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By the end of this section, you will be able to:

  • Describe microeconomics
  • Describe macroeconomics
  • Contrast monetary policy and fiscal policy

Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes. Economics acknowledges that production of useful goods and services can create problems of environmental pollution. It explores the question of how investing in education helps to develop workers’ skills. It probes questions like how to tell when big businesses or big labor unions are operating in a way that benefits society as a whole and when they are operating in a way that benefits their owners or members at the expense of others. It looks at how government spending, taxes, and regulations affect decisions about production and consumption.

It should be clear by now that economics covers a lot of ground. That ground can be divided into two parts: Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses; Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy.

To understand why both microeconomic and macroeconomic perspectives are useful, consider the problem of studying a biological ecosystem like a lake. One person who sets out to study the lake might focus on specific topics: certain kinds of algae or plant life; the characteristics of particular fish or snails; or the trees surrounding the lake. Another person might take an overall view and instead consider the entire ecosystem of the lake from top to bottom; what eats what, how the system stays in a rough balance, and what environmental stresses affect this balance. Both approaches are useful, and both examine the same lake, but the viewpoints are different. In a similar way, both microeconomics and macroeconomics study the same economy, but each has a different viewpoint.

Whether you are looking at lakes or economics, the micro and the macro insights should blend with each other. In studying a lake, the micro insights about particular plants and animals help to understand the overall food chain, while the macro insights about the overall food chain help to explain the environment in which individual plants and animals live.

In economics, the micro decisions of individual businesses are influenced by whether the macroeconomy is healthy; for example, firms will be more likely to hire workers if the overall economy is growing. In turn, the performance of the macroeconomy ultimately depends on the microeconomic decisions made by individual households and businesses.

Microeconomics

What determines how households and individuals spend their budgets? What combination of goods and services will best fit their needs and wants, given the budget they have to spend? How do people decide whether to work, and if so, whether to work full time or part time? How do people decide how much to save for the future, or whether they should borrow to spend beyond their current means?

What determines the products, and how many of each, a firm will produce and sell? What determines what prices a firm will charge? What determines how a firm will produce its products? What determines how many workers it will hire? How will a firm finance its business? When will a firm decide to expand, downsize, or even close? In the microeconomic part of this book, we will learn about the theory of consumer behavior and the theory of the firm.

Macroeconomics

What determines the level of economic activity in a society? In other words, what determines how many goods and services a nation actually produces? What determines how many jobs are available in an economy? What determines a nation’s standard of living? What causes the economy to speed up or slow down? What causes firms to hire more workers or to lay workers off? Finally, what causes the economy to grow over the long term?

An economy's macroeconomic health can be defined by a number of goals: growth in the standard of living, low unemployment, and low inflation, to name the most important. How can macroeconomic policy be used to pursue these goals? Monetary policy , which involves policies that affect bank lending, interest rates, and financial capital markets, is conducted by a nation’s central bank. For the United States, this is the Federal Reserve. Fiscal policy , which involves government spending and taxes, is determined by a nation’s legislative body. For the United States, this is the Congress and the executive branch, which originates the federal budget. These are the main tools the government has to work with. Americans tend to expect that government can fix whatever economic problems we encounter, but to what extent is that expectation realistic? These are just some of the issues that will be explored in the macroeconomic chapters of this book.

Key concepts and summary

Microeconomics and macroeconomics are two different perspectives on the economy. The microeconomic perspective focuses on parts of the economy: individuals, firms, and industries. The macroeconomic perspective looks at the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation. Macroeconomics has two types of policies for pursuing these goals: monetary policy and fiscal policy.

