Macroeconomics & Microeconomics?

Macro

Macroeconomics is the economics sub-field of study that considers aggregate behavior, and the study of the sum of individual economic decisions. This is in contrast to microeconomics, the study of the economic behaviour of individual consumers, firms, and industries. Macroeconomics can be used to analyze how best to influence government policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments. Macroeconomics is sometimes used to refer to a general approach to economic reasoning, which includes long term strategies and rational expectations in aggregate behavior. Contents [hide] 1 Origins 2 Analytical approaches 2.1 Schools 3 See also [edit] Origins Until the 1930s most economic analysis did not separate out individual economics behavior from aggregate behavior. With the Great Depression of the 1930s, suffered throughout the developed world at the time, and the development of the concept of national income and product statistics, the field of macroeconomics began to expand. Particularly influential were the ideas of John Maynard Keynes, who formulated theories to try to explain the Great Depression. Before that time, comprehensive national accounts, as we know them today, did not exist . One of the challenges of economics has been a struggle to reconcile macroeconomic and microeconomic models. Starting in the 1950s, macroeconomists developed micro-based models of macroeconomic behavior (such as the consumption function). Dutch economist Jan Tinbergen developed the first comprehensive national macroeconomic model, which he first built for the Netherlands and later applied to the United States and the United Kingdom after World War II. The first global macroeconomic model, Wharton Econometric Forecasting Associates LINK project, was initiated by Lawrence Klein and was mentioned in his citation for the Nobel Memorial Prize in Economics in 1980. Theorists such as Robert Lucas Jr suggested (in the 1970s) that at least some traditional Keynesian (after British economist John Maynard Keynes) macroeconomic models were questionable as they were not derived from assumptions about individual behavior. However, New Keynesian macroeconomics has generally presented microeconomic models to shore up their macroeconomic theorizing, and some Keynesians have contested the idea that microeconomic foundations are essential, if the model is analytically useful. The various schools of thought are not always in direct competition with one another -- even though they sometimes reach differing conclusions. Macroeconomics is an ever evolving area of research. The goal of economic research is not to be "right," but rather to be accurate. It is likely that none of the current schools of economic thought perfectly capture the workings of the economy. They do, however, each contribute a small piece of the overall puzzle. As one learns more about each school of thought, it is possible to combine aspects of each in order to reach an informed synthesis. [edit] Analytical approaches The traditional distinction is between two different approaches to economics: Keynesian economics, focusing on demand, and supply-side (or neo-classical) economics, focusing on supply. Neither view is typically endorsed to the complete exclusion of the other, but most schools do tend clearly to emphasize one or the other as a theoretical foundation. Keynesian economics focuses on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies. Supply-side economics delineates quite clearly the roles of monetary policy and fiscal policy. The focus for monetary policy should be purely on the price of money as determined by the supply of money and the demand for money. It advocates a monetary policy that directly targets the value of money and does not target interest rates at all. Typically the value of money is measured by reference to gold or some other reference. The focus of fiscal policy is to raise revenue for worthy government investments with a clear recognition of the impact that taxation has on domestic trade. It places heavy emphasis on Say's law. [edit] Schools Monetarism, led by Milton Friedman, which holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time. New Keynesian economics, which developed partly in response to new classical economics, strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management. Austrian economics is laissez-faire school of macroeconomics. It focuses on the business cycle that arises from government or central-bank interference that leads to deviations from the natural rate of interest. Post-Keynesian economics represents a dissent from mainstream Keynesian economics, emphasizing the role of uncertainty and the historical process in macroeconomics. New classical economics. The original theoretical impetus was the charge that Keynesian economics lacks microeconomic foundations -- i.e. its assertions are not founded in basic economic theory. This school emerged during the 1970s. This school asserts that it does not make sense to claim that the economy at any time might be "out-of-equilibrium". Fluctuations in aggregate variables follow from the individuals in the society continuously re-optimizing as new information on the state of the world is revealed. Later yielded an explicit school which argued that macro-economics does not have micro-economic foundations, but is instead the tool of studying economic systems at equilibrium. which [edit] See also Topics in Macroeconomics Adaptive expectations • Balance of payments • Central bank • Currency • Gold standard • Gresham's Law • Inflation • IS/LM model • Money • Measures of national income and output • Monetary policy • National Income and Product Accounts • Purchasing power parity • Rational Expectations • Reaganomics • Recession • Stockholm school • Unemployment • Austrian economics • Keynesian economics • Monetarism • New classical economics • New Keynesian economics • Supply side economics • Welfare economics • Development