1.2 Microeconomics & Macroeconomics
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 the 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 labour 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 considerable ground. We can divide that ground into two parts: microeconomics and macroeconomics.
Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. Some examples of microeconomics include: What determines the products, and how many of each, a firm will produce and sell? What determines the 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 it’s business? When will a firm decide to expand, downsize, or even close?
Macroeconomics looks at the economy as a whole. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy. 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?
We can determine an economy’s macroeconomic health by examining a number of goals: growth in the standard of living, low unemployment, and low inflation, to name the most important.
Definitions
Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses.
Macroeconomics looks at the economy as a whole
Organizing Economies
Think about what a complex system a modern economy is. It includes all production of goods and services, all buying and selling, all employment. The economic life of every individual is interrelated, at least to a small extent, with the economic lives of thousands or even millions of other individuals. Who organizes and coordinates this system? Who ensures that the right number of employees work in the electronics industry?
There are at least three ways that societies organize an economy.
| Command economy | The government decides what goods and services will be produced and what prices it will charge for them. The government decides what methods of production to use and sets wages for workers. The government provides many necessities like healthcare and education for free. Currently, Cuba and North Korea have command economies. |
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| Market economy | A market is an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses. The New York Stock Exchange is a prime example of a market that brings buyers and sellers together. In a market economy, decision-making is decentralized. Market economies are based on the private enterprise: the private individuals or groups of private individuals own and operate the means of production (resources and businesses). (In a command economy, by contrast, the government owns resources and businesses). A person’s income is based on his or her ability to convert resources (especially labour) into something that society values. The more society values the person’s output, the higher the income (think Lady Gaga or Justin Bieber). In this scenario, market forces, not governments, determine economic decisions. |
| Mixed economy | Most economies in the real world are mixed. They combine elements of command and market systems. The Canadian economy is positioned toward the market-oriented end of the spectrum. Some countries in Europe (Belarus) and Latin America (Venezuela), while primarily market-oriented, have a greater degree of government involvement in economic decisions than the Canadian economy. China and Russia, while over the past several decades have moved more in the direction of having a market-oriented system, remain closer to the command economy end of the spectrum. |
Attribution
“1.2 Microeconomics and Macroeconomics” in Principles of Economics 2e by OpenStax is licensed under Creative Commons Attribution 4.0 International License.
“2.3 Applications of the Production Possibilities Model” in Principles of Macroeconomics by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
“Introduction to Economic Systems” in Macroeconomics by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.
