Business Courses/Economics 101: Principles of MicroeconomicsCourse
- AuthorNicolaas Ackermann
Nicolaas has four years of professional work experience - having worked in hospitality, journalism, and marketing. He has a BA in Communication studies from the North-West University and has completed his TEFL qualification. He also has six years of writing experience complementing his qualified competence.
View bio - InstructorKevin Newton
Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.
View bio - Expert ContributorJoseph Shinn
Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.
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Learn the definition of microeconomics and macroeconomics. Also, discover the differences between microeconomics and macroeconomics as branches of economics.Updated: 11/21/2023
Table of Contents
- What Are Micro- and Macroeconomics?
- Microeconomics vs. Macroeconomics
- The Relevance of Microeconomics and Macroeconomics
- Microeconomics Examples
- Macroeconomics Examples
- Lesson Summary
Additional Activities
Microeconomics versus Macroeconomics Practice:
For each of the following, determine whether the topic would be considered part of macroeconomics or microeconomics. Your answer should also discuss why you believe this is the case.
- A firm is trying to determine how many units of its product they should produce if the goal is to maximize profits.
- A government's economic advisors are trying to determine the impact of a fiscal stimulus package on the unemployment rate.
- When a country's central bank prints more money, the end result is higher prices, also known as inflation.
- When businesses invest more in capital goods, the overall production level in an economy increases over time.
- Your brother is unable to afford both a trip to the movies and eats dinner at a restaurant. Therefore, he needs to decide which of the two he will do.
- Prices of apples are determined by the interaction of supply and demand in the apple market.
- The overall price level is determined by the interaction between aggregate supply and aggregate demand.
- International trade impacts employment totals in all countries that participate in the trade.
- An employer is trying to determine the impact of a new payroll tax on their overall profit level.
Solutions:
- Microeconomics
- Macroeconomics
- Macroeconomics
- Macroeconomics
- Microeconomics
- Microeconomics
- Macroeconomics
- Macroeconomics
- Microeconomics
Table of Contents
- What Are Micro- and Macroeconomics?
- Microeconomics vs. Macroeconomics
- The Relevance of Microeconomics and Macroeconomics
- Microeconomics Examples
- Macroeconomics Examples
- Lesson Summary
Microeconomics and macroeconomics are two branches of economics. Other branches include agricultural economics, international economics, and behavioral economics. Microeconomics looks at minor components of an economy, such as a single family or business. Macroeconomics looks at the big picture - how all the individual units of an economy interact. The study of micro- and macroeconomics centers on how different elements of economics interact with one another on varying scales. The study further details the decisions that economic participants make in a functioning system. Microeconomics can naturally be found within macroeconomics; for instance, a government's monetary policy (e.g. interest rates) pertains to macroeconomics. These interest rates subsequently influence microeconomic factors, such as commercial bank loans. Economists believe that scarcity is an important factor in that it drives the actions of individuals, families, and companies. Scarcity means that there is a finite amount of resources. It's a prime determinant of aggregate demand in an economy. Utility is a complementary factor to scarcity. Utility is the measure of how useful a resource is to a decision-maker.
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Microeconomics is the study of the behavior of individual economic agents and how they make their decisions. An individual economic agent may be a person, family, or organization. Economists refer to these agents as firms. By looking at supply and demand in terms of scarcity, microeconomists examine how goods and services move through the economy. For example, labor economist analyzes the labor market by looking at demand (job openings) and supply (employees looking for work).
Firms make economic decisions based on scarcity and utility. Resources like money and time are scarce, so firms compare the amount of utility each unit offers. Microeconomics includes the break-even point where a firm's production costs equals revenue. Any revenue beyond the break-even point is profit.
Macroeconomics is the study of aggregate variables. That is, it is a study of how all the independent agents in an economy interact. So microeconomists look at how scarcity influences firms, while a macroeconomist looks at scarcity in the context of an entire economy. By considering an economy on a macroeconomic level, important trends can be identified, such as the direction the economy is moving or the cyclical stage it's in (expansion, peak, recession, or depression).
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The relevance of the two economic categories is found in how they makeup the whole of any economy. Microeconomics is useful in making decisions at the individual level. For example, production decisions by a firm and consumption decisions by a consumer. Macroeconomics is relevant in the study of economic decisions regarding the entire economy. The relevance further extends to how influential financial firms and institutes implement micro- and macroeconomic analyses in their investment models and decision-making processes. For example, a hedge fund will track the monetary policy (a macroeconomic factor) of the reserve bank of its country. The bank's policy for the current year includes hiking interest rates in an attempt to curb inflation. This means commercial banks will be less likely to hand out loans to businesses and individuals. In turn, this limits these firms' transaction choices (microeconomic level). Additionally, the reserve bank's policy will ultimately lead to a slowdown in the economy. This potential slowdown so plays a big role in the hedge fund's investment decisions. In light of the analysis, the fund might decide to short the market.
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The division of microeconomics comprises of a great number of factors. Some of the microeconomic examples include individual demand, individual supply, the theory of the firm, opportunity cost, and consumer theory.
- Individual demand - This refers to what the individual needs or desires. It is significantly influenced by the abovementioned concepts of scarcity and utility. If a good or service is scarce, chances are good that it'll most likely attract greater demand. Similar to utility - if a product or service is very useful, more individuals will have a demand for it.
- Individual supply - The supply side of individuals' decisions center on producers. How much are individual producers and manufacturers willing to create with respect to market prices?