economics • Economics • Political economy • List of economics topics • List of economic geography topics • List of international trade topics • Important publications in macroeconomics Retrieved from "http://en.wikipedia.org/wiki/Macroecono… Categories: Macroeconomics | Economics ViewsArticle Discussion Edit this page History Personal toolsSign in / create account Navigation Main Page Community Portal Featured articles Current events Recent changes Random article Help Contact Wikipedia Donations Search Toolbox What links here Related changes Upload file Special pages Printable version Permanent link Cite this article In other languages Bosanski Български Català Česky Dansk Deutsch Eesti Ελληνικά Español Français Galego 한국어 Hrvatski Bahasa Indonesia Íslenska Italiano עברית ქართული ລາວ Latviešu Lietuvių Magyar Македонски Nederlands 日本語 Norsk (bokmål) Norsk (nynorsk) Polski Português Română Русский Simple English Slovenčina Slovenščina Српски / Srpski Srpskohrvatski / Српскохрватски Suomi Svenska Tiếng Việt Türkçe 中文 This page was last modified 18:58, 13 September 2006. All text is available under the terms of the GNU Free Documentation License. (See Copyrights for details.) Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc. Privacy policy About Wikipedia Disclaimers One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, as well as describing the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include markets under asymmetric information, choice under uncertainty and economic applications of game theory. Contents [hide] 1 Assumptions and definitions 2 Modes of Operation 3 Opportunity cost 4 Taxonomy of Microeconomics 4.1 Fundamental concepts in microeconomics 4.2 Consumer theory 4.3 Production and pricing theory 4.4 Welfare economics 4.5 Industrial organization 4.6 Market failure 4.7 Financial economics 4.8 International trade 4.9 Methodology 5 External links [edit] Assumptions and definitions The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers or groups of buyers or sellers do have the ability to influence prices. Quite often a sophisticated analysis is required to understand the demand-supply equation of a good. However, the theory works well in simple situations. Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where so-called market failures lead to resource allocation that is suboptimal by some standard (highways are the classic example, profitable to all for use but not directly profitable for anyone to finance). In such cases, economists may attempt to find policies that will avoid waste; directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing" markets to enable efficient trading where none had previously existed. This is studied in the field of collective action. The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process. The interpretation of this relationship between price and quantity demanded of a given good is that, given all the other goods and constraints, this set of choices is that one which makes the consumer happiest. [edit] Modes of Operation It is assumed that all firms are following rational decision-making, and will produce at the profit-maximizing output. Given this assumption, there are four categories in which a firm's profit may be considered. A firm is said to be making an economic profit when its average total cost is less than the price of the product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price. A firm is said to be making a normal profit when its economic profit equals zero. This occurs where average total cost equals price at the profit-maximizing output. If the price is between average total cost and average variable cost at the profit-maximizing output, then the firm is said to be in a loss-minimizing condition. The firm should still continue to produce, however, since its loss would be larger if it were to stop producing. By continuing production, the firm can offset its variable cost and at least part of its fixed cost, but by stopping completely it would lose the equivalent of its entire fixed cost. If the price is below average fixed cost at the profit-maximizing output, the firm should go into shutdown. Losses are minimized by not producing at all, since any production would not generate returns significant enough to offset any fixed cost and part of the variable cost. By not producing, the firm loses only its fixed cost. In economics, a market failure is a situation in which markets do not efficiently organize production or allocate goods and services to consumers (for example, a failure to allocate goods in a way some see as socially or morally preferable). To economists, the term would normally be applied to situations where the inefficiency is particularly dramatic, or when it is suggested that non-market institutions would provide a more desirable result. On the other hand, to many, market failures are situations where market forces do not serve the perceived "public interest". Here, the focus is on the economists' theories of market failure. Economists use model-like theorems to explain or understand such cases. The two main reasons that markets fail to produce efficient results are: the inadequate expression of costs or benefits in prices and thus into microeconomic decision-making in markets. sub-optimal market structures In economics, information asymmetry occurs when one party to a transaction has more or better information than the other party. (It has also been called asymmetrical information and markets with asymmetrical information). Typically it is the seller that knows more about the product than the buyer, but this is not always the case. Examples of situations where the seller usually has better information than the buyer are numerous and include used-car salespeople, stockbrokers, real estate agents, and life insurance transactions. Examples of situations where the buyer usually has better information than the seller include estate sales as specified in a last will and testament. This situation was first