Lesson 2: Microeconomics Vs.

Macroeconomics

This distinction is a way of classifying the different problems economists study based on
the level of detail we want to consider. Economic theories broadly fall under two categories:
microeconomics and macroeconomics.

BRANCHES OF ECONOMICS

Microeconomics vs Macroeconomics

Micro—from the Greek word ‘mikros’, meaning ‘small’.

Microeconomics takes a close-up view of the economy and analyzes individual parts of
an economy- a consumer, a business firm, an industry, a single market-rather than the whole
economy.

Macro— from the Greek word ‘makros’, meaning ‘large’.

Macroeconomics takes an overall view of the economy. It deals with the economic
behavior of the whole economy or its aggregates (composed of individual units).

Aggregates – Business, government, households

Macroeconomists focus on the national, regional, and global scales. The purpose is to
maximize national income and provide national economic growth.

Microeconomics focuses on individual parts of the economy while macroeconomics looks

at the economy as a whole.

Macro Variables: National Income, Inflation Rate, and Interest Rate

Economic Indicators

National Income is the total amount of money earned within a country over a period of time. It
includes GDP, GNP, and net national income. Increases in National Income mean that the
economy has grown.

GNP vs. GDP

Gross National Product (GNP)

It is the total market value of all the final goods and services produced by nationals of a country
in one year.

Gross Domestic Product (GDP)

It is the total market value of all the final goods and services produced within the territory of a
country in one year.
Lesson 2: Microeconomics Vs. Macroeconomics

This distinction is a way of classifying the different problems economists study based on
the level of detail we want to consider. Economic theories broadly fall under two categories:
microeconomics and macroeconomics.

Price Indices

Price Index is the measure of how prices change over a period of time. It is a way to measure
inflation.

Inflation – an increase in the overall price level

Deflation – a decrease in the overall price level

Sustained Inflation – an increase in the overall price level that continues over a significant period.

Interest Rate

An interest rate is the percentage of principal charged by the lender for the use of its money.
Since banks borrow money from you (deposits), they also pay you an interest rate on your money.

Unemployment

It is the inability of the labor force to find job.

Labor Force – people 15-64 years of age; willing and able to work

Employed + Unemployed = Labor Force

BRANCHES OF MODERN ECONOMICS

POSITIVE ECONOMICS VS. NORMATIVE ECONOMICS

This distinction in economics is based on the purpose of analyzing a problem.

In positive economics, we can test whether it is right or wrong by checking it against the
facts. It attempts to determine how the world is. Positive Economics is essentially about cause-
effect relationships that can be tested.

Normative economics requires us to make judgements about different outcomes and our
judgement depends on our values. It goes beyond how the world is and considers how the
world ought to be and deals essentially with policy goals.

Most public policy is based on a combination of both positive and normative economics.

A clear understanding of the difference between positive and normative economics may
lead to better policy-making if policies are made based on a balanced mix of facts (positive
economics) and opinions (normative economics).
Lesson 2: Microeconomics Vs. Macroeconomics

This distinction is a way of classifying the different problems economists study based on
the level of detail we want to consider. Economic theories broadly fall under two categories:
microeconomics and macroeconomics.

Making Economic Decisions

Business firm employs resources to produce goods and services to be sold in the market.

Entrepreneurs seek new business opportunities and develop new ways of doing things.

Applied Economics is the use of economic theories and models to explain why certain events
occur, predict the likely effects of events and government actions, and recommend courses of
action for business and government to follow.

Economic Theory – constructed by economists. It is a statement or set or related statements of a

presumed relationship between two or more economic variables

Economic Model – often composed of diagrams and equations – is a formal statement of an

economic theory.

Prepared by:

Ms. Khryssia Mae Crespo