What is 'Microeconomics'

Microeconomics is the social science that studies the implications of

individual human action, specifically about how those decisions affect the
utilization and distribution of scarce resources. Microeconomics shows how
and why different goods have different values, how individuals make more
efficient or more productive decisions, and how individuals best coordinate
and cooperate with one another. Generally speaking, microeconomics is
considered a more complete, advanced and settled science than
macroeconomics.

Example Of Micro

Microeconomics is the study of the behaviour of the individual units (like an

individual firm or an individual consumer) of the economy.

According to these units, we may see these examples:

Firms:
o Demand and Supply of commodities & determination of price by a firm
o Study of costs of producing a good by a firm
o Study of revenue of a firm
o Determining producer's equilibrium (cost & revenue)
Consumers:
o Utility of a consumer : satisfaction from consumption
o Consumer's Equilibrium

Characteristics

Microeconomics is an analytical branch of economics that looks at the behavior,

spending patterns and allocation of money to goods and servicesby
consumers, companies and suppliers. It looks to explain the decision making process in
spending money, and what amount of money, on goods and services. This analysis can
then be used by companies to try to brand, price or sell its product to consumers in a
way that is more attractive. It can also tell a company what their spending tells them
about themselves and how their allocation of money can be best used to turn spending
into profits.
Macroeconomics
Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch
of economics dealing with the performance, structure, behavior, and decision-making of
an economy as a whole. This includes regional, national, and global economies.[1]
Macroeconomists study aggregated indicators such as GDP, unemployment rates, national
income, price indices, and the interrelations among the different sectors of the economy to better
understand how the whole economy functions. Macroeconomists develop models that explain the
relationship between such factors as national
income, output, consumption, unemployment, inflation, savings, investment, international
trade and international finance.

Example
Macroeconomics studies the behaviour of aggregates of the economy as a whole, ie
it deals with the problems faced by the economy as a whole, and not just by an
individual unit.

Calculation of National Income : GDP, NNP, GNP, GDP PPP etc. Because it
includes income of all the residents of a country, not just one individual.
Determination of equilibrium level of output and employment :
o Aggregate Demand and Aggregate Supply analysis.
o Inflation, deflation and controlling the situation
o Employment and unemployment
Monetary Policy :
o Money supply
o Interest rates
Fiscal Policy
o Government budget : expenditure and income.
o Taxes and subsidies.
Balance of Payment situation.
Factors that affect u individually are studied in Microeconomics and factors that
generally affect everyone in the economy are studied under Macroeconomics.

Characteristics
The characteristics that describe a macroeconomy are usually referred to as the key
macroeconomic variables. The following four variables are considered to be the most
important in gauging the state or health of an economy: aggregate output or income, the
unemployment rate, the inflation rate, and the interest rate. These will be briefly
discussed shortly. It is, however, prudent to point out that numerous additional
measures or variables are collected and used to understand the behavior of an
economy. In the United States, for example, these additional measures include: the
index of leading economic indicators (provides an idea where the economy is headed in
the near future); retail sales (indicates the strength of consumer demand in the
economy); factory orders, especially for big-ticket items (indicates the future growth in
output, as orders are filled); housing starts (usually a robust increase in housing starts is
taken as a sign of good growth in the future); the consumer confidence index (indicates
how likely consumers are to make favorable decisions to buy durable and nondurable
goods, services, and homes). Sometimes, the variables tracked are more innocuous
than those included in the preceding list, such as: aluminum production, steel
production, paper and paperboard production, industrial production, hourly earnings,
weekly earnings, factory shipments, orders for durable goods, new factory orders, new-
home sales, existing-home sales, inventories, initial jobless claims, married and jobless,
help-wanted advertising, purchasing manager's survey, and the U.S. trade deficit.
As is apparent from the preceding list, economists and financial observers use
observations on numerous variables to understand the behavior of an economy.
Nevertheless, the four key macroeconomic variables summarize the most important
characteristics of a macroeconomy.

