PowerPoint presentation The subject of Microeconomics

PowerPoint Presentation The subject of Microeconomics Theoretical relationship between prices, wages, interest Theory of the consumer behaviour Theory of the firm (costs, prices, structures) Monetary.

The subject of Microeconomics

 Theoretical relationship between prices,

wages, interest

 Theory of the consumer behaviour

 Theory of the firm (costs, prices, structures)

 Monetary theory?

The subject of Macroeconomics

 „Index problems” – GDP, CPI,

Unemployment Rate

 Central macro institution; the government (budget and the central bank)

 Relationship between various policies

Examples of macroeconomic problems

 What is the nature of inflation?

 What makes the GDP grow?

 How government spending affects

employment?

 How monetary policy affects the welfare of citizens?

 Is macroeconomics separate from

microeconomics?

Macroeconomics and political

sciences

 Government as a central figure in

macroeconomics

 Also the central figure in political sciences, ideology and politics

 Connection between those two

Positive Macroeconomics vs

Normative Economic Policies

 Macro describes necessary connections between the magnitudes

 Example: money printing leads to inflation

 Politics says what should be done.

 Example: we should print more money

Macroeconomics and macroeconomic history

 Theory as set of economic laws describing how the economy works

 Universal and applicable to different cases

 Macroeconomic history is a study of

particular time and place

 Complementary, but separate

Model building

 Models and causality

 Exogenous and endogenous variables

 Simple monetarist model of inflation

 More M leads to more CPI increase What is exogenous and endogenous?

Macroeconomics and the history of

thought

 The most common story – macroeconomics

started with Keynes’s treatise Theory of

Employment, Interest and Money.

 Before that „classical economics” dominated and according to it no possible problems

could arise

 Everything was to be solved by the

movement in prices

Macroeconomics and the history of thought (continued)

 However, many economists did deal with

„macroeconomic problems”

 There were macro theories of macro

movements in aggregates

Business cycle theory as the basic element in Macroeconomics

 Theory of economic development (long run)

 Theory of economic fluctuations (short run movements)

 Boom/expansion and bust/recession

Keynes’s story of macroeconomic thought

 The ambition to be Einstein of economics

 Einstein’s division between specific theory and general theory in physics

 Keynes’s division between classical theory (special circumstances) and his theory

(general one)

Great Depression of 1929

 Stock market crash

 Banking system collapses and with it the investment activity

 Radical increase in unemployment rate

 Decrease in the standard of living

Supposed assumption of classical

economics

 Mechanism of supply and demand

 Equilibrium model

 Perfect adjustment of all prices to changing

circumstances

 No possibility of unemployment equilibrium

Keynes appears

 Sticky prices and wages – lack of

equilibration mechanism

 Reasons for those and „solutions” proposed

by the government

Facts about history of

macroeconomics

 Were there any competing theories or

Keynes was the only one to describe reality?

 Competing theories existed

 Example: monetarist theory of money supply,

or Hayek’s theory of cycles

 One of major sources of Keynes’s success: well-thought marketing and great charisma

Different types of policies

 Monetary policy and central banking

 Fiscal policy, taxation and expenditures

 Income and price planning

 Trade policy

 Regulations upon business

 Industrial policy

 Education policy etc.

 Which are the most important ones for macro models?

Different theories of business cycle

 Monetary theories

 Demand theories

 Supply theories

 Monetary versus Real

 Mixtures

Circular flow

 Households and firms

 Financial markets, the government, foreign trade

 „Stocks” and „flows”