Micro and Macro Economics

Microeconomics vs. Macroeconomics

• Microeconomics studies individual economic units, like households and firms, examining their resource allocation decisions
• Key microeconomic concepts: supply and demand, consumer behavior, production costs, and market structures
• Macroeconomics studies the economy as a whole, focusing on aggregate measures such as GDP, inflation, and unemployment
• Key macroeconomic concepts: economic growth, fiscal policy, monetary policy, and international trade

Microeconomics Focus

• Focuses on actions of individual consumers, producers and firms
• Examines how entities decide how to allocate limited resources

Supply and Demand

• Analyzes the interaction between supply (producers) and demand (consumers) to determine prices and quantities
• Explains market equilibrium, shortages, and surpluses

Economic Theory Foundations

• Economic theory provides a framework to both understand and predict economic phenomena
• Simplifies realities to analyze cause-and-effect relationships
• Helps economists, policymakers, and educators

Construction of Economic Theory: Observation & Data

• Economic theory construction starts by identifying a real-world economic problem
• Relevant data is gathered through surveys, statistics, and historical records
• Patterns and regularities are then identified in the data

Construction of Economic Theory: Hypotheses

• Tentative explanations or hypotheses are developed based on patterns observed
• Hypotheses should feature testable statements about relationships between variables
• Example: Increased interest rates lead to decreased investment

Construction of Economic Theory: Testing

• Statistical methods and empirical evidence are used to test hypotheses validity
• Hypotheses are refined or revised based on test results
• A model is developed to represent relationships

Construction of Economic Theory: Generalization

• Consistently supported hypotheses can be generalized into a theory
• Theories explain economic phenomena more broadly
• Example: Supply and Demand theory

Economic Theory Functions

• Economic theory explains why economic events happen
• Provides insight into cause-and-effect relationships
• Example: Explains the reason for price fluctuations in a market

Economic Theory Examples

• Examples include comparative advantage theory, Keynesian theory of aggregate demand, neoclassical theory of consumer behavior

Economic Theory Conclusions

• It is essential to understand and analyze economics
• Provides a framework towards explanation, prediction, and policy formulation.

Economic Theory for Teachers

• Understanding Economic Theory is vital for educators

Fundamental Economic Problems

• The basic economic problem is scarcity, where limited resources must meet unlimited wants and needs

Scarce Resources

• Resources like money, time, land and raw materials are finite
• People have endless desires for goods and services
• This contrast creates a gap between people's wants and availabilty

Considerations for Production

• Consumer demand: What do people want and need
• Resource availability: What resources are available to produce goods and services
• Opportunity cost: Weighing the act of producing one good or service over another

Approaches to Production

• Production technology: What production methods are available
• Cost of production: How can goods and services be produced at the lowest possible cost
• Labor skills: What skills and expertise are needed for different production methods

Production Methods

• Labor Intensive Technology uses more labor and less capital, providing more employment
• Capital Intensive Technology uses more capital and less labor
• Capital intensive technology lowers cost and increases the speed of production

Considerations for Distribution

• Income distribution: How is income distributed among individuals and households
• Social welfare: How can goods and services be distributed to ensure basic needs are met
• Equity and fairness: How can a society ensure a fair distribution of resources and opportunities

Distribution Choices

• Goods/services can be produced for the richer or poorer sections of society

Production for the Poor

• Production of goods and services for the poor leads to maximum social welfare
• Production of goods and services for the rich leads to more profit

Fundamental Problems

• Scarcity: Limited resources & unlimited wants/needs force choices and trade-offs
• Interdependence: Production questions are interconnected, choices affecting each other
• Universality: Issues exist across all societies regardless of economic system

Circular Flow Model

• Simplifies interactions and flows within an economy
• Goods & Services: Firms produce/sell to households
• Money: Households purchase goods/services, firms pay for resources

Key Circular Flow Elements

• Households: Provide resources, purchase goods/services
• Firms: Produce goods/services, pay for resources

Circular Flow Interdependence

• Emphasizes interdependence of households and firms

Circular Flow Process

• Money flows from households to firms and back, continuously

Supply and Demand Introduction

• Demand: Quantity of a commodity a person is ready to buy at different prices over time

Factors Constituting Demand

• Desire, means to buy, willingness to use means

Demand Determinants

• Price of product, prices of related goods, consumer income, consumer tastes/preferences, expectations

Demand Curve Overview

• Movement in the demand curve occurs when the quantity demanded of a commodity changes due to price changes
• A shift in the demand curve occurs when non-price determinants change

Comparing Demand Movement with Demand Shift

• Change in quantity demanded of commodity resulting from change in price is demand movement
• Changes in the demand for the commodity resulting from factors other than price are demand shifts

Supply Basics

• Supply refers to the schedule of quantities a seller offers at various prices
• It is a combination of the producer's willingness and ability to supply

Ways Suppliers Express Supply

• Supply function: Algebraic expression stating a supplier's behavior, what the firm offers at a given price