 |
Microeconomics and macroeconomics compared
|
|
|
|
The discipline of economics is divided into two major subjects called microeconomics and macroeconomics, which economists often call simply “micro” and “macro”. Microeconomics is the study of individual households, firms and markets. Macroeconomics is the study of the economy as a whole.
Microeconomics and macroeconomics differ in the questions each asks and in the level of aggregation each uses. Microeconomics deals with the determination of prices and quantities in individual markets and with the relations among these markets. Thus it looks at the details of the market economy. Microeconomists analyze market structure: why some markets are highly competitive, with hundreds or even thousands of firms producing a product, whereas other markets are very concentrated with only one or a very few firms producing a given product. Microeconomists analyze the causes and effects of these different market structures. Microeconomic analysis also examines the market for inputs to the production process. These inputs include capital such as machinery and, very importantly labour. The study of labour markets covers issues of wages, hours of work, and working conditions and extends to such related issues, as discrimination in the labour markets and the role of labour unions. Microeconomics also studies the principles of markets failure and the ways the government can deal with such failures. Finally, microeconomists do positive economic analysis of governments – how and why governments behave as they do.
In contrast, macroeconomics focuses on much broader aggregates. It looks at such thing as the total number of people employed and unemployed, the average level of prices and how it changes over time, national output, and average level of prices and how it changes over time, national output, and aggregate consumption. Macroeconomics asks what determines these aggregates and how they respond to changing conditions. Whereas microeconomics looks at demand and supply with regard to particular commodities, macroeconomics looks at aggregate demand and aggregate supply.
MICROECONOMICS
Microeconomics studies the economic decision making of firms and individuals in a market setting: it is the study of the economy in the small. Microeconomics focuses on the individual participants in the economy: the producers, workers, employers and consumers. In everyday economic life, thing are bought and sold, people decide where and how many hours to work. Business managers decide what to produce and how this production is to be organized. These activities result in transactions (business deals) that take place in markets where buyers and sellers come together. People involved in microeconomic transactions are motivated to do the best they can for themselves with the limited resources at their disposal. They use marginal analysis to determine their best course of action.
Microeconomics deals with the determination of prices and quantities in individual markets and with the relations among these markets. Microeconomists analyze market structure: why some markets are highly competitive, whereas other markets are very concentrated with only one or a very few firms producing a given product. Microeconomics also studies the principles of markets failure and the ways the government can deal with such failures. Finally, microeconomists do positive economic analysis of governments – how and why governments behave as they do.
|
|
|
THE ROLE OF GOVERNMENT
Government plays a large role in all modern economies. The government sector, which includes federal, state, and local governments, relates to households and firms. The government pays its employees, including elected officials from the president on down, wages and salaries. These wages and salaries join the flow of payments from firms for productive services, and these flows taken together make up total household income. Governments also make transfer payments to individuals without requiring the provision of any service in return. Social security, welfare benefits, and grants to college students are examples of transfer payments. Transfers are not payments for services, as with wages, but are more in the nature of gifts or grants paid to individuals who meet certain qualifications. The work transfer is very descriptive, because these payments transfer money from some households, as taxpayers to other households, who qualify as recipients of the benefits.
The government also affects how goods are produced, for example through the regulations it imposes. Managers of factories and mines must obey safety requirements even where these are costly to implement, firms are prevented from freely polluting the atmosphere and rivers, offices and factories are banned in attractive residential parts of the city.
THE ROLE OF GOVERNMENT (to be continued)
In everyday society governments provide such services as national defense, police, public education, firefighting services and administration of justice. So governments spend part of their revenue on these particular goods and services.
Governments finance their expenditure primarily through taxes collected from households and firms. In the UK the government takes nearly 40 per cent of national income in taxes. By taxing the rich and making transfers to the poor, the government ensures that the poor are allocated more of what is produced and the rich get correspondingly less.
We focus on government for a number of reasons. One is that taxes, government expenditures on goods and on transfers, and government regulations all affect the way private markets work. Markets free of government intervention function well in some respects and function poorly in others.
What ought to be the role of government in the economy? The following economic responsibilities are best fulfilled by government:
- Safeguarding the market system;
- Providing public goods and services;
- Dealing with externalities;
- Assisting those in need;
- Helping specific groups;
- Stabilizing the economy.
THE MIXED ECONOMY
In a mixed economy the government and private sector interact in solving economic problems. The government controls a significant share of output through taxation, transfer payments, and the provision of goods and services such as defense and the police force. It also regulates the extent to which individuals may pursue their own self-interest.
In a mixed economy the government may also be a producer of private goods such as steel or motor cars. Examples of this in the UK include nationalized industries such as steel and coal.
|
|
|
