresses many issues:
    10. 10. Important issues in macroeconomics <ul><li>What is the government budget deficit? How does it affect the economy? </li></ul><ul><li>Why are so many countries poor? What policies might help them grow out of poverty? </li></ul>Macroeconomics , the study of the economy as a whole, addresses many topical issues:
    11. 11. Why learn macroeconomics? <ul><li>1. The macroeconomy affects society’s well-being. </li></ul><ul><li>Each one-point increase in the unemployment rate is associated with: </li></ul><ul><ul><li>920 more suicides </li></ul></ul><ul><ul><li>650 more homicides </li></ul></ul><ul><ul><li>4000 more people admitted to state mental institutions </li></ul></ul><ul><ul><li>3300 more people sent to state prisons </li></ul></ul><ul><ul><li>37,000 more deaths </li></ul></ul><ul><ul><li>increases in domestic violence and homelessness </li></ul></ul>
    12. 12. Economic models <ul><li>…are simplified versions of a more complex reality </li></ul><ul><ul><li>irrelevant details are stripped away </li></ul></ul><ul><li>…are used to </li></ul><ul><ul><li>show relationships between variables </li></ul></ul><ul><ul><li>explain the economy’s behavior </li></ul></ul><ul><ul><li>devise policies to improve economic performance </li></ul></ul>
    13. 13. Example of a model: Supply & demand for new cars <ul><li>shows how various events affect price and quantity of cars </li></ul><ul><li>assumes the market is competitive : each buyer and seller is too small to affect the market price </li></ul><ul><li>Variables: </li></ul><ul><ul><li>Q d = quantity of cars that buyers demand </li></ul></ul><ul><ul><li>Q s = quantity that producers supply </li></ul></ul><ul><ul><li>P = price of new cars </li></ul></ul><ul><ul><li>Y = aggregate income </li></ul></ul><ul><ul><li>P s = price of steel (an input) </li></ul></ul>
    14. 14. The demand for cars <ul><li>demand equation: Q d = D ( P,Y ) </li></ul><ul><li>shows that the quantity of cars consumers demand is related to the price of cars and aggregate income </li></ul>
    15. 15. Digression: functional notation <ul><li>General functional notation shows only that the variables are related. </li></ul><ul><li>Q d = D ( P,Y ) </li></ul><ul><li>A specific functional form shows the precise quantitative relationship. </li></ul><ul><ul><li>Example: D ( P,Y ) = 60 – 10 P + 2 Y </li></ul></ul>A list of the variables that affect Q d
    16. 16. The market for cars: Demand Q Quantity of cars P Price of cars The demand curve shows the relationship between quantity demanded and price, other things equal. D
    17. 17. The market for cars: Supply Q Quantity of cars P Price of cars D S The supply curve shows the relationship between quantity supplied and price, other things equal.
    18. 18. The market for cars: Equilibrium Q Quantity of cars P Price of cars S D equilibrium price equilibrium quantity
    19. 19. The effects of an increase in income An increase in income increases the quantity of cars consumers demand at each price… … which increases the equilibrium price and quantity. Q Quantity of cars P Price of cars S D 1 Q 1 P 1 P 2 Q 2 D 2
    20. 20. The effects of a steel price increase An increase in P s reduces the quantity of cars producers supply at each price… … which increases the market price and reduces the quantity. Q Quantity of cars P Price of cars S 1 D Q 1 P 1 P 2 Q 2 S 2
    21. 21. Endogenous vs. exogenous variables <ul><li>The values of endogenous variables are determined in the model. </li></ul><ul><li>The values of exogenous variables are determined outside the model: the model takes their values & behavior as given. </li></ul><ul><li>In the model of supply & demand for cars, </li></ul>
    22. 22. A multitude of models <ul><li>No one model can address all the issues we care about. </li></ul><ul><li>e.g. , our supply-demand model of the car market… </li></ul><ul><ul><li>can tell us how a fall in aggregate income affects price & quantity of cars. </li></ul></ul><ul><ul><li>cannot tell us why aggregate income falls. </li></ul></ul>
    23. 23. A multitude of models <ul><li>So we will learn different models for studying different issues ( e.g ., unemployment, inflation, long-run growth). </li></ul><ul><li>For each new model, you should keep track of </li></ul><ul><ul><li>its assumptions </li></ul></ul><ul><ul><li>which variables are endogenous, which are exogenous </li></ul></ul><ul><ul><li>the questions it can help us understand, and those it cannot </li></ul></ul>
    24. 24. Prices: flexible vs. sticky <ul><li>Market clearing : An assumption that prices are flexible, adjust to equate supply and demand. </li></ul><ul><li>In the short run, many prices are sticky – adjust sluggishly in response to changes in supply or demand. For example, </li></ul><ul><ul><li>many labor contracts fix the nominal wage for a year or longer </li></ul></ul><ul><ul><li>many magazine publishers change prices only once every 3-4 years </li></ul></ul>
    25. 25. Prices: flexible vs. sticky <ul><li>The economy’s behavior depends partly on whether prices are sticky or flexible: </li></ul><ul><li>If prices are sticky, then demand won’t always equal supply. This helps explain </li></ul><ul><ul><li>unemployment (excess supply of labor) </li></ul></ul><ul><ul><li>why firms cannot always sell all the goods they produce </li></ul></ul><ul><li>Long run: prices flexible, markets clear, economy behaves very differently </li></ul>