Professional Documents
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A leading indicator.
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Primary tool: models simplified versions of a more complex reality irrelevant details are stripped away
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Models
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Models
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Economic models
are used to show relationships between variables explain the economys behavior devise policies to improve economic performance
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Economic Models
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A math analogy
X = 2+aY,
Y = 3 bX.
a = 10, b = 4.
X and Y: endogenous
a and b: exogenous
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Example of a model:
Variables:
Q d = quantity of cars that buyers demand Q s = quantity that producers supply P = price of new cars Y = aggregate income Ps = price of steel (an input)
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Q d = D (P,Y )
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D (P ,Y )
The demand curve shows the relationship between quantity demanded and price, other things equal.
D
Quantity of cars
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P
S
Q S (P , Ps )
The supply curve shows the relationship between quantity supplied and price, other things equal.
D
Quantity of cars
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P
S
equilibrium price
D
Quantity of cars
equilibrium quantity
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Q d D (P ,Y )
An increase in income increases the quantity of cars consumers demand at each price which increases the equilibrium price and quantity.
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Price of cars
P
S
P2
P1
D1 Q1 Q2
D2
Quantity of cars
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Q S (P , Ps )
An increase in Ps reduces the quantity of cars producers supply at each price
Price of cars
S2
S1
P2 P1 D Q2 Q1
Quantity of cars
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P, Q , Q
Y , Ps
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equations for wireless phones; include two exogenous variables in each equation.
2. Draw a supply-demand graph
change in one of your exogenous variables affects the models endogenous variables.
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Demand for cell phones Exogenous variables Supply for cell phones Exogenous variables Change of equilibrium
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A multitude of models
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A multitude of models
For each new model, you should keep track of its assumptions which variables are endogenous,
which are exogenous the questions it can help us understand, and those it cannot
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real wage
W D2
Unemployment
D1
Q Labor
hired
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Differences in scientific judgment Differences in values When economists do agree, policymakers may
not 93% of economists believe tariffs hurt general welfare 90% of economists believe fiscal stimulus works
The Science of Macroeconomics
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