Introduction to Economics: Microeconomics and Macroeconomics
What is Economics?
Introduction
Adam Smith, known as the father of Economics, established the first modern economic theory in 1776, called the Classical School. Smith believed that people who acted in their own self-interest produced goods and wealth that benefited all of society. Classical theory forms the basis of capitalism and is still prominent today. Economics is the study of social science in which we study the production, distribution, and consumption of goods and services. Economics considers how an individual satisfies his/her needs and wants with scarce resources. The most basic need is survival, which requires food, clothing, and shelter. This social science, known as “Economics,” is based on the idea that it can be analyzed mathematically and scientifically.
Definition of Economics
There are some useful definitions by famous writers and authors:
“Economics was concerned with an enquiry into the nature and causes of wealth of nations.” – Adam Smith
“Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” – Lionel Robbins (1935)
“The mechanics of utility and self-interest.” – W. Stanley Jevons (Late 19th Century)
“A study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.” – Alfred Marshall (Principles of Economics’)
“The study of how a person or society meets its unlimited needs and wants through the effective allocation of resources.” – Paul Samuelson (1970)
Points to Cover
- Economics is the study of how people choose to use resources.
- The term economics comes from the Ancient Greek Oikonomia, which means “management of a household, administration,” etc.
- Economics is the social science of satisfying unlimited wants with scarce resources.
- Economics is the social science that analyzes the production, distribution, and consumption of goods and services.
Why Economics?
Economics examines how people make choices. It suggests a way of understanding how to make the best use of available resources. It helps us to study human behavior towards the products and services they consume. The underlying essence of economics is trying to know how both individuals and nations behave in response to certain material constraints. Economics studies various important things like trade, production, distribution, and consumption decisions. Economic analysis is applied throughout society in business, finance, government, education, health, law, politics, etc.
Types of Economics
Economics is broadly divided into two types: Microeconomics and Macroeconomics.
Microeconomics
The word micro means the study of the economy at a small level. Microeconomics is the study of economics at the level of an individual customer, group of consumers, or firms. It is a branch of economics that explains how individuals, groups, or firms make decisions to allocate limited resources. Microeconomics describes the market behavior and decision-making process of individual consumers and firms and also studies the factors that affect the choices of individual buyers and sellers.
Microeconomics Focuses On:
- Individual consumer’s behavior
- One product’s price
- Demand and income of individual customers
- Study of individual firm’s location, cost, revenue, and profit
Macroeconomics
The word macro means the study of the economy at a large scale. Macroeconomics is the study of the processes and performance of the whole economic system. It gives a view of aggregate economic factors, such as the total amount of goods and services produced by society. It considers all the factors affecting the entire economy, including GDP, unemployment, inflation, economic growth and development, monetary and fiscal policies. Macroeconomics looks at the total output of a nation and aims to maximize production levels and promote trade and growth for the future. Macroeconomics deals with the performance, behavior, and structure of the entire economy, compared to microeconomics, which is more focused on the selections made by individual performers in the economy like people, households, industries, etc.
Boundaries of Macroeconomics
It is significant to understand the boundaries of economic theory. Theories are often formed in a vacuum and lack real-world factors like taxation, regulation, and transaction costs. The real world is also incredibly complicated, and the expectations of social preference and principles do not lend themselves to mathematical analysis. Within the boundaries of economic theory, it is important to track the major macroeconomic factors like GDP, inflation, and unemployment. The performance of companies and their stocks are significantly influenced by the economic matters in which the company operates. Analyzing macroeconomic statistics can help an investor make good decisions.