1.3 – Microeconomics and Macroeconomics
Learning Objectives
By the end of this section, you will be able to:
- Describe microeconomics and macroeconomics
- Contrast monetary policy and fiscal policy
There is more than one way to slice and dice the discipline of economics. In addition to orthodox and heterodox perspectives, we can also think in terms of looking at the components that make up the economy versus looking at the complete system. Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses; Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports.
This distinction can be found within both orthodox and heterodox perspectives, although how the micro and the macro fit together is understood differently. Moreover, unlike the distinction between orthodox and heterodox economics, micro- and macroeconomics are not separate subjects. Rather they are complementary perspectives on the overall subject of the economy.
To understand why both micro- and macroeconomic perspectives are useful, consider the problem of studying a biological ecosystem like a lake. One person who sets out to study the lake might focus on specific topics: certain kinds of algae or plant life, the characteristics of particular fish or snails, or the trees surrounding the lake. Another person might take an overall view and instead consider the entire ecosystem of the lake from top to bottom; what eats what, how the system stays in a rough balance, and what environmental stresses affect this balance. Both approaches are useful, and both examine the same lake, but the viewpoints are different. In a similar way, both microeconomics and macroeconomics study the same economy, but each has a different viewpoint.
Whether you are looking at lakes or economics, the micro and the macro insights should blend with each other. In studying a lake, the micro insights about particular plants and animals help to understand the overall food chain, while the macro insights about the overall food chain help to explain the environment in which individual plants and animals live.
Macroeconomics
What determines how many goods and services a nation actually produces? What determines how many jobs are available in an economy? What determines a nation’s standard of living? What causes the economy to speed up or slow down? What causes businesses to hire more workers or to lay workers off? Finally, what causes the economy to grow over the long term? These questions are typical of macroeconomic studies, whether orthodox or heterodox.
An economy’s macroeconomic health can be defined by a number of goals: growth in the standard of living, low unemployment, and low inflation, to name the most commonly considered by economists. How can macroeconomic policy be used to pursue these goals? Monetary policy, which involves policies that affect bank lending, interest rates, and financial capital markets, is conducted by a nation’s central bank. For the United States, this is the Federal Reserve. Fiscal policy, which involves government spending and taxes, is determined by a nation’s legislative body. For the United States, this is the Congress, which determines the federal budget, and the executive branch, which carries out the spending programs and tax collection.
These are the main tools the government has to work with. But, of course, tools are only useful for fixing problems when the problems have been correctly identified. As you’ll see periodically in this book, there is a close relationship between, on the one hand, the various economic theories of how the economy works and, on the other, the government policies (if any) that are necessary to improve economic outcomes.
Microeconomics
What determines how households and individuals spend their budgets? How do people decide whether and where to work, or how much to save for the future? What determines the products, and how many of each, a firm will produce and sell? What determines what prices a firm will charge? What determines how a firm will produce its products? What determines how many workers it will hire? How will a firm finance its business? When will a firm decide to expand, downsize, or even close?
In the microeconomic part of this book, you will learn about theories of consumer behavior and theories of the business enterprise. In the process, you’ll see both heterodox and orthodox answers to all these questions and more.
Summary
Microeconomics and macroeconomics are two different perspectives on the economy. The microeconomic perspective focuses on parts of the economy: individuals, firms, and industries. The macroeconomic perspective looks at the economy as a whole, focusing on goals like growth in the standard of living, unemployment, and inflation. Macroeconomics has two types of policies for pursuing these goals: monetary policy and fiscal policy.
Glossary
- fiscal policy
- economic policies that involve government spending and taxes
- macroeconomics
- the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
- microeconomics
- the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
- monetary policy
- policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms
the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance
policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing
economic policies that involve government spending and taxes