MICROECONOMICS VS.

MACROECONOMICS

MICROECONOMICS MACROECONOMICS
-the study of how households and firms make decisions and how they - the study of economy-wide phenomena, including inflation,
interact in markets (Mankiw) unemployment, and economic growth (Mankiw)
- the branch of economics that focuses on actions of particular agents - the branch of economics that focuses on broad issues such as
within the economy, like households, workers, and business firms growth, unemployment, inflation, and trade balance. It has two types
-studies individuals and business decisions. It focuses on supply and of policies for pursuing these goals: monetary policy (policy that
demand, and other forces that determine price levels, making it a involves altering the level of interest rates, the availability of credit in
bottom-up approach (Investopedia) the economy, and the extent of borrowing) and fiscal policy(economic
policies that involve government spending and taxes).
-analyzes the decisions made by countries and
governments(Investopedia)

Economics is divided into two different categories: microeconomics and macroeconomics. Microeconomics is the study of individuals
and business decisions, while macroeconomics looks at the decisions of countries and governments. While these two branches of economics
appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two
fields.

*Microeconomics
Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources and prices of goods
and services. It also takes into account taxes and regulations created by governments.
Microeconomics focuses on supply and demand and other forces that determine the price levels in the economy. It takes what is referred
to as a bottom-up approach to analyzing the economy. In other words, microeconomics tries to understand human choices and resource allocation.
Having said that, microeconomics does not try to answer or explain what forces should take place in a market. Rather, it tries to explain what
happens when there are changes in certain conditions.
For example, microeconomics examines how a company could maximize its production and capacity so that it could lower prices and
better compete in its industry. A lot of microeconomic information can be gleaned from the financial statements.
Microeconomics involves several key principles including (but not limited to):
 Demand, Supply, and Equilibrium: Prices are determined by the theory of supply and demand. Under this theory, suppliers offer the
same price demanded by consumers in a perfectly competitive market. This creates economic equilibrium.
 Production Theory: This is the study of production.
 Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during
production.
 Labor Economics: This principle looks at workers and employers, and tries to understand the pattern of wages, employment,
and income.
*Macroeconomics
Macroeconomics, on the other hand, studies the behavior of a country and how its policies affect the economy as a whole. It analyzes
entire industries and economies, rather than individuals or specific companies, which is why it's a top-down approach. It tries to answer questions
like "What should the rate of inflation be?" or "What stimulates economic growth?"
Macroeconomics examines economy-wide phenomena such as gross domestic product (GDP) and how it is affected by changes in
unemployment, national income, rate of growth, and price levels.
Macroeconomics analyzes how an increase or decrease in net exports affects a nation's capital account, or how GDP would be affected
by the unemployment rate.

Basic macroeconomic concepts

 Output and income- National output is the total amount of everything a country produces in a given period of time. Everything that is
produced and sold generates an equal amount of income. The total output of the economy is measured GDP per person. The output
and income are usually considered equivalent and the two terms are often used interchangeably,output changes into income. Output
can be measured or it can be viewed from the production side and measured as the total value of final goods and services or the sum
of all value added in the economy.
 Unemployment- The amount of unemployment in an economy is measured by the unemployment rate, i.e. the percentage of workers
without jobs in the labor force. The unemployment rate in the labor force only includes workers actively looking for jobs. People who
are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded.
 Inflation and deflation - A general price increase across the entire economy is called inflation. When prices decrease, there is
deflation. Economists measure these changes in prices with price indexes. Inflation can occur when an economy becomes overheated
and grows too quickly. Similarly, a declining economy can lead to deflation.

Macroeconomics focuses on aggregates and econometric correlations, which is why it is used by governments and their agencies to
construct economic and fiscal policy. Investors of mutual funds or interest rate-sensitive securities should keep an eye on monetary and fiscal
policy. Outside of a few meaningful and measurable impacts, macroeconomics doesn't offer much for specific investments.
John Maynard Keynes is often credited as the founder of macroeconomics, as he initiated the use of monetary aggregates to study
broad phenomena. Some economists reject his theory, while many of those who use it disagree on how to interpret it.
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.

- 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.- 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.