1. OUTPUTIINCOME.
An economy's overall economic activity is summarized by a measure of aggregate
output. As the production or output of goods and services generates income, any
aggregate output measure is closely associated with an aggregate income measure.
The United States now uses an aggregate output concept known as the gross domestic
product or GDP. The GDP is a measure of all currently produced goods and services
valued at market prices. One should notice several features of the GDP measure. First,
only currently produced goods (produced during the relevant year) are included. This
implies that if you buy a 150-year old classic Tudor house, it does not count towards the
GDP; but the service rendered by your real estate agent in the process of buying the
house does. Secondly, only final goods and services are counted. In order to avoid
double counting, intermediate goodsgoods used in the production of other goods and
servicesdo not enter the GDP. For example, steel used in the production of
automobiles is not valued separately. Finally, all goods and services included in the
GDP are evaluated at market prices. Thus, these prices reflect the prices consumers
pay at the retail level, including indirect taxes such as local sales taxes.
A measure similar to GDP is the gross national product (GNP). Until recently, the
government used the GNP as the main measure of the nation's economic activity. The
difference between GNP and GDP is rather small. The GDP excludes income earned
abroad by U.S. firms and residents and includes the earnings of foreign firms and
residents in the United States. Several other measures of output and income are
derived from the GNP. These include the net national product (NNP), which subtracts
from the GNP an allowance for wear and tear on plants and equipment, known as
depreciation; the national income, which mainly subtracts indirect taxes from the NNP;
the personal income, which measures income received by persons from all sources and
is arrived at by subtracting from the national income items such as corporate profit tax
payments and social security contributions that individuals do not receive, and adding
items such as transfer payments that they do receive but are not part of the national
income; and the personal disposable income, which subtracts personal tax payments
such as income taxes from the personal income measure. While all these measures
move up and down in a generally similar fashion, it is the personal disposable income
that is intimately tied to consumer demand for goods and servicesthe most dominant
component of the aggregate demandand the total demand for goods and services in
the economy from all sources.
It should be noted that the aggregate income/output measures discussed above are
usually quoted both in current prices (in "nominal" terms) and in constant dollars (in
"real" terms). The latter quotes are adjusted for inflation and are thus most widely used
since they are not subject to distortions introduced by changes in prices.

2. UNEMPLOYMENT.
The level of employment is the next crucial macroeconomic variable. The employment
level is often quoted in terms of the unemployment rate. The unemployment rate itself is
defined as the fraction of labor force not working (but actively seeking employment).
Contrary to what one may expect, the labor force does not consist of all able-bodied
persons of working age. Instead, it is defined as consisting of those working and those
not working but seeking work. Thus, it leaves out people who are not working but also
not seeking worktermed by economists as being "voluntarily" unemployed. For
purposes of government macroeconomic policies, only people who are "involuntarily"
unemployed are of primary concern.
For different reasons, it is not possible to bring down the unemployment rate to zero in
the best of circumstances. Realistically, economists normally expect a fraction of labor
force to remain unemployedthis fraction for the U.S. labor market has been estimated
to be 6 percent. The 6 percent unemployment rate is often referred to as the benchmark
unemployment rate. In effect, if the unemployment level is at 6 percent, the economy is
considered to be at full employment.

3. INFLATION RATE.
The inflation rate is defined as the rate of change in the price level. Most economies
face positive rates of inflation year after year. The price level, in turn, is measured by a
price index, which measures the level of prices of goods and services at given time. The
number of items included in a price index vary depending on the objective of the index.
Usually three kinds of price indexes, having particular advantages and uses are
periodically reported by government sources. The first index is called the consumer
price index (CPI), which measures the average retail prices paid by consumers for
goods and services bought by them. A couple of thousand items, typically bought by an
average household, are included in this index.
A second price index used to measure the inflation rate is called the producer price
index (PPI). It is a much broader measure than the consumer price index. The producer
price index measures the wholesale prices of approximately 3,000 items. The items
included in this index are those that are typically used by producers (manufacturers and
businesses) and thus it contains many raw materials and semi-finished goods. The third
and broadest measure of inflation is the called the implicit GDP price deflator. This
index measures the prices of all goods and services included in the calculation of the
current output of goods and services in the economy, the GDP.
The three measures of the inflation rate are most likely to move in the same direction,
even though not to the same extent. Differences can arise due to the differing number of
goods and services included for the purpose of compiling the three indexes. In general,
if one hears about the inflation rate number in the popular media, it is most likely to be
the number based on the CPI.

4. THE INTEREST RATE.

The concept of interest rates used by economists is the same as the one widely used
by ordinary people. The interest rate is invariably quoted in nominal termsthat is, it is
not adjusted for inflation. Thus, the commonly followed interest rate is actually the
nominal interest rate. Nevertheless, there are literally hundreds of nominal interest
rates. Examples include: savings account rate, six-month certificate of deposit rate, 15-
year mortgage rate, variable mortgage rate, 30-year Treasury bond rate, 10-
year General Motors bond rate, and commercial bank prime lending rate. One can see
from these examples that the nominal interest rate has two key attributesthe duration
of lending/borrowing involved and the identity of the borrower.
Fortunately, while the hundreds of interest rates that one encounters may appear
baffling, they are closely linked to each other. Two characteristics that account for this
linkage are the risk worthiness of the borrower and the maturity of the loan involved. So,
for example, the interest rate on a 6-month Treasury bill is related to that on a 30-year
Treasury bond, as bonds/loans of different maturity levels command different rates.
Also, a 30-year General Motors bond will carry a higher interest rate than a 30-year
Treasury bond, since a General Motors (GM) bond is riskier than a Treasury bond.
Finally, one should note that the nominal interest rate does not represent the real cost of
borrowing or the real return on lending. To understand the real cost or return, one must
consider the inflation-adjusted nominal rate, called the real interest rate. Tax and other
considerations also influence the real cost or return. Nevertheless, the real interest rate
is a very important concept in understanding the main incentives behind borrowing or
lending.

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