First, the fundamentals
Income
Expenses
Taxes
Interest
Healthcare
Savings
What is common among the above? You might think “money” as a common factor. But no, it is YOU! Everything that happens with money is related to you and not the other way round. Paul Krugman, the Noble prize-winning Economist, says economics is all about people - how they earn their money and how they spend their income.
Broadly, economics is classified into two types - Macro & Micro. The study of larger aspects (a bigger picture) like a country is Macroeconomics while studying on a smaller level is microeconomics, hence the prefixes respectively. To simply put, microeconomics is examining the performance of one student in a classroom while macroeconomics is examining the performance of an entire class.
You may wonder why this distinction is required in the first place. If in a classroom only one student is struggling to study well but all others are getting good grades, the kind of actions needed to be taken is different (providing that student with individual attention). Whereas if the entire classroom is unable to get good grades, the kind of effort required here is different. Maybe there is an issue with the teacher. Maybe the ambiance is not good enough for the students to focus on the class. Anything.
Macro is study of forest and micro is study of the trees
Who takes the responsibility for macro and micro?
The responsibility for each branch of study can be assigned to two different institutions in this regard - the markets and the government. While in theory, it is technically possible to have a pure-Market based economy or a pure-Command based economy, in reality, all economies are mixed. Micro being governed by the markets and macro by the government. Markets provide resources based on the free will of the people - voluntarily for monetary benefits. Govt provides resources in terms of intangible efforts like taxes, regulations, reforms, etc (fiscal policy)
Over a period of time, we started having representing bodies for each of these branches. Currently, the monetary policy is handled by the central bank (RBI in India) and fiscal policy is handled by the government (Finance Ministry).
There is going to be no end to learning on Micro and macroeconomics. We will continue to dwell deeper into these topics as we progress.
Goals and objects
For macroeconomics - Price stability and employment
For microeconomics - Efficiency (growth) and income/wealth distribution
Price stability: There is no industry in the world that the government cannot intervene and set some rules and regulations so all the players go through a smooth transaction.
Employment: While people are willing to work voluntarily on their free will, it is the government’s job to ensure all available resource of a country is fully employed to produce more goods and services. [A separate post on why employment in a market is not falling under microeconomics but under macro]
Efficiency: Efficiency, or more precisely growth, will ensure that the economy is growing faster than the growth rate of the population. This is important to ensure a healthy standard of living is provided to the players.
Equality: Fair distribution of income and wealth is important among players to ensure everyone can purchase goods at the price fixed by the government. [Separate post on why equality is falling under microeconomics and not under macro]
Some questions
Which of the following is an example of a macroeconomic question?
a. How many smartphones should Samsung produce this quarter?
b. What is the optimal number of workers for a juice shop to employ during the summer?
c. Who are the winners and losers from the imposition of a tax on cigarettes?
d. How will a consumer react if their income decreases?
e. What would be the likely impact of an increase in business taxes on the overall level of inflation in the country?
Which of the following are the key differences between market economics and command economics?
a. There are a winner and a loser in every exchange in a market economy.
b. Money is used to facilitate exchanges in market economies, but not command economies.
c. Resources are owned by private individuals, rather than by the government, in a market economy.
d. The government makes all resource allocations in a market economy
Frequently used terms
Supply/ demand
Scarce/ abundance
Command/ market
Asset/ liability
Credit/ debit
These terms will be covered one by one as and when the topic arises.
What am I reading?
The age of diminished expectations by Paul Krugman
How to lie with statistics by Darrell Huff
Answers to the above questions
e
c