4. Markets

Units of government have a major impact on the economic life of firms and households. Their decisions, in turn, are affected by events in the economy. Economists are interested not only in the actions of households, firms and units of government, but also in how those actions are coordinated. In an economy like that of the United States, markets play a key role in coordination.

A market is any arrangement people have for trading with one another. Some markets, like the New York Stock Exchange, are highly visible and organized. Others, like the word-of –mouth networks that put teenage baby-sitters in touch with people who need their services, do their work informally, out of sight. Whether visible or not, markets play a key role in the job of putting scarce resources to their best uses in meeting people’s wants and needs.

In order to put resources to their best possible uses, the people who make decisions must know which resources are scarcest and which uses for them are best. Markets transmit information about scarcity and resource values in the form of prices. If a good becomes scarcer, its price is bid up. The rising price signals buyers to cut back on the amount of that good they buy, and it signals producers to find new sources of supply or substitute less costly resources. If a good becomes more abundant, its price tends to fall. The falling price signals users to favour that good over more costly ones.

MICROECONOMICS AND MACROECONOMICS COMPARED

The discipline of economics is divided into two major subjects called microeconomics and macroeconomics, which economists often call simply “micro” and “macro”. Microeconomics is the study of individual households, firms and markets. Macroeconomics is the study of the economy as a whole.

Microeconomics and macroeconomics differ in the questions each asks and in the level of aggregation each uses. Microeconomics deals with the determination of prices and quantities in individual markets and with the relations among these markets. Thus it looks at the details of the market economy. Microeconomists analyze market structure: why some markets are highly competitive, with hundreds or even thousands of firms producing a product, whereas other markets are very concentrated with only one or a very few firms producing a given product. Microeconomists analyze the causes and effects of these different market structures. Microeconomic analysis also examines the market for inputs to the production process. These inputs include capital such as machinery and, very importantly labour. The study of labour markets covers issues of wages, hours of work, and working conditions and extends to such related issues, as discrimination in the labour markets and the role of labour unions. Microeconomics also studies the principles of markets failure and the ways the government can deal with such failures. Finally, microeconomists do positive economic analysis of governments – how and why governments behave as they do.

In contrast, macroeconomics focuses on much broader aggregates. It looks at such thing as the total number of people employed and unemployed, the average level of prices and how it changes over time, national output, and average level of prices and how it changes over time, national output, and aggregate consumption. Macroeconomics asks what determines these aggregates and how they respond to changing conditions. Whereas microeconomics looks at demand and supply with regard to particular commodities, macroeconomics looks at aggregate demand and aggregate supply.

MICROECONOMICS

Microeconomics studies the economic decision making of firms and individuals in a market setting: it is the study of the economy in the small. Microeconomics focuses on the individual participants in the economy: the producers, workers, employers and consumers. In everyday economic life, thing are bought and sold, people decide where and how many hours to work. Business managers decide what to produce and how this production is to be organized. These activities result in transactions (business deals) that take place in markets where buyers and sellers come together. People involved in microeconomic transactions are motivated to do the best they can for themselves with the limited resources at their disposal. They use marginal analysis to determine their best course of action.

Microeconomics deals with the determination of prices and quantities in individual markets and with the relations among these markets. Microeconomists analyze market structure: why some markets are highly competitive, whereas other markets are very concentrated with only one or a very few firms producing a given product. Microeconomics also studies the principles of markets failure and the ways the government can deal with such failures. Finally, microeconomists do positive economic analysis of governments – how and why governments behave as they do.