Category: Brief Guide to Microeconomics

Reading Time: 4 minutes

Learning Goals:

By the end of this portion of these series of articles, you will have accomplished the following goals:

– Define microeconomics. – Define macroeconomics. – Differentiate between monetary policy and fiscal policy.

Economics is targeted at studying and improving the well being and financial state of all human beings, including those with and without meaningful employment, as well as those with high salaries and those with low salaries. Economics give due attention to the fact that goods and services that are used for something, can often emit byproducts that lead to environmental pollution. It examines the process in which a worker’s skills are improved by them investing in their education. It also examines how large labor unions or large businesses operate in such a way that is beneficial to society, as well as when they operate in such a way that benefits their members or owners at the detriment of society as a whole. It also examines how government spending, taxes, and regulations influence choices and opportunities in the scope of production and consumption.

It should have become pretty obvious by now that economics encompasses multiple different topics and subjects. These topics and subjects primarily fall into one of two subdivisions in economics: Microeconomics concentrates on on the actions of individual forces within the economy, such as households, workers and businesses, while Macroeconomics examines the entire economy. It focuses on topics such as enabling the growth of production as well as common inhibitors to it, the number of unemployed individuals within the total economy, inflation causing rising prices, monetary deficits within the government, and the levels of imports and exports. Microeconomics and macroeconomics should not be seen as mutually exclusive of each other, as they tend to compliment each other via the insight they provide on the economy as an organism or system.

In order to achieve the comprehension necessary to elaborate on why having both macroeconomic and microeconomic perspectives is more useful than just one or the other, you can compare them in similarity to researching a biological ecosystem such as a lake. A researcher who goes on a mission to study the lake might focus on a series of specific topics: specific types of algae or flora, the attributes possessed by various type of marine life and snails, or the trees that grow near the lake. Another research might take a more total approach and take into consideration the entirety of the lake, from what is food for what, how the entire ecosystem is able to maintain a rough equilibrium, and what environmental pressures are able to interrupt this balance. Approaching the study in both ways has it’s usefulness, and both set out to analyze the same lake, but the perspectives are not the same. In a similar matter, both microeconomics and macroeconomics analyze the same economy, but each takes on a different perspective of things.

It doesn’t matter if you are examining lakes or economics, the micro and macro insights should intertwine with one another. Where one would analyze a lake, the micro insights one gains regarding certain flora and fauna would help them comprehend the food chain, while the macro insights regarding the food chain go towards elaborating on the environment in which these individual varieties of flora and fauna reside.

In economics, the micro choices made by individual businesses are largely swayed and impacted by the level of health of the macro economy, one example being that companies have an increased chance of hiring extra workers if the economy as a whole is growing. And yet, the level of health of the macro economy is largely dependant and influenced by the micro choices made by individual businesses and households.

MICROECONOMICS

So what essentially are the deciding factors that contribute to how households and individuals spend their wealth? How can we combine certain types of goods and services to best achieve the needs and wants, in conjunction with the allocated budget for their spending? How do people determine when and where they should work, and if they do decide to work, whether it should be full time or part time in terms of hours? What is the process that governs people deciding to save money for the future, and if so, how much? What about the need or wants that might arise that cannot be covered by the budget, when is borrowing an option?

How is a company influenced into producing a certain quantity of products or services? What factors influence their pricing strategy for those products and services? What factors influence the ways in which those products and services are manufactured or procured? What factors influence things such as the amount of workers the company thinks it will need? How about it’s sources of finance and funding for it’s projects and operations? What factors influence whether or not a business will continue to operate, whether it wants to expand it’s operations or downsize, or even shut down completely? In the microeconomics portion of these series of articles, we will examine both the theory of consumer behavior as well as the theory of the firm.

MACROECONOMICS

What factors influence how much economic activity is occurring in a society? Plainly speaking, what contributes to how many goods and services a country is churning out? What factors influence the amount of jobs that are available for the taking in the economy? What factors contribute to the standard of living in a country? What factors contribute to a country’s economy going from full throttle to full reverse? What factors contribute to companies firing or hiring more workers? And last but not least, what factors contribute to an economy growing over a certain period of time?

An economy’s macroeconomic quality level can be assessed by a number of objectives attributed to it: when the standard of living begins to grow, when unemployment is low, and when inflation is low, which are some of the most crucial things required for a healthy and thriving economy. How can changing macroeconomic policy sway the pursuit of these objectives one way or another? Monetary policies, which can have an enormous impact on bank lending, financial markets and interest rates, are often carried out or designed by a country’s central bank. In the case of the United States of America, this central bank is called the Federal Reserve. Fiscal policy is something that encompasses government spending and taxes, tends to be designed and implemented by a country’s legislative branch. As it pertains to the United States, this would be Congress, and the executive branch, which forms the federal budget for the rest of the government. These are the main weapons the government has in terms of fighting against the war of it’s own ineffectiveness. Americans expect this government to fix any economic issues that the country as a whole might run into, but how realistic is it to carry this assumption around? These are just a taste of the microeconomic and macroeconomic issues that will be examined throughout these series of articles.

