01 Introduction to Macroeconomics

Course Context & Logistics

This course is a core component of ETH’s Department of Management, Technology, and Economics (D-MTEC). The department’s vision is to analyze the interplay of technology, organizations, and society to foster the sustainable use of resources. Macroeconomics provides the essential framework for understanding these large-scale systems.

Administrative Essentials

• Moodle: The central hub for all course materials, including slides, problem sets, and announcements. Link to Moodle.
• Textbook: N. Gregory Mankiw & Mark P. Taylor (2023), Economics, 6th Ed. This single book covers both macro and micro principles. A 25% discount is available via instructions on Moodle.
• Recordings: Lectures are recorded and accessible via ETH Multimedia Services for enrolled students. Login details will be posted on Moodle.
• Contacts:
  • Prof. Dr. Jan-Egbert Sturm (sturm@kof.ethz.ch)
  • Assistants: Roxane Spitznagel & Aline Scheurer (emails on Moodle).
  • Office hours are by appointment.

Assessment & Exam

Your grade is 100% based on the final exam.

• Date (Tentative): Tuesday, 13.01.2026, 14:15-15:45.
• Format: 90-minute, closed-book, computer-based exam under the Bring-Your-Own-Device (BOYD) policy.
• Registration: You must register for the exam on myStudies during the 3rd/4th week of the semester. Course enrollment is not exam registration.
• Retake (Tentative): Monday, 23.02.2026. For students who fail the first attempt only.

Critical: BYOD System Test Run

To ensure a smooth exam experience, a mandatory test run will occur during the next lecture.

When: Next lecture, 23 September Where: Rooms ETA F5, ETF C1, and ETF E1 (live-streamed).

This session is not graded. We will conduct a survey using the exam system to simulate the environment.

Preparation Steps:

1. Check Requirements (by 18. Sept): Use the QR code to confirm your laptop’s compatibility. We will contact you if issues arise. ![image on slide 11 showing the QR code for the laptop requirements survey]
2. Install Software: Install the Safe Exam Browser from safeexambrowser.org. This locks your computer into exam mode.
3. Attend: Bring your fully charged laptop and ETH login credentials.

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The Core of Economics: Scarcity and Choice

At its root, economics is the study of how society manages its scarce resources. Scarcity means we have finite resources and therefore cannot satisfy every human want. This fundamental constraint forces us to make choices, which are governed by a set of core principles.

How People Make Decisions

Principle #1: People Face Trade-offs

“There is no such thing as a free lunch.” Every decision involves a trade-off, giving up one thing to get another.

• Guns vs. Butter: A society’s classic trade-off between defense spending and consumer goods.
• Efficiency vs. Equity: A fundamental policy dilemma.
  • Efficiency: Maximizing the output from scarce resources (the size of the economic pie).
  • Equity: Distributing economic prosperity fairly among society’s members (how the pie is sliced). Policies that promote equity, like progressive taxation, can reduce the incentive to produce, thus shrinking the pie.

Principle #2: The Cost of Something Is What You Give Up to Get It

The true cost of any action is its opportunity cost, the value of the best alternative that you forgo. It’s not just about money spent, but about opportunities lost.

The Opportunity Cost of an ETH Degree

The cost of your degree isn’t just tuition and living expenses. The most significant component is the income you could have earned by working instead. That forgone salary is the opportunity cost of your time.

Principle #3: Rational People Think at the Margin

Economists model individuals as rational agents who systematically and purposefully do their best to achieve their objectives. Rational decisions are not made on an all-or-nothing basis, but through marginal analysis. This involves comparing the additional benefits (marginal benefits) and additional costs (marginal costs) of a small, incremental change to a plan. Action is taken only if $MB>MC$.

Principle #4: People Respond to Incentives

An incentive is anything that motivates a person to act. Since rational people weigh costs and benefits, their behavior changes when those costs or benefits change. Understanding incentives is central to analyzing markets and designing effective public policy.

The Law of Unintended Consequences

Policies can have unforeseen effects by altering incentives in unexpected ways. The “Cobra Effect” is a classic example: offering a bounty for dead cobras led people to breed them, making the problem worse. Good policy requires thinking through all incentive effects.

How People Interact

Principle #5: Trade Can Make Everyone Better Off

Trade is not a zero-sum game. By allowing for specialization, trade enables individuals and nations to focus on what they do best. This increases total production and allows everyone to consume a greater variety and quantity of goods and services. Switzerland specializes in watches and pharmaceuticals, trading them for German cars, both nations benefit.

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity

In a market economy, the decentralized decisions of millions of households and firms allocate resources. Adam Smith’s “invisible hand” describes how prices act as signals, guiding self-interested actors to outcomes that often maximize society’s overall welfare. Prices elegantly convey information about both a good’s value to consumers and its cost of production.

Principle #7: Governments Can Sometimes Improve Market Outcomes

The invisible hand needs a government to protect it. The government’s role is to enforce property rights and to intervene in cases of market failure, when the market on its own fails to produce an efficient allocation of resources. Key causes include:

• Externalities: When an action impacts a bystander (e.g., pollution).
• Market Power: When a single entity (e.g., a monopoly) can unduly influence prices.

How the Economy as a Whole Works

This is the domain of macroeconomics.

Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

The vast differences in living standards across the globe are almost entirely explained by differences in productivity, the amount of goods and services produced per unit of labor. Higher productivity leads to higher incomes and a better standard of living.

Principle #9: Prices Rise When the Government Prints Too Much Money

Inflation, a general increase in the price level, is almost always caused by an excessive growth in the quantity of money. When a central bank prints too much money, its value falls.

Principle #10: Society Faces a Short-Run Trade-off between Inflation and Unemployment

In the short run, policymakers face a trade-off, known as the Phillips Curve: lowering inflation often leads to a temporary rise in unemployment, and vice versa. This trade-off is central to the analysis of the business cycle, the short-term fluctuations in economic activity.

The Economist’s Way of Thinking

The Economist as Scientist

Economists use the scientific method: they develop theories, collect data, and analyze it to test those theories. Because controlled experiments are rare, they often rely on historical events as “natural experiments.”

To simplify a complex world, economists use models built on assumptions. A good model strips away irrelevant details to reveal important underlying relationships.

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