Chapter 5

Microeconomics and macroeconomics

 Learning objectives
By the end of this chapter you will be able to:
explain the difference between
microeconomics and macroeconomics identify
the decision makers involved in
microeconomics and macroeconomics
5.1 The difference between microeconomics
and macroeconomics
Economics is divided into microeconomics and
macroeconomics. As their names suggest.
microeconomics is concerned with the small
scale and macroeconomics with the large
scale.
 Microeconomics
Microeconomics is the study of the behaviour
and decisions of households and firms and the
performance of individual markets .
Microeconomic topics include changes in the
earnings in a particular occupation and
changes in the output in the car industry.
 Macroeconomics
Macroeconomics is the study of the whole
economy. Macroeconomic topics include
changes in the number of people employed in
the economy and changes in the country’s
output.
The connection between macroeconomics
and microeconomics
Many of the concepts used in microeconomics are
also used in macroeconomics, but on a different
scale. For example, you will later examine the
demand for an individual product. and the total
demand for all goods and services in an economy.
You will also look at why the price of a particular
product may change and why the price level in an
economy may change .
 Interdependence
• Microeconomic decisions and interactions add
up to the macroeconomic picture. This means
that changes in the micro economy affect
changes in the macro economy and vice versa.
 Example
• For example, a reduction in the output of the
car industry may result in a rise in the
country’s unemployment rate Similarly, a
decision by the government to cut income tax
rates may result in households buying more
cars.
 Answer
• 1 (a), (b) and (e): microeconomics.
• (c) and (d): macroeconomics.
5.2 Decision makers in microeconomics and
macroeconomics
The decision makers in microeconomics and
macroeconomics are sometimes referred to as economic
agents. They are households, firms and government.
Households are buyers, also known as consumers,
savers and workers. Firms are business concerns that
produce goods and services, and employ workers and
other factors of production. Government is the system
which rules a country or region. A government produces
and provides some products, provides financial benefits,
and taxes and regulates the private sector
 The aims of decision makers
Households, as consumers, seek low prices and good
quality products. As workers, they want good working
conditions and high pay. As savers they want their money
to be safe and to give a good return. Firms in the private
sector usually try to make as much profit as possible. A
government wants a strong economy. It may have
objectives for the macro economy, including full
employment of labour It may also seek to improve the
performance of individual markets by, for example, taxing
the sale of cigarettes
 Answer
1 a Households. As workers, households would be
likely to welcome a shorter working week if pay is
kept the same. It would enable them to enjoy more
leisure time.
B Households. These will give consumers choice and
variety and may keep down prices.
C Firms. These will give them choice and variety and
may keep down the cost of raw materials.
D A government. Higher tax revenue would enable a
government to spend more money.
Multiple choice questions
Multiple choice questions
 Answer

AnswerMultiple choice questions

• 1A
• Both changes are concerned with activities in one
market.
• 2D
• The total output of the Egyptian economy is
influenced by what households decide to buy, what
Egyptian firms produce and how the government
affects the decisions of households and firms and
the output of state-owned enterprises.
 Four part question
A Define microeconomics (2)
B Explain whether decisions in microeconomics
involve an opportunity cost (4)
 Answer
• a Microeconomics is economics on a small
scale. It covers activity in individual markets.
For example, a microeconomic topic is
changes in the demand for and output of
oranges.
 Answer
• B The vast majority of decisions in microeconomics
involve an opportunity cost. This is because they have
implications for the use of economic resources which
have alternative uses. For example, a decision by
households to buy more chocolate may mean that they
are giving up the opportunity to buy fruit. A decision by
a footwear manufacturer to produce more shoes may
mean that it has to reduce its output of boots. It is only
in the case of a free good, such as air, which is available
in an infinite quantity without production, that there is
no opportunity cost.