Reading Time: 10 minutes

THE GOALS OF LEARNING

By the time we reach the end of this segment, you will acquire the ability to conversate about the significance of researching and studying the field of economics, examine and articulate the connection between production and the division of labor, and assess the impact of scarcity.

Economics can be described as the study of how humans make choices with scarcity as the primary condition. These can be choices made by individual persons, as a family unit, by a business or by society as a whole. If you examine with feverous squinting your surrounding environment, you will realize that scarcity is a major facet of reality. Scarcity can be defined as the situation where human wants for goods, services and resources, are more than what is around at the time. The resources needed to produce the goods and services humans want are things such as labor, tools, land, raw materials and capital, yet they are limited in their supply. At the end of the day, the most scarce resource we have is time, whether a person is rich or poor, only has 24 hours in a single day to attempt to acquire the goods and services they are seeking. At any time, it’s safe to say that our resources are finite.

One way to think about it is this: In 2015, the labor force of the United States of America consisted of over 158.6 million workers, as per the U.S. Bureau of Labor Statistics. It’s also worth noting that the total area of the United States is 3,794,101 square miles. These are quite the hefty numbers for such important resources, but the fact still remains that they are rather limited. Due to the fact that these resources are limited, it’s also safe to ascertain the unfortunate assumption that goods and services that can be produced with them is also limited. If you put this in combination with the notion that human wants appear to be infinite, scarcity as a problem becomes more apparent and identifiable.

The homelessness epidemic, for example, is one way to prove scarcity exists.

If you don’t think scarcity is actually that significant, consider the following economic problem: Does every human being on the planet need to eat food in order to survive? Does everyone need shelter in order to survive? Is everyone able to attain healthcare if they needed it? In every single country on the planet, there are those who are hungry, homeless, and need healthcare as soon as possible in order to survive, but simply do not have access to it. The most rational label that can be attributed to these scenarios in the economic sense is scarcity. Scarcity is to economics as a concept what underwear is to a buttocks, therefore we need to examine scarcity a bit further in order to be able to understand economics better.

THE ISSUE OF SCARCITY

If you consider all the things that are the focus of our consumption, such as food, water, healthcare, electricity, shelter, clothing, transportation and entertainment, then how would you go about acquiring those items? Chances are that you don’t manufacture them yourself. More than likely you go out and buy them. How are you able to afford the things that you buy? You work in exchange for getting paid. In case you don’t work, chances are someone else is working and getting paid to help you survive. Yet despite this, the vast majority of the human population never has enough money to spend in order to acquire all the things they want. This is all too common of an issue arising out of this concept of scarcity. So how do we go about finding a solution?

Every level of every society must determine the appropriate ways in which to utilize their own resources. A family must determine whether it’s best to buy a new car or spend that money on a vacation instead. Towns must decide between allocating a greater portion of it’s budget to police and fire protection or the educational system. Countries must choose between allocating a greater budget for armed defense or for the purposes of ecological protection. Most of the time, there is simply not enough money in the entire budget in order to allocate financial resources to everything in order to accomplish every single goal. So why don’t we just manufacture the things that we consume ourselves? The most simple answer to this question is that most of us do not know how to manufacture these things, but it is not the only answer that factors in here. With the study of economics you will learn things such as the fact that the most obvious choice is not always the right answer, or at the very least, the complete answer. By studying economics, you will begin to think and perceive the world in new ways. If you think back to the time of the pioneers, you will realize that people knew how to perform many more tasks than we do today, from building their own houses to growing their own crops, to hunting for food, as well as to repairing their equipment. The majority of human beings now do not know how to execute some of these tasks, and some of us don’t know how to do any of them! This is not due to the fact that we cannot learn these things, or have lost our capacity to do so, but instead it has become so we don’t have to. Adam Smith in his book The Wealth of Nations pioneered this idea through his defining of the division and specialization of labor.

THE DIVISION OF LABOR AND SPECIALIZATION OF LABOR ROLES

Economics as a formal study has it’s roots with Adan Smith who lived from 1723 to 1790, and whom published his legendary treatise on economics titled The Wealth of Nations, in the year 1776. There had been many authors who had written about the subject of economics in the centuries prior to Smith, but he was the first to write on the subject in a more extensive manner. In the first chapter of the Wealth of Nations, Smith presents the concept of the division of labor, which essentially proposed that a good or service being produced can be divided into a variance of tasks produced by different workers, as opposed to all tasks required to produce that good or service being carried out by a single worker.

