Chapter 5: Microeconomics & Macroeconomics

• Microeconomics: study of particular markets and sections of the economy.
• Topics covered in microeconomics:

  » Factors of production

  » Demand

  » Supply

  » Price elasticity of demand

  » Market failure

  » Economies and diseconomies of scale

  » Firms’ costs, revenues and objectives

  » Market structure
• Decision makers in microeconomics (1):

  • Entrepreneur considering which type of business to start
  • Farmer deciding how best to allocate farmland to different crops or the rearing of farm animals
  • Firms investigating prices being charged by rivals to set own prices
  • Firms considering economic profits of different choices before making a decision
  • Firms deciding on the best combination of factors of production to use in the production process
• Decision makers in microeconomics (2):

  • Consideration of advantages and disadvantages of trade unions from the viewpoint of workers, firms, government
  • Wage differentialsInfluence on labour markets
  • Workers deciding how to allocate time and energy based on consideration of opportunity costs
  • Households considering the economic costs of raising a child
• Decision makers in microeconomics (3):

  • Advantages and disadvantages of small firms vs pros and cons of different types of merges (horizontal, vertical, conglomerate)
  • Consideration of different reasons for firms to adopt labour-intensive production methods
  • How internal and external economies of scale can affect a firm's scale of operations
• Macroeconomics: study of economic behaviour and decision-making in the whole economy.
• Topics covered in macroeconomics:

  • Role of government
  • Redistribution of income
  • Fiscal policy
  • Monetary policy
  • Supply-side policies
  • Economic growth
  • Employment and unemployment
  • Inflation and deflation
• Decision makers in macroeconomics (1):

  • Government decisions regarding which products to tax, such as tobacco, alcohol and petrol
  • Government policies to achieve economic growth, stable inflation, employment, balance of payments stability and redistribution of income
  • Government decisions to improve market efficiencies and the productive capacity of the economy, such as through education and training, labour market reforms, deregulation, improving incentives to work and invest, and privatisation
• Decision makers in macroeconomics (2):

  • Government setting different rates of progressive taxation to ensure those who earn more pay a greater proportion of income tax, without creating disincentives to work
  • Government decisions and policies regarding the eradication of poverty
  • Government decisions about immigration and emigration
  • Government decisions about protectionism, such as the use of tariffs and import quotas to limit competition from international rivals
• Decision makers in macroeconomics (3):

  • Decision of the population in how they allocate their income between savings and expenditure (household consumption)
  • Decision making of consumers, workers, savers, lenders and firms due to the consequences of inflation
  • Economy’s decision about the degree of international specialisation
  • Role of speculators and multinational companies in the determination of exchange rates