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By the end of this section, you will be able to:

  • 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.


What determines how households and individuals spend their budgets? What combination of goods and services will best fit their needs and wants, given the budget they have to spend? How do people decide whether to work, and if so, whether to work full time or part time? How do people decide how much to save for the future, or whether they should borrow to spend beyond their current means?

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.


What determines the level of economic activity in a society? In other words, what determines how many goods and services a nation actually produces? What determines how many jobs are available in an economy? What determines a nation’s standard of living? What causes the economy to speed up or slow down? What causes firms to hire more workers or to lay workers off? Finally, what causes the economy to grow over the long term?

An economy's macroeconomic health can be defined by a number of goals: growth in the standard of living, low unemployment, and low inflation, to name the most important. How can macroeconomic policy be used to pursue these goals? Monetary policy , which involves policies that affect bank lending, interest rates, and financial capital markets, is conducted by a nation’s central bank. For the United States, this is the Federal Reserve. Fiscal policy , which involves government spending and taxes, is determined by a nation’s legislative body. For the United States, this is the Congress and the executive branch, which originates the federal budget. These are the main tools the government has to work with. Americans tend to expect that government can fix whatever economic problems we encounter, but to what extent is that expectation realistic? These are just some of the issues that will be explored in the macroeconomic chapters of this book.

Key concepts and summary

Microeconomics and macroeconomics are two different perspectives on the economy. The microeconomic perspective focuses on parts of the economy: individuals, firms, and industries. The macroeconomic perspective looks at the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation. Macroeconomics has two types of policies for pursuing these goals: monetary policy and fiscal policy.

Questions & Answers

production possibility curve
Mama Reply
graphs about production possibility curve?
what are the concept of economic
dauda Reply
demand suply and population
graphs on about ppc
with the aid of diagrams illustrate movement along and shifts in demand curve
Mercy Reply
what is scarcity
ISAH Reply
limited in supply relative to demand
scarcity means resources available to provide our daily needs are limited
shortage of resources that we need for our demand. basically price go up due to this problem.
scarcity means our resources r not enough for us or our resources r limited
discuss the effects of price controls int the economy
• It stimulates excess demand, which cannot be statified ie shortage in the market. • It encourages hoarding of commodities by wholesales and retailers. • It leads to the creation of " black market" or undercounter sales and its attendant high prices. • It encourage conditional sales of products.
on how scarcity,choice and opportunity cost work together
means less than requirement
What are the reasons for the existence of monopoly?
Gerry Reply
Because such barriers occur in different forms, there are therefore varying reasons for the existence of monopolies. Ownership of a Key Resource: When one company exerts sole control over a resource that is necessary for the production of a specific product, the market may become a monopoly.
Thanks Kenneth
what is international trade
Syed Reply
what is imperfect compition
what is crowding out effect
what is federal finance?
what is populic
what is imperfect compition
Explain five importance of the study of economic
Francis Reply
study of economics help a person to make rational choice in multiple wants. help individual to be a well all-round thinker.
the five important of the study of economics are as follows (1)time (2)management of resources (3)choice making (4)business(5)scarcity
an increase in demand (while supply remains constant) what will happen to deh graph?
Thabiso Reply
what is going to happen to the graph if there is an increase in demand, While supply remains constant .
What will happen to the graph if there is an increase in demand While supply remains constant?
price will increase high than automatically demand will decrease
equilibrium ?
is when the supply and demand are balanced
what is demand
Sarkwah Reply
demand is the willingness to buy a commodity backed by the ability to pay.
demand is mere desire on commodity with ability to back up with purchasing power
demand is the want of commodity back by the ability to pay for that commodity
demand is the willingness to buy any type of commodity for the exchange of something that is valuable to the seller.
demand is any valuable commodity that people are willing to buy at prices.
Equilibrium is when there's an equality between quantity demanded and quantity supplied
Victory Reply
Again the consumer will be in equilibrium if the price of the commodity is equal to Marginal utility of that product
wat is the law of supply
Agnes Reply
It's what* -The law of supply states that price and supply is relative. As all factors are equal, if price increases then quantity of supply there for increases.
the law of suppy state that when prise is high, more commodity with be supply and when p is low less of the same commodity will be supply.
It states that, "other things being equal, move supplied at a higher price than at a lower price ".
it's state that the increased in prices will lead to decreased in supply
what is the theory of supply and the determinants of demand
And please what is change in quantity supplied?
guys why are you so quiet
A woman has a television set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her television set for $450. What is the opportunity Cost of keeping the old TV?
Murewah Reply
Maybe the opportunity cost of the TV is 800
principle of effective demand?
Abubakar Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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