In order to paint a better picture of the division of labor, Smith counted the number of tasks that were required to make a pin: drawing out a piece of wire, cutting it to the correct length, placing a head on one end and a point on the other, then packaging the pins, just to name some of the tasks included in this process. Smith counted 18 distinct tasks that were required to build a single pin!

Businesses in contemporary times also divide tasks. Even a somewhat simple business such as that of a restaurant divides up the tasks regarding the cooking of meals between several different roles such as top chef, sous chefs, kitchen assistants, dishwashers, servers to be waiters for the tables, greeters to meet people at the door and find them seating, janitors to clean up everyone’s mess, as well as a manager to deal with everyone’s paychecks and bills, and this is not to exclude the economic connections a restaurant keeps with it’s suppliers of food, furniture, kitchen equipment as well as the landlords that own the building where the restaurant happens to be. A more sophisticated business such as that of a manufacturing enterprise, such as that of a shoe factory, or something like a hospital, might consist of hundreds of job classifications working within it’s corridors.

HOW DOES THE DIVISION OF LABOR HELP TO INCREASE PRODUCTION?

If we took the tasks required to produce a good or service and divided and sub-divided them among different workers tasked with different roles, we are able to get these workers as well as the industry to produce a greater output than they normally would have if the workers took on all tasks individually and simultaneously. In the research for his book, Smith observed workers in pin factories produce 20 pins per day when tasked with all the tasks required in producing them, yet a small business of 10 workers, each tasked with only repeating 2-3 tasks out of the total 18 required to produce a pin, the production output increased to 48,000 per day, which, is 240x more than if each of those 10 workers was tasked with doing 20 tasks instead. So we need to examine how is it that, a group of workers each performing their own set of specialized tasks, is able to out-produce the group who is trained to perform all tasks required in the process to produce a pin? Smith suggested three reasons for this phenomena.

The first reason is a worker is afforded concentration focus in an area that they have some advantage in, and specialize accordingly to build on top of that strength as opposed to where they might have a weakness with a partiular task in the production process. Later on in these series of articles, we will build on this idea by discussing the concept of comparative advantage. People appear to have various skills, talents and interests, so they will be naturally more suited and productive at some jobs and tasks over others. These particular advantages may arise out of previous educational experience, which are additionally molded by interests and talents. It is only those who possess degrees in medicine that qualify to become doctors, to give you one example. For certain goods, specialization relies on factors such as geography – it is easier to become a wheat farmer in a place such as North Dakota over that of Florida, and yet it would be easier to operate a tourist hotel in Florida than in North Dakota. Likewise, if you live closer to a large city it would be easier to entice a sufficient quantity of customers to come to your dry cleaning business or movie theater than if you were located in a sparsely populated rural area that did not have a sufficient population that would convert a large enough portion to sustain this business. Therefore, if people lean towards specializing in things they know how to do best, they will gain greater efficacy in their productive abilities, than if they were to combine their knowledge to produce things they are both good at as well as not so good at.

The second reason is that workers who specialize in fewer tasks will learn to produce something faster and with higher quality than if they spread out their efforts over more tasks. This pattern is apparent for most workers, and includes workers such as those who work on the assembly line piecing together cars, barbers and stylists who cut hair, and cardiosurgeons who perform open heart surgery. It’s also proven that specialized workers know their skill well enough that they can come up with innovative ways to improve upon their worker so it is faster and better.

A kindred pattern can be observed in businesses. In many cases, a business that focuses on one or a handful of products, which is often referred to as the business’s core competency, ends up having higher rates of success than businesses who attempt to sell a wider assortment of products.

The third reason is that economies of scale can be to the advantage of businesses via specialization in that with the increasing number of a certain good being produced, the cost to produce eacn individual unit tends to decline. To illustrate this, imagine a car factory that produces only 100 cars per year. Each car would be relatively expensive to produce. Yet, if a factory produces 50,000 cars per year, then it’s worth the factory’s investment to set up assembly lines and buy enormous machines that workers will use to perform specialized tasks, the average cost to produce each individual car will significantly diminish. The results derived from workers who perform specialized tasks and can concentrate on their talents and preferences, perfect their specialized tasks, and work in large organizations in a society that would benefit more from the specialization and distribution of labor in such a way that is more efficient and results in faster production output than if each person attempted to produce their own goods and services. The division and specialization of labor has truly been a remarkable paradigm shift to curbing scarcity.

TRADE AND MARKETS

Specialization is obviously only rational if employees who are paid for doing these specialized tasks are able to pay for other goods and services that they do not produce themselves. Simplified, in order for specialization to work, the main requirement is trade.

