1Chapter One

A PowerPointTutorialTo Accompany

macroeconomics, 5th. ed.N. Gregory Mankiw

Mannig J. Simidian

®

2Chapter One

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. SimidianHarvard UniversityJune 2002

Acknowledgements

3Chapter One

A PowerPointTutorialto Accompany macroeconomics, 5th ed.

N. Gregory Mankiw

Mannig J. Simidian

®

CHAPTER ONEThe Science of Macroeconomics

4Chapter One

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!

Welcome to Welcome to Macroeconomics!Macroeconomics!

5Chapter One

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.

PricePrice

DemandDemand

QQ*

PP

SupplySupply

QuantityQuantity

*

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

equilibrium.

6Chapter One

Market clearing is an alignment process whereby decisions between suppliers and demanders reach an equilibrium. Here’s how it works.

Remember that the demand curve slopes downward meaning thatRemember that the demand curve slopes downward meaning thatas you increase the price (by moving along the demand curve), the as you increase the price (by moving along the demand curve), the quantity demanded decreases. Conversely, the supply curve slopes quantity demanded decreases. Conversely, the supply curve slopes upward implying that as the price increases (by moving along the upward implying that as the price increases (by moving along the

supply curve), the amount supplied will increase.supply curve), the amount supplied will increase.

Let’s say you begin with a Let’s say you begin with a demanddemand and and supplysupply curve for CDs. curve for CDs.

PP

QQ

DD SS

Now, suppose that there is a sudden increase in the demand for CDs. Demand will shift from D to D´.

The center point A is where market decisions reach an equilibrium.

Q*Q*

P*P* AA

D´D´

Q´Q´

P´P´BB

The increase in demand places upward pressure on the price to point B since the original price, P* no longer clears the market.

Shortage

7Chapter One

SHIFTS IN DEMAND: Suppose your incomerises? Your demand for a given product, say pizza for example, will also increase.

This translates into a rightward shift in thedemand curve from D to D''. Result:both price and quantity are higher.

PP

DD

SS

QQ

DD''

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 supplyfrom S to S'' ..Result: price falls, quantity rises.Result: price falls, quantity rises.

PP

DD

SS

QQ

SS''

8Chapter One

Economists typically assume that the market will go into an Economists typically assume that the market will go into an equilibrium of supply and demand, which is called the equilibrium of supply and demand, which is called the market clearing process. market clearing process. This assumption is central to the This assumption is central to the pizza example on the previous slide. But, assuming that pizza example on the previous slide. But, assuming that markets clear markets clear continuously continuously is not realistic. For markets to is not realistic. For markets to clear continuously, prices would have to adjust instantly to clear continuously, prices would have to adjust instantly to changes in supply and demand. But, evidence suggests that changes in supply and demand. But, evidence suggests that prices and wages often adjust slowly.prices and wages often adjust slowly.

So, remember that although market clearing models assume So, remember that although market clearing models assume that wages and prices are that wages and prices are flexible, flexible, in actuality, some wages in actuality, some wages and prices are and prices are sticky. sticky.

9Chapter One

Microeconomics is the study of how households and firmsmake decisions and how these decision makers interact in the

marketplace. In microeconomics, a person chooses tomaximize his or her utility subject to his or her budget constraint.

Macroeconomic events arise from the interaction of manypeople trying to maximize their own welfare. Therefore, when

we study macroeconomics, we must consider itsmicroeconomic foundations.

10Chapter One

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

®

11Chapter One

MacroeconomicsReal GDP

Inflation RateUnemployment RateRecessionDepressionDeflationModelsEndogenous variablesExogenous variablesMarket clearingFlexible and sticky pricesMicroeconomics

MacroeconomicsReal GDP

Inflation RateUnemployment RateRecessionDepressionDeflationModelsEndogenous variablesExogenous variablesMarket clearingFlexible and sticky pricesMicroeconomics