Questions & Answers

How dose economics use science methods to explains it problems
Edmond Reply
according to Jhon Robinson the main problem of economics is what to produce? how to produce? whom to produce? economics tries to solve these problem scientifically by using its theories which are scientific in nature,basically micro and macro theories which just explain what the problem is...
Lavkesh
and now the solving techinique is also changed. only theories or its matematical +statistical version is not sufficient so the economist had developed Econometrics which includes economic theory+mathematical economics+statistics, for solving economic problem. This method treats economics as a pure
Lavkesh
..pure science so this technique is based on pure scientific methods.
Lavkesh
measurement of elasticity of demand
John Reply
Price elasticity of demand= Percentage change in quantity demanded/ Percentage change in price
Jale
For example, suppose that a 10 percent increase in the price of an ice-cream cone causes the amount of ice cream you buy to fall by 20 percent. We calculate your elasticity of demand as
Jale
Price elasticity of demand =20 percent /10 percent = 2
Jale
In this example, the elasticity is 2, reflecting that the change in the quantity demanded is proportionately twice as large as the change in the price.
Jale
what is economic
Samuel Reply
economics is a social science that studies the relationship of human behavior between ends and scare...
Lawrence
Why is economics as a subject is so important to human being?
austine
it's significant in study of managing available resources to satisfy human needs and wants
mohamed
economics is the science of wealth
Aamir
it is also said that it is the science of scarcity
Aamir
why study economic
Neo
Economic helps to meet our needs and wants nd to make choices.
Abraham
careers or jobs associated with economics
Neo
Economics is more than choices, scarcity, resources etc. It has a lot to do with psychology, social psychology. Understand motivation for consumer decisons.
TOM
okey
Neo
How does commercial banks create credit
Penda Reply
what is equilibrium price?
Stella Reply
happen when demand curve and supply curve meet
Enockz
intersection point of demand and supply curve
Sarjeel
the equilibrium price is that price at which the quantity demanded is equal to the quantity supplied... i.e the price at which what people want to buy is equal to what the sellers want to sell.
Che
what is difference between demand and quantity demand
Sarjeel
the price which is prevailing in the market ,it is the price at which the consumer is getting maximum satisfaction and the producer is getting maximum profit.
Rather
at equilibrium price demand for commodity is equal to supply of commodity..
Rather
dear sareel, quantity demand means the quantity of commodity which is demanded at a particular price e,g , your demand is for 4 oranges when price of orange is 5,, on the other hand demand means the whole quantity price relationship, quantity demand is shown on a particular point on demand curve,
Rather
sarjeel sbb, reply please...
Rather
what is elasticity of demand
Evans
what is Economics?
Ahmed
Economics can be defined as a social sciences that study human behavior as a relationship between end and scarce mean which have alternative use
Azeez
What is taxation
Azeez
economics is the study of scarcity
Suleiman
dear Suleiman how?
Enockz
economics is a subject matter that studies different economic activities as directed towards maximization of income at level of individual and maximization of social welfare at the level of society as a whole
Rather
economics studies us how to allocate scarce resources to full fill the maximum human wants as the resources have alternative uses..and r very scare to fullfill the human wants as the wants of humans are unlimited
Rather
demand is what a buyer is able and willing to buy at a specific price where by quantity demanded is amount of demand the buyer is able and willing to buy at a specific price.
daudi
thanks che..
Stella
how does commercial banks create credit
Penda
write models of Aggregate Supply?
abdi Reply
models of aggregate supply?
abdi
Then what's the law of elasticity?
austine
wat happen if money circulation failed to be controlled in any county?
Enockz Reply
the amount of money in circulation increases and cause aggregate demand to rise. Thus, hyperinflation.
Che
what's heteroscandacity
Crowther
price mechanism refers to the manner which price of goods and services affect the demand and supply of goods and services
Abaide
heteroscandacity: Is the circumstance where there is unequal variances across the observations.
Enockz
what is price mechanisms?
Che Reply
price mechanism refers to the manner which price of goods and services affect the demand and supply of goods and services
Abaide
what is demand
kabeer Reply
desire and ability to pay for a commodity is called demand.
Rather
i desire to become Prime Minister of India , is it demand ?please answer---
Rather
demand refers to the quantity demanded of a commodity that consumers are willing and able to buy at a particular price over a given period of time
Abigail
or the willingness power of a commoditythat is backed up by the ability to pay