- The theory of the firm - The theory of the firm is an economic theory that details the nature of a firm (business or corporation) and how it aims to maximize profits through its aggregate operations
- The concept of opportunity cost - Opportunity cost relates to microeconomics in the sense that it pertains to the decisions made by individuals. It captures how consumers sacrifice one good or service for another.
- Consumer theory - This is the study that aims to analyze and predict the consumption patterns of consumers. These patterns primarily revolve around the principles of demand - if a consumer demand something, they buy it; forming a pattern
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Macroeconomic examples include aggregate demand, aggregate supply, efficiency, investment, unemployment, and inflation:
- Aggregate demand - This details the demand of all the individuals in an economy combined. Aggregate demand is one of the key price determinants in markets as it offers insight into how much the entire market value a good or service.
- Aggregate supply - This defines how much all the producers and manufacturers in an economic system are willing and capable of producing for the market
- Efficiency - The importance of efficiency in macroeconomics is simply found in how it is a prime driver of an economy's welfare.
- Investment - On a macro-level, investment often refers to a government's fiscal policy (where it intends to spend its annual budget). It further refers to influential investments made by large firms.
- Unemployment - Unemployment points to how many citizens of a country are jobless. This is a vital aspect for governments when making policy decisions.
- Inflation - Inflation is the general increase in prices in an economy. High inflation makes an economy inefficient and can potentially destroy it.
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Microeconomics and macroeconomics detail the decisions that are made by varying economic participants. Microeconomics center around individuals and macroeconomics is primarily about the government and the general input of all individuals combined. The relevance of the two economic divisions is found in how they make up an economy as a whole. Microeconomics is relevant to the decisions of individual consumers and companies, whereas macroeconomics point to decisions made by the whole economy. Examples of microeconomics are individual demand, individual supply, the theory of the firm, opportunity cost, and consumer theory. Examples of macroeconomics include aggregate demand, aggregate supply, efficiency, investment, unemployment, and inflation.
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Video Transcript
What Is Economics?
Just like medicine or engineering, economics is an applied science that exists to help humanity tackle a very specific problem. Medicine treats disease, engineering builds better structures, and economics treats the idea of scarcity. Scarcity is a very real problem in our society, and frankly, it's one that we're not likely to ever get rid of. Scarcity states that there are finite supplies of everything. Land? Finite. Air? Finite. Time? Very finite.
Luckily for us, we have economics to help us figure all that out. Needless to say, that's a lot of information to process, since scarcity leaves its mark on everything. As a result, economists have divided the field up into countless specialties, from labor economics to international economics and even religious economics. However, the two largest divisions are by far the most important: microeconomics and macroeconomics.
Microeconomics
At its core, microeconomics is the study of how scarcity causes the actions of individuals, families, and companies. By the way, by companies, I mean any group of people acting in a collective economic sense, whether it's a non-profit organization, a local government, a college club, or even a traditional for-profit business. You'll sometimes see the term 'firm' used instead, but it's the same thing.
Economic thought, at a very base level, goes into almost every decision you make. Do you buy pizza or go for a nice steak dinner? The answer is dependent on the amount of utility you gain, which is literally a measure of how useful something is to you. If it's just you and some friends, you'd probably order the pizza. If it's a cute date, chances are you're going to be eating some sirloin. Just hope that your date isn't a vegetarian.
More than just that, microeconomics helps companies plan their investments. We can find out how many burgers our fast food place would have to sell in order to justify another location. In fact, this is related to a word you'll see a lot in microeconomics. The marginal impact of something is how much it would cost to do just 1 more unit of something.
For breakfast sandwiches in the fast food drive thru, this could be simply a few cents. For a factory running at full capacity, it could mean building an entire new location. We can also determine at what point a burger becomes profitable. If it costs me a dollar to produce a burger, economics tells me I need to sell that burger for more than just a buck.
Macroeconomics
Figuring out how much a burger costs or whether your Friday night dinner companion would prefer steak or pizza is important, but economics is useful on a much larger scale, too. Macroeconomics is the study of how scarcity causes the actions of whole economies, especially on an international level. That steak isn't going to do you a lot of good if you're unemployed, and macroeconomics helps governments prevent unemployment.
At this level, economics is all about efficiency, or using scarce resources effectively, and unemployment is a massive inefficiency. It is the macroeconomic equivalent of leaving 3 dozen burgers out in a hot car to ruin.
However, it's not only unemployment that is the concern of macroeconomists. Efficiency isn't a constant -- it's always changing. One hundred years ago, the most efficient form of transportation across the Atlantic was by steamship. Today, it is by jet. In another 100 years, it could be rockets or transporting by underwater vacuum tubes. Macroeconomics helps governments figure out how much should be devoted to research. It also helps them keep the economy balanced -- something that politicians take almost as seriously as their reelection campaigns.
This is because a balanced economy also helps limit inflation, or when money loses its value. Some inflation is okay, because too little inflation means that people want to hold on to their money instead of investing it, and investment is always a good thing for the economy. However, too much inflation can destroy an economy very quickly.
Lesson Summary
In this lesson, we described the two largest branches of economics, namely microeconomics and macroeconomics. Central to both of these is the idea of scarcity, or that all resources are limited.
We showed how microeconomics is used to help people and companies make the best decisions with the scarce resources available to them. We also discussed the role of utility in decision making, as well as the idea of the marginal cost of something.
With regards to macroeconomics, we showed how people use this field to avoid inefficiencies in an entire country's economy. Among the most hated of these inefficiencies are unemployment, falling behind in innovation, and inflation.
Learning Outcomes
This lesson can provide you with the knowledge necessary to:
- Dissect the branches of microeconomics and macroeconomics
- Compare the relationships between each of these branches and scarcity
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