Explain briefly how macroeconomics is different from microeconomics. How can macroeconomists use microeconomic theory to guide them in their work, and why might the wish to do so? Please give examples.
All economic problems arise from scarcity because human wants are unlimited but resources are limited. Economics the science of choice, it is talking about how individuals and societies make a choice from the scarcity. All economic choices can be summarized in three questions: What gets produced? How is it produced? Who gets what is produces? Economists define their work in micro and macro perspective. Microeconomics and Macroeconomics are the two major branches of economics.
What is Microeconomics?
Microeconomics is the study of how households and firms make decisions and how they interact in markets. So all these problems belong to microeconomics: how the consumer reacts when price changes; how the firms decide the output level and how they decide the production method; how should the firms charge their product prices. Microeconomics also considerate the demand and supply of individual goods and services and the equilibrium occurs when the quantity of demands are equal to the quantity of supplies. A typical example of microeconomics is a mobile phone manufacturer decides to charge what price of their new model of smart phone depends on the demand of the mobile markets. A number of factors would affect the demand of the mobile phone including the price of the product itself, the income of the consumer, the consumer’s amount of accumulated wealth, the price of other competitor’s product, the consumer’s tastes and preferences and the expectations about future income, wealth and prices. The manufacturer also concerns the cost of production of the new model smart phone to decide the price and output level in the market. These decisions include when a consumer (i.e. households) purchases a good and for how much, or how a producer (i.e. firms) determines the price it will charge for its product are the key content of Microeconomics.
What is Macroeconomics?
While Microeconomics looks at the demand and supply of individual goods and services, Macroeconomics focus on the aggregate output - the totally quantity of goods and services produced in the economy in a given period. The major concerns of macroeconomics are the study of economy-wide phenomena including inflation, unemployment, and economic growth. If aggregate output decreases, which means the total quantity of goods and services produced less and the standard of living also declines. Inflation is an increase level in the overall price. Government doesn’t want to see hyperinflations when means price level increases rapidly in a short period. Unemployment rate is an indicator of the economy’s health and related to the economy’s aggregate output very closely. Generally, macroeconomics studies how the government policy can affect above phenomena so that the following macroeconomic goals may be achieve: stable price level, low unemployment rate, steady economic growth, and healthy financial system. Microeconomics focuses on four groups activities in the circular of payments, including the private sector – households who receive income from firms and the government, buy goods and services from firms and pay taxes to the government; and firms receive payment from households and the government for goods and services and pay wages to households and pay tax to the government; the public sector – the government receives taxes from households and firms and pay interest and transfers to the household; and lastly the foreign sector – the rest of the worlds who import and export goods and services from households and firms. These four groups play the economic interactions in the macroeconomy in a difference ways for paying and receiving income. In the contrast, firms and households are only involving in the circular flow of economic...