described by Kenneth J. Arrow in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review. George Akerlof later used the term asymmetric information in his 1970 work The Market for Lemons. He also noticed that, in such a market, the average value of the commodity tends to go down, even for those of perfectly good quality. It is even possible for the market to decay to the point of nonexistence. Because of information asymmetry, unscrupulous sellers can "spoof" items (like software or computer games) and defraud the buyer. As a result, many people not willing to risk getting ripped off will avoid certain types of purchases, or will not spend as much on a given item. [edit] Opportunity cost Main article: Opportunity cost Although opportunity cost can be hard to quantify, the effect of opportunity cost is universal and very real on the individual level. In fact, this principle applies to all decisions, not just economic ones. Since the work of the Austrian economist Friedrich von Wieser, opportunity cost has been seen as the foundation of the marginal theory of value. Opportunity cost is one way to measure the cost of something. Rather than merely identifying and adding the costs of a project, one may also indentify the next best alternative way to spend the same amount of money. The forgone profit of this next best alternative is the opportunity cost of the original choice. A common example is a farmer that chooses to farm his land rather than rent it to neighbours, wherein the opportunity cost is the forgone profit from renting. In this case, the farmer may expect to generate more profit himself. Similarily, the opportunity cost of attending university is the lost wages a student could have earned in the workforce, rather than the cost of tuition, books, and other requisite items (whose sum makes up the total cost of attendance). The opportunity cost of a vacation in the Bahamas might be the down payment money for a house. Note that opportunity cost is not the sum of the available alternatives, but rather the benefit of the single, best alternative. Possible opportunity costs of the city's decision to build the hospital on its vacant land are the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses -- but not all of these in aggregate. The true opportunity cost would be the forgone profit of the most lucrative of those listed. One question that arises here is how to assess the benefit of dissimilar alternatives. We must determine a dollar value associated with each alternative to facilitate comparison and assess opportunity cost, which may be more or less difficult depending on the things we are trying to compare. For example, many decisions involve environmental impacts whose dollar value is difficult to assess because of scientific uncertainty. Valuing a human life or the economic impact of an Arctic oil spill involves making subjective choices with ethical implications. The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S).[edit] Taxonomy of Microeconomics [edit] Fundamental concepts in microeconomics Elasticity - Consumer surplus - Producer surplus - Aggregation of individual demand to total, or market, demand [edit] Consumer theory Preference - Indifference curve - Utility - Marginal utility - Income [edit] Production and pricing theory Production theory basics - X-efficiency - Factors of production - Production possibility frontier - Production function - Economies of scale - Economies of scope - Profit maximization - Price discrimination - Transfer pricing - Joint product pricing - Price points [edit] Welfare economics Welfare economics - Pareto efficiency - Kaldor-Hicks efficiency - Edgeworth box - Social welfare function - Income inequality metrics - Lorenz curve - Gini coefficient - Poverty level - Dead weight loss [edit] Industrial organization Market form - Perfect competition - Monopoly - Monopolistic competition - Oligopoly - Concentration ratio - Herfindahl index [edit] Market failure - Collective action - Information asymmetry - Externality - Social cost - Free goods - Taxes - Tragedy of the commons - Tragedy of the anticommons - Coase's Penguin. [edit] Financial economics Efficient markets theory - Financial economics - Finance - Risk [edit] International trade International trade - Terms of trade - Tariff - List of international trade topics [edit] Methodology General equilibrium - Game theory - Institutional economics - Neoclassical economics - Austrian economics [edit] External links Wikibooks has a book on the topic of MicroeconomicsAmosWEB GLOSS*arama - online economics dictionary A free textbook of microeconomics, supplemented by software and data - Key concepts of microeconomics easily explained and thoroughly criticised. Smartalec Economic Discussion Board: [1] - Growing community for Economic discussion. Topics in microeconomics Scarcity • Opportunity cost • Supply and demand • Elasticity • Economic surplus • Economic shortage • Aggregation of individual demand to total, or market, demand • Consumer theory • Production, costs, and pricing • Market form • Welfare economics • Market failure Retrieved from "http://en.wikipedia.org/wiki/Microecono… Categories: Economics | Microeconomics ViewsArticle Discussion Edit this page History Personal toolsSign in / create account Navigation Main Page Community Portal Featured articles Current events Recent changes Random article Help Contact Wikipedia Donations Search Toolbox What links here Related changes Upload file Special pages Printable version Permanent link Cite this article In other languages Български Bosanski Català Česky Deutsch Eesti Ελληνικά Español Esperanto Français 한국어 Italiano עברית ქართული ລາວ Latviešu Lietuvių Македонски Magyar Nederlands 日本語 Norsk (bokmål) Norsk (nynorsk) Polski Português Română Русский Simple English Slovenčina Српски / Srpski Srpskohrvatski / Српскохрватски Suomi Svenska Tiếng Việt Türkçe 中文 This page was last modified 23:23, 20 September 2006. 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