Macroeconomics Ihsane Himmi

Grades 40% Final Exam 30% Midterm 20 % Participation 10% Project

Project Article analysis (once every two classes) Financial Times The Economist Business Weekly etc

Chapter 1: Introduction to macroeconomics

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. Adam Smith

Definition of economics the study of how individuals and societies use limited resources to satisfy unlimited wants.

Fundamental economic problem scarcity. individuals and societies must choose among available alternatives.

Economic goods, free goods, and economic bads economic good (scarce good) - the quantity demanded exceeds the quantity supplied at a zero price. free good - the quantity supplied exceeds the quantity demanded at a zero price. economic bad - people are willing to pay to avoid the item

Economic resources land natural resources, the “free gifts of nature” labor the contribution of human beings capital plant and equipment this differs from “financial capital” entrepreneurial ability

Resource payments Economic ResourceResource payment landrent laborwages capitalinterest entrepreneurial abilityprofit

Rational self-interest individuals select the choices that make them happiest, given the information available at the time of a decision. self-interest vs. selfishness

Positive and normative analysis positive economics attempt to describe how the economy functions relies on testable hypotheses normative economics relies on value judgements to evaluate or recommend alternative policies.

Economic methodology scientific method observe a phenomenon, make simplifying assumptions and formulate a hypothesis, generate predictions, and test the hypothesis.

Simplifying assumptions ceteris paribus – holding everything else constant abstraction in economics used to simplify reality

Logical fallacies fallacy of composition occurs when it is incorrectly assumed that what is true for each and every individual in isolation is true for an entire group. post hoc, ergo propter hoc fallacy (association as causation) occurs when one incorrectly assumes that one event is the cause of another because it precedes the other.

Microeconomics vs. macroeconomics microeconomics - the study of individual economic agents and individual markets macroeconomics - the study of economic aggregates