By the end of this chapter, you will be able to able to:
> distinguish between microeconomics and macroeconomics
> explain the decision makers involved in microeconomics and macroeconomics.
Microeconomics is the study of particular markets and sections of the economy (rather than the economy as a whole). It is concerned with the economic factors that affect choices and the effects of changes in these factors on decision makers. Microeconomics studies the economic behaviour of individuals, households and firms in relation to these factors.
Microeconomics attempts to explain what is likely to happen if to the economy as a whole due to changes in certain economic factors. For example, if the demand for a fashionable product increases, this will tend to raise its prices. If there is a major discovery of gold, its price will tend to fall because gold supply is increased. Microeconomics tends to use theory, rather than empirical evidence, to explain changes in individual markets and industries.
Decision makers in microeconomics
Microeconomics is concerned with decision making by individuals, households and firms.
Examples include:
Individuals
» an entrepreneur considering which type of business to start
» a farmer deciding how best to allocate farmland to different crops or the rearing of farm animals
Households
» a household considering the economic costs of raising a child
Workers
» workers deciding how to allocate their time and energy based on consideration of opportunity costs
» the influence of wage differentials on labour markets (see Chapter 18)
Firms
» firms investigating the prices being charged by their rivals in order to set their own prices
» firms considering the economic profits of difference choices before making a decision
» firms deciding on the best combination of factors of production to use in the production process
» how internal and external economies of scale can affect a firm’s scale of operations
» consideration of the different reasons for firms to adopt labour-intensive or capital-intensive production methods (see Chapter 21)
» the advantages and disadvantages of small firms (see Chapter 20) versus the advantages and disadvantages of different types of merger (horizontal, vertical and conglomerate)
Others
» third parties losing out from the misallocation of resources through the overconsumption of demerit goods (see Chapter 14) and the under-consumption of merit goods
» consideration of the advantages and disadvantages of trade unions from the viewpoint of workers, firms and the government (see Chapter 19).
Decision makers in macroeconomics
Macroeconomics is concerned with decision making for the economy as a whole.
Examples include:
Government
Policies
» government policies to achieve economic growth, stable inflation, employment, balance of payments stability and redistribution of income (see Chapter 25)
Population
» government decisions about immigration and emigration (see Chapter 34)
Social Wellbeing
» government decisions and policies regarding the eradication of poverty (see Chapter 33)
» government decisions to improve market efficiencies and the productive capacity of the economy, such as through education and training, labour market reforms, deregulation, improving incentives to work and invest, and privatisation (see Chapter 28)
» the decision of the population in how they allocate their income between savings and expenditure (household consumption)
Business Environment
» the government setting different rates of progressive taxation (see Chapter 26) to ensure those who earn more pay a greater proportion of income tax, without creating disincentives to work
» decision making of consumers, workers, savers, lenders and firms due to the consequences of inflation (see Chapter 31)
» the economy’s decision about the degree of international specialisation (see Chapter 36)
International Trade
» government decisions about protectionism, such as the use of tariffs and import quotas to limit competition from international rivals (see Chapter 37)
» the role of speculators and multinational companies in the determination of exchange rates (see Chapter 38).