Explained: Fundamentals of microeconomics and macroeconomics

Economists may define the subject of economics in several ways considering different aspects of the economy. In simple words, economics is fundamentally about managing scarce resources in the most satisfactory manner possible. It includes studying how societies use limited resources to satisfy unlimited wants and needs.

Economics is classified into two significant parts: (i) Microeconomics and (ii) Macroeconomics.

Micro and macro are the Greek words, respectively, for “small” and “big”. Microeconomics is the branch of economics that considers the behaviours of decision-makers within the economy, such as individuals, households, and firms (businesses). On the other hand, macroeconomics considers the economy as a whole. Let us study them here in detail.

Economy:

Economy refers to a system that decides how scarce resources like people, land, and raw materials are used so that goods and services can be produced and consumed. An economy might be designed to make the three fundamental decisions of what, how, and for Money. Similar to individuals and households making opportunity cost decisions about what they consume; Business firms make decisions about what to produce and how much to produce based on the demand for goods and services in the market. Thus, what’s happening in the economy can affect our decisions. Our decisions can also influence how the economy is performing. Every time we choose to buy something (or not to), affects the economy.

Principles of economics:

Important basic economic principles include scarcity, supply and demand, costs and benefits, and incentives that help making economic decisions. These principles were not created by economists. They are basic principles of human behavior. These principles exist regardless of whether individuals live in market economies or planned economies.

Microeconomics:

The following components compose Microeconomics:

Consumer behaviour: A consumer is a person, company, or other organization that purchases goods and services from the marketplace through market transactions. Consumer behaviour is the study of how people, groups or organisations make decisions about what they buy, want, need, or act in regards to a product, service, or company. The three factors that affect consumer behaviour are psychological, personal, and social.  Consumer behaviour plays an important role of how the consumer’s emotions, attitudes, and preferences affect buying behaviour.

Market demand and supply: Supply refers to the amount of goods that are available. Demand refers to how many people want those goods. When supply of a product goes up, the price of a product goes down and demand for the product can rise because it costs loss. Supply is generally considered to slope upward: as the price rises, suppliers are willing to produce more. Demand is generally considered to slope downward: at higher prices, consumers buy less.

Individual preference: An individual’s preferences, is a way for what a person wants to do, stem from their own values or cultural norms, knowledge and available information, religious or cultural beliefs as well as personal tastes. Preferences are also influenced by past experiences and the consequences of previous decisions.

Market-specific labour markets: The labour market refers to the supply and demands for labours, for which employees provide the supply for the wages and employers provide the demand by willing to employ at a given point in time. It depends upon the output of a company. If the production output of the company increases the demand for labourers to the company increases. Similarly, when the supply of jobs goes up the demand goes down and vice versa. This demand and supply may not necessarily be in long-run equilibrium. It is determined by the real wage firms are willing to pay for this labour and the number of workers willing to supply labour at that wage. The four types of labours in the market are skilled, unskilled, semi-skilled, and professional. Together, these four types of labour make up the active labour force. The labour market should be viewed at macroeconomic and microeconomic levels because each offers valuable insight into employment and the economy as a whole. Microeconomic theory analyses the supply of labour and demand at the individual firm and worker level, whereas macroeconomic theory analyses at the global level.

The price mechanism:

Much of the study of microeconomics is devoted to the investigation of how prices are determined in the marketplace. Producers and customers initiate forces that we term supply and demand accordingly, and it is their dealings within the marketplace that create the price mechanism. This mechanism was once famously described as the ‘invisible hand’ that guides the actions of producers and consumers.

Elasticity: The concept of elasticity deals with the receptivity of quantity demanded or quantity supplied to a variation in price. If the smallest variation in price brings about an enormous change in the quantity demanded, then the price elasticity of demand is said to be highly elastic. On the contrary, if a price variation has the smallest or no effect on the quantity demanded, then the demand is said to be highly inelastic.

Macroeconomics;

Macroeconomics is the study of the decisions of countries and governments considering the economy as a whole rather than individuals or specific companies. Governments and corporations use macroeconomic models to help in formulating economic policies and strategies. The two main areas of macroeconomic research are long-term economic growth and shorter-term business cycles. The macroeconomic study deals with why the business cycle fluctuates, the role of inflation, the reasons for ups and downs in economic growth, the role of government in determining the pace of growth, the long-run rate of potential output in an economy, and the inflation rate. Macroeconomics analyzes all aggregate indicators and the microeconomic factors that influence the economy.

Macroeconomics is concerned with how the overall economy works. Underlining the entire economy, macroeconomics probes into broad trends rather than focusing on individual markets. Macroeconomics often extends to the international sphere because domestic markets are linked to foreign markets through trade, investment, and capital flows. This practice is crucial for government entities, as it reveals how major decisions could play out not only in the immediate future but also on a long-term basis. Macroeconomics focuses on the performance of economies – changes in economic output, inflation, interest and foreign exchange rates, and the balance of payments. It also focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product, and inflation. Macroeconomics also tries to determine the optimal rate of inflation and factors that may stimulate economic growth. For instance, macroeconomics may analyze how the unemployment rate affects the gross domestic product.

Three types of macroeconomic policies of the governments:

Poverty reduction, social equity, and sustainable growth of a country are only possible with sound monetary, fiscal, and Supply-side policies.

Fiscal policy: Fiscal policy is the use of government revenue collection and expenditure to influence a country’s economy. The primary objective of the fiscal policy is to regulate the case of economic stability, and full employment and stabilize the growth rate.

Monetary Policy: Monetary policy, deals with the supply of money in the economy and the rate of interest. These are the main policy approaches used by economic managers to steer the broad aspects of the economy. The Reserve Bank of India on behalf of the Government of India is setting monetary policy. RBI controls the three tools of monetary policy–open market operations, the discount rate, and reserve requirements.

Supply-side policies: Supply-side policies are government policies that seek to increase the productivity and efficiency of the economy. Supply-side policies aim to increase long-term competitiveness and productivity, and in the long run, supply-side policies can help increase the level of employment in an economy as firms expand and grow.

Conclusion:

Microeconomics is the study of economics at an individual, group, or company level. Macroeconomics takes a wider view and looks at the economies on a much larger scale—regional, national, continental, or even global.