What is Economics?
Simply put, economics is the study of the allocation of scarce resources to satisfy competing ends. In general, this applies mainly to microeconomics. This is because in Macroeconomics, there are many situations where resources are not scarce.
Microeconomics vs Macroeconomics
Microeconomics applies to small elements of an economy. This may be trade between two people, or trade between two countries. It usually focuses on a small basket of goods being traded between a small group of agents. On the other hand, Macroeconomics is the study of an entire economy. It looks at aggregate inputs and outputs with the goal to understand the flows of total consumption, employment rates, wages, prices and many other aggregate parts of an economy. In macroeconomics we look at both the long run and short run changes in the economy.
Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine price levels for specific companies in specific industry sectors. For example, microeconomics would look at how a specific company could maximize its production and capacity so it could lower prices and better compete in its industry.
Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.
While these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public.
The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. Regardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained.
The study of Macroeconomics looks to solve one broad question:
- What Causes Economic Growth?
In pursuit of solving this question, macro economists look at causes of business cycles, inflation, employment and many other aspects of the economy.
- Quoted from Gary Becker