Economics is something all should have a basic understanding of. Economics in its simplest terms can be defined as the study of how society uses its limited resources. Econ is a social science and it studies production, distribution and consumption of goods and services. Individuals on a daily basis make decisions on how they’re going to allocate their limited resources and Economics is the study of those decisions.
Let’s take a look at what exactly are Economic Resources… First, they can be divided into two different types of resources.
- Human Resources
- Labor & Management
- Nonhuman Resources
- Land, Capital Goods, Financial Resources & Technology
These economic resources are what we utilize to produce finished goods or services. They are called inputs. Outputs would be the quantity of goods or services produced in each time period. Inputs will vary from good to good or service to service. The goal is to use these resources in a way that can maximize finished goods or services at the lowest cost possible. This is very important relative to the size of a product or service because improper use of these resources can cause a business or a whole economy itself to suffer or worse case, fail.
Microeconomics Vs Macroeconomics
There are two different studies of economics, Microeconomics and Macroeconomics. Let’s take a deeper look to see the difference.
Microeconomics goal is to best understand how individuals and organizations prioritize the things they want. Micro formally defined is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Put simply, it is the smaller scale of the economics world. It is focused on the individual and their needs and wants. It pays close attention to action and interaction of humans and their choices and incentives.
An example of a microeconomic issue is the study of Supply and Demand. Supply is defined as an amount that a seller is willing to sell. Demand is the amount that buyers want to buy. These issues are a key driver behind any economy. Investors can study the supply and demand of a company’s products to help them determine if revenues can be increased by adjusting the price of the product. For example, if a company were to lower the price, they could sell a larger number of that product and therefor increasing the company’s overall revenue.
Now let’s look at Macroeconomics. To put it simply, Macro is the study of the entire economy. It is the branch of economics that deals with performance, structure, behavior and decision-making of an economy as a whole. This will include regional, national and global economies. Also, will examine indicators such as unemployment, interest rates, inflation, economic growth and exchange rates. So, Macroeconomics is the big picture, the 30,000 foot view of an economy. Macro is used by governments to determine and develop their economic policies. Macro will try to find correlations between different indicators.
Investors can use macroeconomic outlooks to determine where they will invest their money. They can find out what may be good now or in the future or what may be bad now or in the future, to invest in. Macro can help investors gauge the possible growth of a possibly industry or asset class.
Asset classes will be investments that are grouped together. Classes could be stocks, bonds, real estate and commodities.
I want to list some questions of Microeconomics and Macroeconomics that are aimed to be answered..
- How will demand for certain foods change, if income levels increase?
- What happens to consumer demand, if price of cars increase?
- What happens if interest rates rise?
- Will certain trade deals be a damper on economic growth?
To understand Macroeconomics, you must understand Microeconomics.
Taking Econ in school? Micro Or Macro first?
Many students will ask which course they should take first of econ, if they must take both. I personally took Micro first and found it to be a little more challenging than Macro. But I wouldn’t have understood Macro without taking Micro first. They both include mathematical equations, but Micro will include a little more equation solving. Macro will make sense after taking micro because you will have an idea how consumers act and many of the indicators talked about in Macro will be results of Microeconomic behaviors.