You do not need to have prior knowledge of electrical engineering or acoustic systems in order to know how to play music, you can just buy an MP3 player, download the music and listen to it on the MP3 player. You don’t need to have a full breadth of knowledge regarding artificial fibers or how sewing machines are constructed if you want to buy an article of clothing such as a skirt or a t-shirt, you simply go out and buy the skirt and wear it. You also do not need to be a mechanical engineer or know the intricacies of an internal combustion engine in order to operate an automobile – you just need to get inside the car and start driving. So instead of attempting to acquire all the knowledge, skills and abilities required for the manufacturing of all the goods and services that one would want to consume, the market enables you to learn only a specialized set of skills and then use the pay that you receive for your own skills to buy the goods and services that you want or need to consume. This is the process through which our society has developed a powerful economy.

WHY SHOULD YOU STUDY ECONOMICS?

Now since we’ve gone through a brief overview of what is typically studied in the field of economics, let’s now briefly further convince you why you should study it. Economics should not be seen as a set of facts that should be memorized, even though there lies a plethora of crucial ideas that need to be learned. Economics instead should be perceived as a compendium of questions that need answers or a series of puzzles that must be pieced together. Most crucially, economics will give you the necessary knowledge and tools required in order to work these puzzles out. If you have not yet been bitten by the economics “bug”, there are several other reasons why you should begin studying the field of economics.

– Basically every major issue that is plaguing the world today, ranging from global warming to world poverty, to the wars in Syria, Afghanistan and Somalia, contains an economic element. If you want to be involved in resolving these issues, you will need to be able to comprehend all the dimensions involved in them. Economics is one of these dimensions and having a thorough knowledge of the subject is required for resolving these issues.

– It is a bit difficult magnifying the crucial nature economics plays in terms of good citizenship. You need to possess the knowledge required for informed voting in regards to budgets, regulations, policies and laws that have societal implications. When the US government came to a halt due to the fiscal cliff of 2012, what issues were present? Would you happen to know?

– Having a fundamental comprehension of economics will increase your ability to think in ways that are more well rounded. When you read any article regarding economic issues, you will be better able to comprehend and assess the writer’s point of view. When you hear school mates, work colleagues, or politicians talking about economics, you will be able to differentiate between common sense in economics and nonsense being passed off as economics. You will discover new approaches to thinking about current events and regarding personal and business decisions, as well as politics.

The field of economics doesn’t provide the answers, but it is able to light the path to various choices and opportunities.

Reading Time: 3 minutes

Is Facebook one of the things that you use frequently? One thing that has an enormous impact on economics is how information travels through society. In this day and age, the biggest names in social media, such as Twitter, Facebook and Instagram are heavy hitters when it comes to forming the information super highway.

In the following series of articles, we will examine the following things:

> What is economics, and why is it significant? > The differences between microeconomics and macroeconomics. > The use of economic models and theories by economists for purposes of analysis and comprehension of economic topics. > The organization of economies and the variety of different economic systems that exist and have existed throughout the world.

Example of Decisiveness:

Should we post or not post? Every single day we run into simple issues that require us to make a decision either one way or another, and among these include what to eat for breakfast, lunch or dinner, to which streets to take to class or to work, to more complicated decisions, such as “Should I do a double major and add an additional semester to my education?” How we respond to these situations largely depends upon the circumstances as well as the access to available information that we can retrieve at that particular moment: This information is often referred to as “imperfect” by economists, as we seldom have all the data we require in order to make the highest quality decisions available to us. Despite the fact that we do not have all the data required, we are still able to process the information we already have and make hundreds of decisions per day.

Now, we have another available means through which we can collect information and that means is social media. Social media outlets such as Facebook and Twitter have adjusted the procedures that we use in order to make certain choices, how we use our time, what movies or TV shows we decide to watch next, what things we buy, and many other changes. For example, what percentage of you go on to choose a university without first looking at it’s Facebook page or Twitter feed to see the type of information it posts as well as whether they provide feedback to your questions as well as to those of others.

As you will realize in these series of articles, how economics and economic markets are affected largely depends upon the dessimination of information in a society, such as how fast information travels through the social media platform Facebook. “Economists love nothing better than when deep and liquid markets operate under conditions of perfect information,” states Jessica Irvine, National Economics Editor for News Corp Australia.

This takes us the inevitable path of confronting the purpose of these series of articles, which is an introduction to the realm of decision making, information processing and parsing, and understanding behavior when it comes to the markets – this is all within the realm of economics. Each segment of different articles in these series of articles will begin with a reference and commentary into current and sometimes past events, at the end of each segment in order to try and bring the concepts learned here into a more practical sort of use.

What is economics and why is it worthwhile to devote your time to studying it? There are surely other things you could be doing with your time, including studying other fields. We we’ve seen the Example of Deciseveness, economists study how people make choices, and the choice for you to read these series of articles and study more about economics can also be considered an economic choice.

Economics might not be what you envisioned it would be. It is not mostly about money or finance, business or mathematics. So how can we define economics? It is both a way of perceiving the world as well as an discipline or area of study in it’s own right.