2. Microeconomics is the study of how households and firms
make decisions and how these decision makers interact in the
broader marketplace. In microeconomics, an individual chooses to
maximize his or her utility subject to his or her budget constraint.
Macroeconomic events arise from the interaction of many
individuals trying to maximize their own welfare. Because
aggregate variables are the sum of the variables describing
individuals’ decisions, the study of macroeconomics
is based on microeconomic foundations.
3. What is Macroeconomics?
Microeconomics v/s macroeconomics
Macroeconomics is concerned with
aggregates and average of the entire
economy, such as national income,
aggregate output, total employment, total
consumption, savings and investments,
aggregate demand, aggregate supply,
general level of prices etc.
In macroeconomics we study how these
aggregates and averages of the economy
as a whole are determined and what
causes fluctuations in them
4. Macroeconomics is concerned with the behavior of
the economy as whole…with booms and
recessions, with economy’s total output of goods
and services, the growth of output, the rate of
inflation and unemployment, the balance of
payment, and exchange rate
Macroeconomics focuses on the economic
behavior and policies that affects consumption and
investments, trade balance, determinants of wages
and prices, monetary and fiscal policies, the money
stock, budget, interest rate and national debt
5. Important issues in
Why does the cost of living keep rising?
Why are millions of people unemployed, even when
the economy is booming?
What causes recessions? Can the government do
anything to combat recessions? Should it?
What is the government budget deficit? How does it
affect the economy?
Why are so many countries poor?
What policies might help them grow out of poverty?
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:
6. Economic models
…are simplified versions of a more complex
irrelevant details are stripped away
…are used to
Make testable predictions that can, when proven,
… explain the economy’s behavior
devise policies to improve economic performance
7. 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.
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.
8. Macroeconomic Analysis
Helps in understanding the complicated
Formation and understanding of national
Tool for the solution of economic problems
related to output, employment, and national
Individual are ignored
Individual differences are overlooked
9. Issues and Problems in Economics
What to produce
Allocation of resources
How to produce
For whom to produce
Problems of efficiency and growth
10. Goals of Macroeconomic Policy
High standard of living
Reduction of economic inequality and
removal of poverty
Rapid economic growth
External balance v/s overall balance in
economic relations with the rest of the
11. Objectives of Macroeconomic
High and rising per capita incomes
Avoiding excessively high inflation
Efficient use of human and non-human
resources with minimum possible
unemployment of labour
Poverty removal and removal of extreme
inequalities of income
Avoidance of persistent imbalance in
foreign trade and excessive resorts to
12. Review Questions
What is macroeconomic?
What is the difference between
microeconomics and macroeconomics?
What are the major issues in macroeconomic
Why do we need to study macroeconomics?
What is macroeconomics model? Why do we
use macroeconomic models?
What are the objectives of macroeconomic