1. What title did the book The Wealth of Nation earn Adam Smith?
2. Did Adam Smith support physiocrats or mercantilists?
3. What was a nations wealth dependent upon in Smiths view?
4. Why would economy work best if left to function on its own?
5. What is the point of producing only those products that customers wanted?
6. What is meant by invisible hand?
7. In what way was invisible hand free to guide the economy?
UNIT 4 LEVELS OF ECONOMICS
Text
MICROECONOMICS versus MACROECONOMICS
VOCABULARY
unit
household
to charge
income -
field of economics ()
suppliers of labour
applied economics
labour economics
cost-benefit analyses -;
demand -
supply -
market equilibrium
total national output ,
level of price
rate of inflation
consumption patterns
aggregate -
gross national product (GNP) ()
production facilities
prosperity -
well-being ,
Economics is divided into two major branches: macroeconomics and microeconomics.
The word micro means small, and microeconomics means economics in the small.
Microeconomics deals with the functioning of individual industries and the behaviour of individual economic decision-making units: single business firms and households. The choices of firms about what to produce, how much to charge and the choices of households about what to buy and how much of it to buy help to explain why the economy produces the things it does.
Another big question that microeconomics addresses is who gets the things that areproduced. Why do we have poverty? Who is poor? Why do some jobs pay more than others? Why do teachers or plumbers or baseball pitchers get paid what they do?
Think again about all the things you consume in a day, and then think back to that view out over a big city. Somebody decided to build those factories. Somebody decided to construct the roads, build the housing, produce the cars, knit the T-shirts, and smoke the bacon. Why? What is going on in all these buildings? It is easy to see that understanding individual micro decisions is very important to any understanding of your society.
The distribution of products and income among all these units is also analyzed by microeconomics. In this field of economics individuals are considered both as suppliers of labour and as consumers of goods. Firms are also studied as suppliers of products and as consumers of labour and capital. Microeconomics theory is used widely in many areas of applied economics. For example, it is used in industrial organization, labour economics, international trade, cost-benefit analyses and many other economic subfields.
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The central components of microeconomics are demand, supply and market equilibrium. Demand refers to how individuals or households form their demands for different goods and services. Supply refers to how firms decide which and how many goods or services they will supply and what combination of factors of production they should employ in supplying them. Market equilibrium refers to how markets enable these supplies and demands to interact. There was a long period in the 19th and early in the 20th centuries when microeconomic questions dominated in economics.
Macroeconomics adds it all up and looks at the economy in the large. Macroeconomics deals with economic factors such as total national output and income, unemployment, level of price, and the rate of inflation. Instead of trying to understand what determines the output of a single firm or industry or the consumption patterns of a single household or group of households, we turn to the factors that determine national output, or national product. Macroeconomics turns from household income to national income.
While microeconomics focuses on individual product prices and relative prices, macroeconomics looks at the price level and the general rate of inflation. Microeconomics questions how many people will be hired (or fired) this year in the steel industry or in the high-tech firms around a definite region what factors determine how much labour a firm or an industry will hire. Macroeconomics deals with aggregate employment and unemployment: how many jobs exist in the country, and how many people who are willing to work will not be able to find work.
Microeconomics, then, looks at the individual unit - the household, the firm, the industry. It sees and examines the trees. Macroeconomics looks at the whole, the aggregate. It sees and analyzes the forest.
Macroeconomic theory is largely concerned with what determines the size of gross national product (GNP), its stability and its relationship to unemployment and inflation. The GNP is the value of all goods and services produced by a country during a given period, even if production facilities are in another country. The key to prosperity in an economy is steady growth in national output. When growth in nations output exceeds its growth in population, this improves the well-being of the population of a country.
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