Economics: Micro vs. Macro

• Economics is a social science that studies how societies allocate scarce resources to satisfy unlimited wants and needs.
• It examines production, distribution, and consumption of goods and services.
• Economics analyzes decisions made by individuals, businesses, and governments.
• The fundamental problem in economics is scarcity, where limited resources cannot fulfill unlimited desires.

Microeconomics

• Microeconomics focuses on individual agents, such as households, firms, and markets.
• It examines supply and demand, price determination, market structures, and consumer behavior.
• Key topics include elasticity, market equilibrium, and the effects of government policies on individual markets.
• Microeconomics aims to understand how resources are allocated at the individual level.

Macroeconomics

• Macroeconomics studies the economy as a whole, including aggregate variables like GDP, inflation, and unemployment.
• It investigates economic growth, business cycles, monetary and fiscal policies, and international trade.
• Macroeconomics examines how governments can stabilize the economy and promote long-term growth.
• Important concepts include aggregate demand, aggregate supply, and the multiplier effect.

Key Economic Concepts

• Opportunity cost is the value of the next best alternative foregone when making a decision.
• Incentives are factors that motivate individuals and firms to act in a certain way.
• Efficiency refers to the optimal allocation of resources to maximize societal well-being.
• Equity concerns the fair distribution of resources and economic outcomes among individuals.

Economic Systems

• A market economy allocates resources through decentralized decisions of firms and households.
• Prices act as signals to guide production and consumption.
• A command economy relies on centralized planning by the government to allocate resources.
• A mixed economy combines elements of both market and command systems.

Supply and Demand

• Demand represents the quantity of a good or service that consumers are willing and able to purchase at various prices.
• The law of demand states that as price increases, quantity demanded decreases, all else equal.
• Supply represents the quantity of a good or service that producers are willing and able to offer at various prices.
• The law of supply states that as price increases, quantity supplied increases, all else equal.
• Market equilibrium occurs where quantity demanded equals quantity supplied, determining the market price and quantity.
• Shifts in demand or supply curves cause changes in equilibrium price and quantity.

Elasticity

• Elasticity measures the responsiveness of quantity demanded or supplied to a change in price or other factors.
• Price elasticity of demand measures how much quantity demanded changes in response to a change in price.
• Elastic demand means quantity demanded is highly responsive to price changes.
• Inelastic demand means quantity demanded is not very responsive to price changes.
• Income elasticity of demand measures how much quantity demanded changes in response to a change in consumer income.
• Cross-price elasticity of demand measures how much quantity demanded of one good changes in response to a change in the price of another good.

Market Structures

• Perfect competition features many small firms, homogeneous products, and free entry and exit.
• Monopolistic competition involves many firms, differentiated products, and relatively easy entry and exit.
• Oligopoly consists of a few large firms that dominate the market.
• Monopoly is characterized by a single firm that controls the entire market.

GDP

• Gross Domestic Product (GDP) is the total value of all final goods and services produced within a country's borders in a specific time period.
• GDP is a measure of a country's economic output and overall economic health.
• Nominal GDP is measured in current prices, while real GDP is adjusted for inflation.
• GDP can be calculated using the expenditure approach, the income approach, or the production approach.

Inflation

• Inflation is a sustained increase in the general price level of goods and services in an economy.
• It reduces the purchasing power of money.
• The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
• Causes of inflation include demand-pull inflation and cost-push inflation.
• Central banks use monetary policy to control inflation.

Unemployment

• Unemployment refers to the situation where individuals are actively seeking employment but are unable to find a job.
• The unemployment rate is the percentage of the labor force that is unemployed.
• Types of unemployment include frictional, structural, cyclical, and seasonal unemployment.
• Full employment refers to a situation where the unemployment rate is at its natural rate.

Monetary Policy

• Monetary policy involves actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Tools of monetary policy include open market operations, the reserve requirement, and the discount rate.
• Expansionary monetary policy aims to increase the money supply and lower interest rates to boost economic growth.
• Contractionary monetary policy aims to decrease the money supply and raise interest rates to curb inflation.

Fiscal Policy

• Fiscal policy involves the use of government spending and taxation to influence the economy.
• Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic growth.
• Contractionary fiscal policy involves decreasing government spending or increasing taxes to curb inflation.
• Fiscal policy can be used to stabilize the economy during recessions or periods of high inflation.
• Government debt is the accumulation of past budget deficits.

International Trade

• International trade involves the exchange of goods and services between countries.
• Comparative advantage is the ability of a country to produce a good or service at a lower opportunity cost than another country.
• Specialization and trade allow countries to consume beyond their production possibilities.
• Trade barriers, such as tariffs and quotas, can restrict international trade.
• Exchange rates determine the value of one currency in terms of another.

Overview of economics, focusing on the distinction between microeconomics and macroeconomics. Microeconomics studies individual agents, markets, and consumer behavior. Macroeconomics examines the economy as a whole, including GDP, inflation, and unemployment.