Macro Chapter 1: Are your smart choices smart for all?
(Macroeconomics and Microeconomics)
Smart microeconomic choice by individuals may or may not add up to
smart macroeconomic outcomes for the economy as a whole. The key
question about the relationship between microeconomic and
macroeconomics is, “if left alone, do markets quickly self-adjust?”
-The great recession of 2008-09 and the great depression of 1929-33
involved financial bubbles that burst, high unemployment, failing living
standards, bankruptcies, as well as government policy mistakes.
Macroeconomics: analyzes the performance of the whole Canadian
economy and global economy—the combined outcomes of all individual
Microeconomics: analyzes choice that individuals in households,
individual businesses, and governments make and how those choices
interact in markets.
Fallacy of composition: what is true for one is not true of all; whole is
greater than the sum of the parts
Paradox of thrift: attempts to increase savings cause aggregate savings
decrease because of galling employment and incomes.
-The circular flow diagram reduces the complexity of the Canadian
economy to three sets of players—households, businesses, and
-Input markets determine incomes; households are the sellers
businesses are the buyers
-Output markets determine the value of all products/services sold;
households are buyers and businesses are sellers
Business cycles: ups and downs of overall economic activity. -The fundamental macroeconomic question “if left aone by government,
does the price mechanisms of market economies adjust quickly to
maintain steady growth in living standards, full employment and stable
-“Yes” answer based on Say’s Law—supply creates its own demand.
-“No” answer from John Maynard Keynes, founder of macroeconomics
“If left alone, do markets quickly self-adjust?” The “yes” and “no” camps
differ on the fallacy of composition, cuases of business cycles, risk of
government failure versus market failure, role of government, and the
Market failure—market outcomes fial to serve in public interest
Government failure: government policy fails to serve the public
-“government policy fails to serve the public interest.
-“Yes”—left alone markets will quickly self-adjust” camp believes
Macroeconomic and microeconomic outcomes are the same
External events or government policy causes business cycles
Government failure is worse than market failure
Government should be hands-off
-“No”—Left alone, markets fail to quickly self-adjust” camp belives
Fallacy of composition—macroeconomic and microeconomic
outcomes different Markets cause business cycles through coordination failures, roles
of money banking, and expectations.
Market failure is worse than government failure.
Government should be hands off.