Introduction
Brian C. Jenkins
University of California, Irvine
April 4, 2017
Brian C. Jenkins University of California, Irvine
Introduction
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Introduction: Microeconomics v. Macroeconomics
Definition
Microeconomics is the study of how individual households and
firms make decisions and interact in markets
Focus is on models of decision-making for individual
consumers and firms
Investigate how particular goods and services are allocated
Brian C. Jenkins University of California, Irvine
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Introduction: Microeconomics v. Macroeconomics
Microeconomic models – like all models – have limitations
Questions that microeconomics is not well-suited to answer:
◦ Why are some countries wealthier than others?
◦ What causes economies to oscillate between periods of
expansion and contraction, boom and recession?
◦ how does government policymaking affect economic growth
and the cyclical fluctuations in the aggregate economy?
Brian C. Jenkins University of California, Irvine
Introduction
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Introduction: Microeconomics v. Macroeconomics
Definition
Macroeconomics is the study of economy-wide phenomena:
inflation, unemployment, economic growth, and business cycle
fluctuations
Macroeconomics is generally divided into two areas1 :
◦ long run: growth
◦ short run: fluctuations or the business cycle
1
though there are areas of overlap. e.g.: the study of unemployment
Brian C. Jenkins University of California, Irvine
Introduction
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Introduction: Microeconomics v. Macroeconomics
The primary purpose of macroeconomics is to produce
knowledge that leads to better macroeconomic policymaking
Effective macroeconomic policy requires:
1
an understanding of the structure of the macroeconomy
2
models of the macroeconomy
3
data on the macroeconomy
4
ability to measure macroeconomic quantities
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Economic models
Definitions
Endogenous variables: variables determined by the model /
internal to the model
Exogenous variables: variables taken as given / external to
the model
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Economic models
Example: The market for apples
define:
P ≡ the unit price of an apple
Y ≡ the average income of apple consumers
W ≡ the average wage of labors who produce apples
R ≡ the price of purchasing physical materials to make
apples: fertilizer, machinery, etc.
Brian C. Jenkins University of California, Irvine
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Economic models
Example: The market for apples (cont’d)
Equilibrium in the apple market is determined by:
1
the demand function for apples:
Q D = D(P, Y )
2
the supply function of apples:
Q S = S(P, W , R)
3
the market clearing condition:
QD = QS
Brian C. Jenkins University of California, Irvine
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Economic models
Example: The market for apples (cont’d)
Which are the endogenous variables – i.e. which variables are
determined by the model? P, Q S , Q D
Which are the exogenous variables – i.e. which variables are
determined outside of the model? Y , W , R
Brian C. Jenkins University of California, Irvine
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Economic Models
In the previous example, some prices and quantities – the
wage W and the rental rate R – were exogenous and so we
say that the model is a partial equilibrium model.
By contrast, a model in which all prices and all quantities are
endogenous is a general equilibrium model.
Partial equilibrium models are often inadequate for
macroeconomic modeling.
Brian C. Jenkins University of California, Irvine
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