Economics · Ch 1 — Introduction to Micro Economics
Micro Economics and Macro Economics
Micro Economics and Macro Economics
The term 'Micro Economics' comes from the Greek word 'mikros', meaning small. Micro Economics studies the economic behaviour of INDIVIDUAL units of an economy — a single consumer, a single household, a single firm, or a single industry — and how prices and quantities are determined in individual markets. Because it examines the economy piece by piece, holding the rest of the economy fixed, Micro Economics is also called Price Theory: its central concern is how the price mechanism allocates scarce resources among competing uses, one market at a time.
'Macro Economics', from the Greek 'makros' meaning large, studies the economy as a WHOLE — aggregate output, the general price level, total employment, national income and economic growth — rather than any single unit within it. Because its central concern is the determination of national income and its distribution, Macro Economics is also called Income Theory.
| Basis | Micro Economics | Macro Economics |
|---|---|---|
| Scope | Studies individual units — a consumer, firm, or industry | Studies the economy as a whole — aggregates |
| Focus | Price determination in individual markets (Price Theory) | Determination of national income, output and employment (Income Theory) |
| Method | Slicing — the economy is examined one unit at a time | Lumping — individual units are added up into economy-wide totals |
| Equilibrium | Partial equilibrium — one market at a time, others held constant | General equilibrium — the economy-wide balance of many markets together |
| Key variables | Individual price, individual demand and supply, a firm's output | General price level, national income, aggregate demand and supply |
| Example question | Why did the price of onions rise last month? | Why did the country's inflation rate rise last year? |