MICROECONOMICS AND MACROECONOMICS

It should be clear by now that economics covers the allocation of scarce resources. But the field of economics if often broken down into two categories: microeconomics and macroeconomics.

Microeconomics

Microeconomics is the branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interaction among these individuals and firms.

One goal of microeconomics is to study the supply and demand and other forces that determine the price in a particular market. For example, what combination of goods and services would fit a specific household's needs and wants or how a specific company could maximize its productions and capacity and both microeconomics related questions.

Macroeconomics

Macroeconomics is the branch of economics that studies the behaviour and performance of an economy/industry as a whole and not just of specific companies.

Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, investment and international trade.

For example, macroeconomists could look at how GDP would be affected by unemployment rate or how an increase/decrease in interest rates would affect inflation.

John Maynard Keynes is often credited with founding macroeconomics when he started the use of monetary aggregates to study broad phenomena.

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EQUILIBRIUM

We have previously described what supply and demand are and how the price fluctuates in order that the quantity demanded and the quantity supplied level out. Thus when these two are equal we reach a desired outcome which economists call equilibrium. At this point the allocation of goods/resources is at its most efficient because at the given price producers are selling all the goods that they have produced and buyers are getting all the goods they have demanded. In this state the market benefits as a whole because when an equilibrium is reached the number of transactions being made is the highest possible. Picture the case of a shop that sells TVs. As you can see in the table below, the higher the price the lower the quantity demanded but the higher the quantity supplied and vice versa. In each case the amount of transactions being made can be expressed by the formula: Number of Transactions = min(Quantity Demanded, Quantity Supplied) This is obviously happening be...

TYPES OF RESOURCES

There are many representations of the resources throughout the world of science and technology. An economist will tell you that they are goods and services used to produce valuable products that meet human needs and wants. A biologist will define them as substances that are required by living organisms for normal growth, maintenance and reproduction. Even a computer scientist will tell you that resources are any physical or virtual components of limited availability within a computer, used for creating a system. Of course, each interpretation is closely tied to its respective field of study, covering only what is relevant to that particular field. But all these definitions have something in common, which is the fact that resources are the means through which a desired product, state or outcome is achieved. In economics the resources are human-centered and they are used in order to create output ( goods and services ) through which we can satisfy our needs and wants. Because ...

OPPORTUNITY COST

Our lives are filled with everyday economic decisions. Whether you choose to spend one hour watching a TV show instead of studying or whether you choose to buy a book over music album you are essentially taking into account the opportunity cost of each. The time you spend watching TV can't be used to study and the money you spend on the book can't be used to buy the album. The opportunity cost is essentially the benefits you forgo when taking a certain set of actions. Thus we can define: Opportunity cost - When utilizing a certain resource, the opportunity cost represents the benefits of the next-highest-valued alternative use of that resource. It is important to understand that when we talk about the opportunity cost we only take into account the benefits of the next highest valued resource instead of adding up all of the other alternatives. The opportunity cost is often expressed as the difference between the expected return value of the two options: Oppor...

Introduction to Economics

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