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  • Writer's pictureShafinaz Shaikh

Economics Basics: Micro & Macro

If you have ever thought about ‘why can’t we just print more money?’ and then actually researched it, you would know how important Economics is in the lives of today’s humans. Economics is generally defined as ‘the branch of knowledge concerned with the production, consumption, and transfer of wealth’ but only after diving deeper does it become apparent that the field of Economics is much more complicated and exists in every part of an average 21st Century human’s existence. Wealth is transferred at various levels, whether it be minor transactions like buying a coffee or an extremely major one like those between two countries. All these transactions affect significant phenomena such as national income and the rate of inflation. This is where different ‘branches’ within the field of Economics arise.

Microeconomics and Macroeconomics are the two group’s economics is divided. As the name suggests, Microeconomics is about the decisions of individuals when it comes to exchanging money for goods or vice versa. It is also specific to decisions that affect how resources are distributed. The decision-making individuals are usually referred to as large groups such as the ‘buyers’, ‘sellers’, and ‘business owners’. The interactions between these groups give rise to the supply and demand of resources. To elaborate further, the study of Microeconomics attends to how individuals/groups react to changes in prices, incentives, etc. It is important to understand the laws of supply and demand to effectively make use of this field of study.

Now that we know what Microeconomics is, let’s look at its applications and uses. It helps out businesses by demonstrating what might happen if they take a certain decision. The laws of supply and demand state that when the price of a product is higher, there will be fewer customers. (Pretty obvious, isn’t it?). This means if a business is able to lower its prices, it should do so in order to have a competitive edge over other rival businesses. On the other hand, Microeconomics can help in more complex ways with concepts like the Price Elasticity of Demand. PED is simply a calculation of ‘what would be the amount of change in demand if we change the price’. Even though ‘higher price=lower demand’ is true for most products, PED analysis proves that a business might make more profit even after losing a few customers. The formula to calculate PED is % Change in Quantity Demanded / % Change in Price. If the price of a product is inelastic, it means that a change in price does not affect the demand very much. Thus, this means if the price of this product was to go up, it might lose a few customers, but the (new price x new number of products sold) is still greater than (old price x old number of products sold). This is just one example of how applying Microeconomics to business can help understand economic phenomena and how to use them to their advantage.

The other part of this field of study is Macroeconomics. Again, as the name suggests, it is not concerned with exchanges between a buyer and a seller, but instead, it looks at how markets and economies operate at a Macro level, i.e., a large scale. By that, I mean the performance of national economies and the global economy. Some of the key issues dealt with by Macroeconomics are ‘what causes economic growth?’, ‘reasons for unemployment’, ‘why does inflation occur’ and so forth. To summarise, Macroeconomics tries to figure out how well an economy is doing, what factors influence it, and how performance may be improved.

Ever since the inception of Macroeconomics in what is said to be the 1930s, several schools of thought have come into existence. They all offer a general theory, and thus have their own limitations such as lacking temporal validity or not taking real-world factors or changing external factors into consideration. Research in Macroeconomics are often further divided into two major fields, Economic Growth (increase in aggregate production in an economy) and Business Cycles (fluctuations and rates of fluctuations in major macroeconomic variables such as employment and national output). The different ‘schools of thought’ under Macroeconomics include Classical economics, New classical, Keynesian economics, New Keynesian, Monetarist and Austrian.

Macroeconomics adopts a top-down perspective, which is examining the economy as a whole and attempting to predict its nature and progression. While on the other hand, Microeconomics has a rather 'bottom-up' approach that focuses on supply and demand, as well as other variables that influence price levels. For people who want to invest in companies, run a business, or improve their products/services competitiveness, it’s best to make use of Microeconomics, as it helps them sort out problems like governmental legislations, taxes, pricing and it also proves to be an aid when making investment decisions. Macroeconomics is basically economic theory, which helps governments and other bodies to completely comprehend the workings of an economy, thus it can help in foreseeing the outcomes and consequences of any new policies and actions.

To recapitulate, Microeconomics and Macroeconomics serve their own purpose when it comes to solving problems, making decisions and creating profits. While making use of Microeconomics is seen as more common due to it dealing with individuals, Macroeconomics remains a vital part of Economics because of its complex and analytical approach towards vast economies.

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