Text 13 Macro- and Micro- Economics

Economics studies the way people deal with a fact of life: resources are limited, but our demand for them is certainly not. Resources may be material things such as food, housing and heating. However there are such resources we cannot touch, such as time and space. Thus if a person spends more time working, he/she makes more money, but will have less time to relax. Every decision people make is a trade-off and economists the reasons for the trade-offs and the effects the decisions have on people`s lives and society.

The two most general fields in economics are microeconomics and macroeconomics.

Microeconomics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics deals with people and private businesses and how their behavior determines prices and quantities in specific markets. Microeconomics focuses on supply and demand and other forces that determine price levels for specific companies in specific industry sectors. For example, microeconomics would look at how a specific company could maximize its production and capacity so it could lower prices and, better compete in its industry.

Macroeconomics is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. Gross National Product (GDP) refers to the market value of all final goods and services produced within a country in a given period. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.

Microeconomics and macroeconomics are closely related. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public (micro effect). Both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained

Questions:

1. What does economics study?

2. How can you explain the phrase “Every decision people make is a trade-off”?

3. What are the two most general fields in economics?

4. What does microeconomics deal with?

5. What is microeconomics primarily focused on?

6. What are the subjects of macroeconomics study?

7. What does the term GDP mean?

8. Why are macroeconomic models and forecasts used by governments and large corporations?

9. Why are microeconomics and macroeconomics actually interdependent and why do they complement one another?

10. Why should microeconomics and macroeconomics be studied together?