Basic macroeconomic concepts

Output and income

National output is the total amount of everything a country produces in a given period of time. Everything that is produced and
sold generates an equal amount of income. The total output of the economy is measured GDP per person. The output and income
are usually considered equivalent and the two terms are often used interchangeably,output changes into income. Output can be
measured or it can be viewed from the production side and measured as the total value of final goods and services or the sum of
all value added in the economy.[5]
Macroeconomic output is usually measured by gross domestic product (GDP) or one of the other national accounts. Economists
interested in long-run increases in output study economic growth. Advances in technology, accumulation of machinery and other
capital, and better education and human capital are all factors that lead to increase economic output over time. However, output
does not always increase consistently over time. Business cycles can cause short-term drops in output called recessions.
Economists look for macroeconomic policies that prevent economies from slipping into recessions and that lead to faster long-
term growth.
Unemployment
The amount of unemployment in an economy is measured by the unemployment rate, i.e. the percentage of workers without jobs
in the labor force. The unemployment rate in the labor force only includes workers actively looking for jobs. People who are
retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded.
Unemployment can be generally broken down into several types that are related to different causes.
 Classical unemployment theory suggests that unemployment occurs when wages are too high for employers to be
willing to hire more workers.[citation needed] Other more modern economic theories[which?] suggest that increased wages
actually decrease unemployment by creating more consumer demand. According to these more recent theories,
unemployment results from reduced demand for the goods and services produced through labor and suggest that only
in markets where profit margins are very low, and in which the market will not bear a price increase of product or
service, will higher wages result in unemployment.
 Consistent with classical unemployment theory, frictional unemployment occurs when appropriate job vacancies exist
for a worker, but the length of time needed to search for and find the job leads to a period of unemployment. [6]
 Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers'
skills and the skills required for open jobs.[7] Large amounts of structural unemployment commonly occur when an
economy shifts to focus on new industries and workers find their previous set of skills are no longer in demand.
Structural unemployment is similar to frictional unemployment as both reflect the problem of matching workers with
job vacancies, but structural unemployment also covers the time needed to acquire new skills in addition to the short-
term search process.[8]
 While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment
occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and
economic growth.[9] The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease
in unemployment.[10]
A general price increase across the entire economy is called inflation. When prices decrease, there is deflation. Economists
measure these changes in prices with price indexes. Inflation can occur when an economy becomes overheated and grows too
quickly. Similarly, a declining economy can lead to deflation.
Central bankers, who manage a country's money supply, try to avoid changes in price level by using monetary policy. Raising
interest rates or reducing the supply of money in an economy will reduce inflation. Inflation can lead to increased uncertainty and
other negative consequences. Deflation can lower economic output. Central bankers try to stabilize prices to protect economies
from the negative consequences of price changes.
Changes in price level may be the result of several factors. The quantity theory of money holds that changes in price level are
directly related to changes in the money supply. Most economists believe that this relationship explains long-run changes in the
price level.[11] Short-run fluctuations may also be related to monetary factors, but changes in aggregate demand and aggregate
supply can also influence price level. For example, a decrease in demand due to a recession can lead to lower price levels and
deflation. A negative supply shock, such as an oil crisis, lowers aggregate supply and can cause inflation.
TEST 1. Classify the following topics as relating to microeconomics or macroeconomics. Write MACRO if the topic relates to Macroeconomics;
MICRO if the topic relates to Microeconomics.
1. a family’s decision about how much income to save
2. the effect of government regulations on auto emissions
3. the impact of higher national saving on economic growth
4. a firm’s decision about how many workers to hire
5. the relationship between the inflation rate and changes in the quantity of money

TEST 2. Classify the following questions as relating to microeconomics or macroeconomics. Write MACRO if the question relates to
Macroeconomics; MICRO if the question relates to Microeconomics
1. What determines the level of economic activity in a society?
2. What determines how many goods and services a nation actually produces?
3. What determines how households and individuals spend their budgets?
4. What determines how many jobs are available in an economy?
5. What combination of goods and services will best fit their needs and wants, given the budget they have to spend?
6. How do people decide whether to work, and if so, whether to work full time or part time?
7. How do people decide how much to save for the future?
8. How do people decide whether they should borrow to spend beyond their current means?
9. What determines a nation’s standard of living?
10. What determines the products, and how many of each, a firm will produce and sell?
11. What determines what prices a firm will charge?
12. What causes the economy to speed up?
13. What causes the economy to slow down?
14. What causes firms to hire more workers?
15. What determines how a firm will produce its products?
16. What determines how many workers it will hire?
17. What causes the economy to grow over the long term?
18. How will a firm finance its business?
19. When will a firm decide to expand, downsize, or even close?
20. What causes firms to lay workers off?