Modern macroeconomics.
Modern macroeconomics is built explicitly on microeconomic foundations. That is, the modern study and analysis of macroeconomics begins by considering how the microeconomic units, namely consumers and firms, in an economy make their decisions and then considers how the choices of these great many...
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| Main Author: | |
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| Format: | Book |
| Language: | English |
| Published: |
Sanjay K. Chugh
2020
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| Subjects: | |
| Online Access: | http://dspace.uniten.edu.my/jspui/handle/123456789/15332 |
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| Summary: | Modern macroeconomics is built explicitly on microeconomic foundations. That is, the
modern study and analysis of macroeconomics begins by considering how the microeconomic
units, namely consumers and firms, in an economy make their decisions and then
considers how the choices of these great many individuals interact with each other to yield
economy-wide outcomes. This approach sounds quite reasonable because, after all, it is
individuals in a society that ultimately make decisions. However, it may surprise you that
macroeconomics was not always studied this way. Indeed much of the evolution of macroeconomic
theory occurred without any reference to its microfoundations. We, however,
will consider the microeconomic foundations of macroeconomics — as such, our consideration
of macroeconomics will mostly be a “ modern ” one.
The two most fundamental microeconomic units in any economy are consumers and
firms. In introductory microeconomics, you studied how these individual units make their
decisions. Under economists ’ usual assumption of rational behavior, the posited goal of
consumers is to maximize their utility, and the posited goal of firms is to maximize their
economic (as opposed to accounting) profits. Concepts such as marginal utility, marginal
revenue, and marginal cost should be familiar to you from your introduction to microeconomics,
and they will provide the foundation of our consideration of macroeconomics.
In modern industrialized economies, consumption activity (i.e., purchases of goods and
services by individuals) constitutes the largest share of all macroeconomic activity. For
example, in the United States, consumption accounts for roughly 70 percent of all economic
activity. Understanding how consumers make decisions and the factors, especially
government policies, that affect these decisions will be of prime importance in our study of
macroeconomics. We thus begin our study of macroeconomics by reviewing the microeconomics
of consumer theory in chapter 1. The tools introduced there will be used repeatedly,
so it is important to grasp these ideas fully. Following this review of consumer theory, we
will develop the macroeconomic theory of consumption, including the impact of various
government policies on consumption behavior. After this, we will introduce firms into our
theoretical model of the economy, again considering the impact of various government
policies on firms ’ decisions. |
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