1.9 Studying the economy as a whole: macroeconomics

what are the two steps to understanding how the whole economy works

(1) aggregation

(2) general equilibrium

general equilibrium analysis

studies how actors in the economy interact directly or indirectly through effects that carry over from one market to another

partial equilibrium analysis

attention is on one set of interactions and everything else in the economy is assumed to be unchanged

paradoxes of the aggregate economy

(1) people acting entirely selfishly in competitive markets could bring about a desirable outcome for the economy as a whole (adam smith)

(2) paradox of thrift - saving can help a family but if everyone saves, the economy might fgo into a recession; what’s good for the family isnt necessarily good for the economy as a whole