Abigail
u r 100% right..
Rather
is ability to purchase a perticular goods at any price at a given time.
Neema
tanz Rather
Abigail
ur desire to become a prime minister of lndia is nt demand because u have nt made any efforts or willingness, it is called mere wish or lets say mere desire
Abigail
Thank you so much dear Abigail Mante for giving answer to my question..
Rather
U are welcome
Abigail
it's ok,dear..
Rather
The term ceteris paribus implies that
Oyelekan
Demand is the quantity demanded of a commodity at which a consumer is willing and able to purchase at various prices over a given period of time.
Suleman
ceteris parbus explains the law of demand,which states that at a higher price quantity demanded of a commodity is low and at a lower price quantity demanded of a commodity is high all other things being equal.
Abigail
U know right girl
Suleman
kk
Abigail
ceteris paribus is an economics terms used in situations where we considered other factors to remain unchanged
Ndeh
Thanks for the answer
Oyelekan
please how does disposable income affect demand?
Che
hell. somebody must tell me what is the meaning if cetrasparibus
Darling
plz. guys
Darling
the quantity of a commodity that a consumer ready willing and able to purchase at a particular price and in a particular period of time is known as demand
The
ceterusparibus means constant i,e,(other things do not change or other things remains constant)
Rather
wht
Bilal
right answer yawer saab
Sarjeel
things like what@Rather
Oyelekan
bilal sheikh why u has been written what
Sarjeel
e,g demand is determined by various factors like price of commodity, uses of good, expected changes in near future, nature of commodity , but when we learn price elasticity of demand , we keep other determinants of demand constant(i,e , we do not expect any change in price of good in near future,etc
Rather
i think u understand the term ceterus paribus..
Rather
bcz I can not understand
Bilal
what
Sarjeel
ok bro
Bilal
wht is other factors
Bilal
income of consumer, taste,
Sarjeel
Gold. Medlist in economics and. Lecturer of economics
HAZRAT
hello..what's are the factors affecting cross elasticity of demand.? at least five factors
Elzevery
The time it takes to get a product to market. That time limit has a name call "Just in Time."
William
thanks guys
kabeer
hey guys what is inelastic demand
Abaide
when there is no change in quantity demanded due to change in price then elasticity of demand is inelastic
Rather
Hi sucker how are you...
HAZRAT
thanks for the answer
Abaide
Any question about economics
HAZRAT
yes. what is the main cause of Heteroscedasticity
Abaide
hi
Habib
waht is elasticity of demand
Sarparah
elasticity of demand means change in quantity demanded divided by change in any of its determinent ,e,g , price ed= % change in quantity demanded/ % change in price.
Rather
elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in price of the commodity in question ,price of other related commodity n the consumers income
Abigail
yes
Kumako
ok
Abigail
guys what is monopoly
kabeer
A single seller in the market.
Tahir
what are the importance of economics
Eric Reply
what causes the demand curve to shift.
Stephen
other factors except price.it include test of a consumer fashen presence of substitute advatisment
Neema
factors other than price
Rather
Its helps to determine the price
Mavis
state three factors that affect demand and supply
VICENT Reply
1,price of the product 2,expectations in near future 3,uses of product
Rather
1.advertisement 2. expectation of future change in price 3.consumers income
Abigail
1.alternative products on market. 2.changes on price 3.consumer's expectations
Anusia
what is cheque
adedayo Reply
resources of exchanging of money to any where
Dinesh
it is a writen order to a bank to pay a specific sum of money to a person
Richard
what is the meaning of money
Micheal Reply
a device agreed upon by a group of people to be used interchangeably for goods and/or services.
drquackery
Money is anything that is generally accepted by people in certain country as a medium of exchange and in a settlement of debt
Amos
is anything which is legally asepted in any society to be used as a medium of exchange
Enockz
is it legal to cut money or burn money
Rather
Money is a durable commodity, that is acceptable as means payment, settlement of debt and medium of exchange.
olayiwola
No it is not legal,that is an abuse to its path
Oyelekan
Money is anything that is generally considered and accepted in exchange of goods and services.
Hanes
money is anything generally acceptable by people in a particular society fr the buying of goods and services and for the settlement of debts. Money acts as legal tender.
Penda
money is anything generally accepted by the public for the settlement. of debt n for the payment of goods and services
Bertilla
hi. i want to know topics one should go thru for understanding market value of a product and profile of it over years.
Zaheer Reply
What are derivatives?
Maliha Reply
A financial instrument whose value depends on the valuation of an underlying asset; such as a warrant, an option etc.
Nnamdi

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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