- Microeconomics: microeconomics exams the behavior and decisions of individual firms and households and the way they interact in specific industries and markets. We use it to analyze decisions made by individual firms, or to look at how certain factors can affect the market for a specific good.
- Macroeconomics: Macroeconomics focuses on the whole national economy or even the whole world economy. Macroeconomics examines the workings and problems of the whole economy, looking at features such as GDP growth and unemployment. We would use macroeconomics to examine the factors that contribute to a country or region’s overall economic growth, or to determine the cause of economic fluctuations (e.g. recessions).
People make choices with scarce resources, and then they interact with other people in markets in other places when they make these choices.
The value of the next-best forgone alternative to making a choice. Economists consider this the real cost of a decision.
Improvements in income, production, or satisfaction owing to the exchange of goods or services.
The interaction can lead to the following:
- Specialization: a concentration of production effort on a single specific task.
- Division of labor: the division of production into various parts in which different groups of workers specialize.
- Comparative advantage: a situation in which a person or group can produce one good at a lower opportunity cost than another person or group.
- Predictale policy framework: the government needs to be predictable in its decision-making process.
- Rule of law (e.g. property rights): property rights need to be clearly defined and enforced.
- Reliable on market economy: the government needs to allow the market to determine prices and quantities produced.
- freely determined prices
- Good incentives: the government needs to provide good incentives for economic activity, such as patents to encourage innovation.
- Specific role of government: the government needs to be able to intervene in the case of market failure, when the market would fail to reach the efficient outcome.
- Market failure
- Government failure
Video 1A: Welcome to the Principles of Economics
Video 1B: The Central Idea - Choice, Scarcity, and Interaction