Microeconomics vs. Macroeconomics

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  • 0:01 What Is Economics?
  • 1:04 Microeconomics
  • 3:27 Macroeconomics
  • 5:13 Lesson Summary
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Lesson Transcript
Instructor
Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

In this lesson, we learn how economics touches every aspect of human life. Focusing on the central ideas of scarcity and utility, we see how economics plays out in its two largest fields, microeconomics and macroeconomics.

What Is Economics?

Just like medicine or engineering, economics is an applied science that exists to help humanity tackle a very specific problem. Medicine treats disease, engineering builds better structures, and economics treats the idea of scarcity. Scarcity is a very real problem in our society, and frankly, it's one that we're not likely to ever get rid of. Scarcity states that there are finite supplies of everything. Land? Finite. Air? Finite. Time? Very finite.

Luckily for us, we have economics to help us figure all that out. Needless to say, that's a lot of information to process, since scarcity leaves its mark on everything. As a result, economists have divided the field up into countless specialties, from labor economics to international economics and even religious economics. However, the two largest divisions are by far the most important: microeconomics and macroeconomics.

Microeconomics

At its core, microeconomics is the study of how scarcity causes the actions of individuals, families, and companies. By the way, by companies, I mean any group of people acting in a collective economic sense, whether it's a non-profit organization, a local government, a college club, or even a traditional for-profit business. You'll sometimes see the term 'firm' used instead, but it's the same thing.

Economic thought, at a very base level, goes into almost every decision you make. Do you buy pizza or go for a nice steak dinner? The answer is dependent on the amount of utility you gain, which is literally a measure of how useful something is to you. If it's just you and some friends, you'd probably order the pizza. If it's a cute date, chances are you're going to be eating some sirloin. Just hope that your date isn't a vegetarian.

More than just that, microeconomics helps companies plan their investments. We can find out how many burgers our fast food place would have to sell in order to justify another location. In fact, this is related to a word you'll see a lot in microeconomics. The marginal impact of something is how much it would cost to do just 1 more unit of something.

For breakfast sandwiches in the fast food drive thru, this could be simply a few cents. For a factory running at full capacity, it could mean building an entire new location. We can also determine at what point a burger becomes profitable. If it costs me a dollar to produce a burger, economics tells me I need to sell that burger for more than just a buck.

Macroeconomics

Figuring out how much a burger costs or whether your Friday night dinner companion would prefer steak or pizza is important, but economics is useful on a much larger scale, too. Macroeconomics is the study of how scarcity causes the actions of whole economies, especially on an international level. That steak isn't going to do you a lot of good if you're unemployed, and macroeconomics helps governments prevent unemployment.

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Additional Activities

Microeconomics versus Macroeconomics Practice:

For each of the following, determine whether the topic would be considered part of macroeconomics or microeconomics. Your answer should also discuss why you believe this is the case.

  1. A firm is trying to determine how many units of its product they should produce if the goal is to maximize profits.
  2. A government's economic advisors are trying to determine the impact of a fiscal stimulus package on the unemployment rate.
  3. When a country's central bank prints more money, the end result is higher prices, also known as inflation.
  4. When businesses invest more in capital goods, the overall production level in an economy increases over time.
  5. Your brother is unable to afford both a trip to the movies and eats dinner at a restaurant. Therefore, he needs to decide which of the two he will do.
  6. Prices of apples are determined by the interaction of supply and demand in the apple market.
  7. The overall price level is determined by the interaction between aggregate supply and aggregate demand.
  8. International trade impacts employment totals in all countries that participate in the trade.
  9. An employer is trying to determine the impact of a new payroll tax on their overall profit level.

Solutions:

  1. Microeconomics
  2. Macroeconomics
  3. Macroeconomics
  4. Macroeconomics
  5. Microeconomics
  6. Microeconomics
  7. Macroeconomics
  8. Macroeconomics
  9. Microeconomics

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