Monday, February 11, 2008

Macro versus Micro

The study of economics is traditionally divided into two fields: macroeconomics and microeconomics.

Macroeconomics is the field of economics that deals with issues that affect an entire economy, such as economic growth, unemployment, inflation, and monetary and fiscal policies. Examples of macroeconomic questions are: How can a society achieve a higher standard of living? What can the government do to reduce unemployment? Why should society care about inflation? How much influence does the government have on the economy? Are tax cuts always beneficial? Should society care about the public debt? Will entitlement social programs, such as Social Security, Medicare, and Medicaid, continue to provide the same level of benefits in the foreseeable future?

Microeconomics is the field of economics that deals with issues that affect individual markets, business firms, and households, such as market structure, profit maximization, and consumer theory. Market structure refers to the composition of a particular market. For example, it is usually beneficial to consumers if there are many producers of a product instead of a monopoly, in which there is only one seller. Profit maximization examines how a company can maximize its profits by altering its prices, output, method of production, or inputs, such as the quantity of labor employed. Consumer theory attempts to explain consumer behavior, such as how people alter their purchasing patterns when there are changes in the prices or quality of products.

Examples of microeconomic issues and questions are: Why do stores in small towns tend to charge higher prices than similar stores in places with many competitors? How many workers should a business firm hire? How much output should it make? How does the number of competing business firms affect the behavior of a company? Why does the same brand of gasoline cost different prices in various places?

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