1.3 – Microeconomics and Macroeconomics
Learning Objectives
By the end of this section, you will be able to:
- Describe microeconomics and macroeconomics
- Contrast monetary policy and fiscal policy
There is more than one way to slice and dice the discipline of economics. In addition to orthodox and heterodox perspectives, we can also think in terms of looking at the components that make up the economy versus looking at the complete system. Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses; Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports.
This distinction can be found within both orthodox and heterodox perspectives, although how the micro and the macro fit together is understood differently. Moreover, unlike the distinction between orthodox and heterodox economics, micro- and macroeconomics are not separate subjects. Rather they are complementary perspectives on the overall subject of the economy.
To understand why both micro- and macroeconomic perspectives are useful, consider the problem of studying a biological ecosystem like a lake. One person who sets out to study the lake might focus on specific topics: certain kinds of algae or plant life, the characteristics of particular fish or snails, or the trees surrounding the lake. Another person might take an overall view and instead consider the entire ecosystem of the lake from top to bottom; what eats what, how the system stays in a rough balance, and what environmental stresses affect this balance. Both approaches are useful, and both examine the same lake, but the viewpoints are different. In a similar way, both microeconomics and macroeconomics study the same economy, but each has a different viewpoint.
Whether you are looking at lakes or economics, the micro and the macro insights should blend with each other. In studying a lake, the micro insights about particular plants and animals help to understand the overall food chain, while the macro insights about the overall food chain help to explain the environment in which individual plants and animals live.
Macroeconomics
What determines how many goods and services a nation actually produces? What determines how many jobs are available in an economy? What determines a nation’s standard of living? What causes the economy to speed up or slow down? What causes businesses to hire more workers or to lay workers off? Finally, what causes the economy to grow over the long term? These questions are typical of macroeconomic studies, whether orthodox or heterodox.
An economy’s macroeconomic health can be defined by a number of goals: growth in the standard of living, low unemployment, and low inflation, to name the most commonly considered by economists. How can macroeconomic policy be used to pursue these