Economics (0455) | Microeconomics and macroeconomics

Welcome to Microeconomics and Macroeconomics!

Hello future Economists! Before we dive into how resources are allocated (which is Section 2), we need to understand the two main viewpoints we use when studying the economy: the small view and the big view.

Don't worry if these long words look confusing—they are actually just two sides of the same coin! This chapter teaches you how to tell them apart, which is essential for understanding all the topics that follow.

2.1 Microeconomics and Macroeconomics: The Difference

The Big Question: Why study both?

Imagine the economy is a giant jigsaw puzzle.

• Microeconomics looks at the individual pieces and how they fit together.
• Macroeconomics looks at the completed picture on the box cover—the overall economy.

2.1.1 Microeconomics: The Individual Focus

The prefix "Micro" means small. Microeconomics focuses on the behaviour of individual economic units.

Definition:

Microeconomics is the study of how individual households, firms, and industries make decisions and how they interact in specific markets.

Key Focus Areas (What Microeconomics Asks):

• Price: Why did the price of coffee increase today? (A single market)

• Wages: Should a particular firm hire more workers? (A single firm's decision)

• Demand: How does a consumer decide what goods to buy? (Individual choices)

The Decision Makers in Microeconomics (The "Micro" Players)

These are the groups making choices on a small scale:

1. Consumers (Households): Decide what to buy, how much to save, and where to work. (Example: Deciding whether to buy a new smartphone or save the money.)

2. Workers: Decide which jobs to take and how many hours to work. (Example: A skilled worker choosing between two different company salaries.)

3. Producers (Firms): Decide what to produce, how to produce it, and how many people to hire. (Example: A local bakery deciding whether to increase the price of bread.)

2.1.2 Macroeconomics: The Aggregate Focus

The prefix "Macro" means large. Macroeconomics looks at the overall performance and behaviour of the entire economy.

Definition:

Macroeconomics is the study of aggregates (totals) and the economy as a whole, focusing on issues such as unemployment, inflation, and economic growth.

Key Focus Areas (What Macroeconomics Asks):

• Unemployment: What is the total percentage of people in the country who cannot find a job?

• Inflation: Is the general level of prices in the entire country rising?

• Growth: Is the total output (GDP) of the nation increasing?

The Decision Makers in Macroeconomics (The "Macro" Players)

While individuals and firms are part of the macroeconomy, the key decision-makers who influence the *totals* are usually large policy-setting bodies:

1. Government: Decides on spending (e.g., building roads) and taxation (Fiscal Policy). (Example: The national government lowering taxes to boost overall consumer spending.)

2. Central Bank: Controls interest rates and the money supply (Monetary Policy). (Example: Raising the national interest rate to control high inflation across the country.)

3. The entire external sector (International Trade): The total flow of exports and imports.

Micro vs. Macro: A Quick Comparison Table

This table helps you clearly see the contrast between the two fields:

Feature	Microeconomics	Macroeconomics
Mnemonic	MICRO (Individual)	MACRO (Aggregate/All)
Focus Level	Individual units, specific markets	The whole economy
Key Variables	Price of a single product, specific demand/supply, wages in one industry.	National output (GDP), inflation, unemployment, trade balances.
Main Goal	How to achieve efficiency and allocate resources optimally in specific markets.	Achieving national goals like economic growth and full employment.
Key Players	Consumers, Workers, Firms	Government, Central Bank, International Trading Partners

Did you know? (A Helpful Analogy)

Think about medical care:

• If you go to a local doctor because you have a headache, that's Microeconomics (treating an individual problem).

• If the government tries to stop a nationwide flu epidemic, that's Macroeconomics (treating the health of the entire population).

Common Mistake to Avoid

Students sometimes mix up *big* companies with *Macroeconomics*. Remember:

A decision made by a massive multinational company (like Apple deciding the price of the new iPhone) is still part of Microeconomics because it relates to a specific firm and a specific market.

Only when we discuss the overall impact of all firms, or national issues like unemployment or inflation, does it become Macroeconomics.

Key Takeaway from This Chapter

Understanding the difference between micro and macro is your foundation. The rest of Section 2 ("The Allocation of Resources") focuses almost entirely on Microeconomics, specifically how demand, supply, and price determine resource allocation in individual markets.

We will return to Macroeconomics later when we study the role of the government and the main aims of the whole economy (Section 4).