Handout - 3
Handout - 3
Handout - 3
Learning Objectives
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 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
1.A balanced federal budget and a balance of trade are considered secondary goals of
macroeconomics, while growth in the standard of living (for example) is considered a primary
goal. Why do you think that is so?
2.Macroeconomics is an aggregate of what happens at the microeconomic level. Would it be
possible for what happens at the macro level to differ from how economic agents would react to
some stimulus at the micro level? Hint: Think about the behavior of crowds.
Keywords
fiscal policy
economic policies that involve government spending and taxes
macroeconomics
the branch of economics that focuses on broad issues such as growth, unemployment,
inflation, and trade balance.
microeconomics
the branch of economics that focuses on actions of particular agents within the
economy, like households, workers, and business firms
monetary policy
policy that involves altering the level of interest rates, the availability of credit in the
economy, and the extent of borrowing
1.3 Governments’ macroeconomic aims
The main government aims for the economy are economic growth, low unemployment, price stability,
balance of payments stability, and redistribution of income. A government can operate a range of policy
measures to achieve these aims and it is judged on their success or otherwise. Performance of the
economy, however, is influenced not just by government policies. In a market that is becoming
increasingly global, one economy’s macroeconomic performance is being affected more and more by
the dynamics of other economies.
C. Price stability: Price stability means that the price level in the economy is
not changing significantly over time. The price of some products may be falling while the
price of others may be rising, but generally the amount households are paying for the
products they are buying is relatively stable.
Keywords
1. Economic growth: an increase in the output of an economy and in the long run, an increase in
the economy’s productive potential.
2. Full employment: the lowest level of unemployment possible.
3. Price stability: the price level in the economy not changing significantly over time