Economics Made Easy for All Series
Economics is a very important subject for all. Its knowledge is required by all- students, workers and retired personnel. I consider understanding of basic essentials of economics as part of general knowledge. Economic rationality generally dictates pursuit of national interests and thus forms the bedrock of international relations. My blogs are generally written with a view to simplify concepts to my students. I am starting this, series by providing an understanding of the subject and its two main branches- ‘macroeconomics’ and ‘microeconomics’.
What is Economics?
Economics is a social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. The field of study of economics was created only because of the need to manage scarce resources. If we had unlimited resources this field of study would not have existed.
Economics can generally be broken down into: macro and micro economics, the former concentrates on the behaviour of the aggregate economy and the latter focuses on individual consumers.
Microeconomics is the branch of economics that analyzes the market behaviour of individual consumers and firms in an attempt to understand the decision-making process of firms and households. The answers to the following questions of an individual consumer/household determine behaviour being studied under it:-
- What to consume/buy?
- How much to consume?
Similarly the questions which a firm seeks answers to are:-
- What to produce?
- For whom to produce?
- How much to produce?
In particular, the subject focuses on patterns of supply and demand and the determination of price and output in individual markets. Some of the theories studied under it are:
- Theories of demand and supply.
- Opportunity cost.
- Theories of production and cost.
- Theories of price determination.
Macroeconomics, on the other hand, looks at the big picture. It focuses on the national economy as a whole and provides a basic knowledge of how things work in the business world. Some of the concepts studied under it are:
- The circular flow model of economy.
- Concept and measurement of national income.
- Aggregate demand and supply.
- Fiscal and monetary policies.
- Inflation and employment.
- Theories of growth.
- Concepts of international trade.
- Money and exchange rates.
For an overall perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro levels. You can start the study of the subject from anywhere. There is relationship between the micro and macro concepts. Clarity in understanding of microeconomic concepts facilitates understanding of macroeconomics.