[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Microeconomics and
Macroeconomics:The
Two Branches of Economics
Economists have developed two different ways to look at the economy. The detailed
study of the decisions of firms and households, and of prices and production in specific
industries, is called microeconomics. Microeconomics (micro is derived from
the Greek word meaning “small”) focuses on the behavior of the units—the firms,
households, and individuals—that make up the economy. It is concerned with how
the individual units make decisions and what affects those decisions.
By contrast, macroeconomics (macro is derived from the Greek word meaning
“large”) looks at the behavior of the economy as a whole, in particular the behavior
of such aggregate measures as the overall rates of unemployment, inflation, and
economic growth and the balance of trade. The aggregate numbers do not tell us
what any one firm or household is doing. They tell us what is happening in total, or
on average. In a dynamic economy, there are always some industries expanding and
others contracting. For instance, the economic expansion of the late 1990s saw rapid
growth in Internet-related industries, while oil firms in Texas contracted. But there
are times when overall growth in an economy slows and times when the level of economic
activity actually declines, not just in an isolated industry but seemingly across
all or almost all industries.
In macroeconomics, we also look at the behavior of the general level of prices,
interest rates, and exchange rates. Why do prices of almost all goods and services
seem to rise at rapid rates during some periods, while at other times they remain
stable? Why do interest rates fluctuate? And what determines the value of the dollar
relative to other currencies?
In approaching these questions, it is important to remember that the behavior
of the economy as a whole is dependent on the decisions made by the millions of
households and firms in the economy, as well as the decisions made by the government.
Micro and macro perspectives are simply two ways of looking at the same
thing. Microeconomics is the bottom-up view of the economy; macroeconomics is
the top-down view.
Wrap-Up
THE BRANCHES OF ECONOMICS
Microeconomics: focuses on the decisions of households and firms and the detailed
study of prices and production in specific industries.
Macroeconomics: focuses on the behavior of the economy as a whole and the
behavior of aggregate variables such as overall employment, output, economic
growth, the price level, and inflation.
THE TWO BRANCHES OF ECONOMICS ∂ 17