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®
A PowerPointTutorial
To Accompany
macroeconomics, 5th. ed.
N. Gregory Mankiw
Mannig J. Simidian
Chapter One
1
Acknowledgements
I would like to express my deepest gratitude to Greg Mankiw, and
reviewers Nancy Jianakoplos (Colorado State University), and
David Spencer (Brigham Young University) for their invaluable
comments.
I also thank Mike McElroy (Duke University/North Carolina State
University) for his support and mentorship over the years.
Finally, I thank my Dad for his continued willingness to discuss the
pedagogy of macroeconomics at all times!
Mannig J. Simidian
Harvard University
June 2002
Chapter One
2
®
A PowerPointTutorial
to Accompany macroeconomics, 5th ed.
N. Gregory Mankiw
CHAPTER ONE
The Science of Macroeconomics
Mannig J. Simidian
Chapter One
3
Welcome to Macroeconomics!
Everyone is concerned about macroeconomics
lately. We wonder why some countries are growing faster
than others and why inflation fluctuates. Why?
Because the state of the macroeconomy affects
everyone in many ways. It plays a significant
role in the political sphere while also affecting
public policy and societal well-being.
Recently, there is much discussion of recessions-- periods in
which real GDP falls mildly-- and depressions, when GDP falls more
severely. Macroeconomists are also concerned with issues such as
inflation, unemployment, monetary and fiscal policies—all of which,
will be discussed at length in Macroeconomics, 5th ed., Mankiw’s
Macroeconomics Modules, and in your macroeconomics course.
Good luck!
Chapter One
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Economists use models to understand what goes on in the economy.
Here are two important points about models: endogenous variables
and exogenous variables. Endogenous variables are those which the
model tries to explain. Exogenous variables are those variables that a
model takes as given. In short, endogenous are variables within a
model, and exogenous are the variables outside the model.
Price
Supply
P*
Demand
Chapter One
Q * Quantity
This is the most famous
economic model. It describes
the ubiquitous relationship
between buyers and sellers in
the market. The point of
intersection is called an
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equilibrium.
Market clearing is an alignment process whereby decisions between
suppliers and demanders reach an equilibrium. Here’s how it works.
Let’s say you begin with a demand and supply curve for CDs.
Remember that the demand curve slopes downward meaning that
as you increase the price (by moving along the demand curve), the
quantity demanded decreases. Conversely, the supply curve slopes
upward implying that as the price increases (by moving along the
supply curve), the amount supplied will increase.
The center point A is where market
D
D´
S
P
decisions reach an equilibrium.
B
Now, suppose that there is a sudden
P´
A
increase in the demand for CDs.
P*
Demand will shift from D to D´.
The increase in demand places upward
pressure on the price to point B since the
original price, P* no longer clears 6the
Chapter One
Q´
Q*
Q market.
S SHIFTS IN DEMAND: Suppose your income
P
rises? Your demand for a given product, say
pizza for example, will also increase.
This translates into a rightward shift in the
demand curve from D to D'. Result:
D' both price and quantity are higher.
D
Q
P
SHIFTS IN SUPPLY: A fall in the price
of materials increases the supply of pizza; at
any given price, pizzerias find that the sale
of pizza is more profitable, and thus the
supply of pizza rises.
This translates into a rightward shift in supply
from S to S' .Result: price falls, quantity rises.
Chapter One
S S'
D
Q
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Economists typically assume that the market will go into an
equilibrium of supply and demand, which is called the
market clearing process. This assumption is central to the
pizza example on the previous slide. But, assuming that
markets clear continuously is not realistic. For markets to
clear continuously, prices would have to adjust instantly to
changes in supply and demand. But, evidence suggests that
prices and wages often adjust slowly.
So, remember that although market clearing models assume
that wages and prices are flexible, in actuality, some wages
and prices are sticky.
Chapter One
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Microeconomics is the study of how households and firms
make decisions and how these decision makers interact in the
marketplace. In microeconomics, a person chooses to
maximize his or her utility subject to his or her budget constraint.
Macroeconomic events arise from the interaction of many
people trying to maximize their own welfare. Therefore, when
we study macroeconomics, we must consider its
microeconomic foundations.
Chapter One
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®
The modules mirror the sequencing of the text, macroeconomics, 5th ed.
There are six parts and a total of nineteen chapters with a module
written for each chapter.
Introduction
Classical Theory, The Economy in the Long Run
Growth Theory, The Economy in the Very Long Run
Business Cycle Theory: The Economy in the Short Run
Macroeconomic Policy Debates
More on the Microeconomics Behind Macroeconomics
Chapter One
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Macroeconomics
Real GDP
Inflation Rate
Unemployment Rate
Recession
Depression
Deflation
Models
Endogenous variables
Exogenous variables
Market clearing
Flexible and sticky prices
Microeconomics
Chapter One
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