ECONOMICS ECS1500
DIFFERENCES BETWEEN MICROECONOMICS AND MACROECONOMICS
MICROECONOMICS MACROECONOMICS
The price of a single product The consumer price index
Changes in the price of a single Inflation
product
The production of a product The total output of all goods and services
The decisions of individual consumers The combined outcome of the decisions of all
consumers in the country
The decisions of individual firms or The combined decisions of all firms in S.A
businesses
Microeconomics – the focus is on individual parts of the economy.
Decisions or functioning of decision makers such as individuals,
households, firms or other orgs. Are considered in isolation from the rest
of the economy.
Macroeconomics – is concerned with the economy as a whole. An overall
view of the economy and aggregate economic behavior is studied.
Emphasis on topic such as total production, income and expenditure,
economic growth, aggregate unemployment, inflation etc. is studied.
The problem of economizing is essentially one of deciding how to make
the best use of limited resources to satisfy unlimited wants
Opportunity cost is best defined as the value of the best alternative
sacrificed when a choice is made
An unskilled labourer would be viewed by economists as a factor of
production.
A technological improvement in the production of a good or service will
cause a rightward/outward shift of the PPC
Interest is income from capital
A capital intensive production system is dominated by capital goods
Capital, wealth and natural resources are stock variables, whereas
investment, profit and losses are flows.
Firms are the purchasers of capital goods in a simple circular flow
The bars above symbols in formula for law of demand implies that the
ceteris paribus rule applies
Under perfect competition the maximum loss a firm will make in the short
run is equal to the total fixed cost.
Under perfect competition information is complete and collusion is
impossible
Monopoly – the ability to influence the market price and the market
output
Oligopoly – the market is dominated by few large firms with market
power ,the strategy can be to join forces and it is called cartel forming
A change in the price of the other factors of production will shift labour
demand curve
1
, A trade union that bargains only for an increase in wages will cause
unemployment
Minimum wages are propagated as a way to avoid exploitation of
workers.
An important similarity between the monopolistic competitor and
oligopolist is that both have incomplete information about market
condition
Monopoly – has thorough knowledge of market conditions
Law of demand implies that as prices fall quantity demanded increases
Demand curve will shift right if there is an increase in the price of the
substitute product
Supply curve will shift left when there is an increase in the price of inputs
An increase in supply and a decrease in demand will always cause a
decrease in the equilibrium price.
An increase in both demand and supply will increase an equilibrium price
Under perfect competition market the participants(firms is a price taker
If a firm under in a perfectly competitive market raises its price above the
market price sales will drop to zero
Demand curve under PC – the demand curve is indicated by a horizontal
line at the given market price
A firm can expand production in the short run by employing more units of
the variable factor of production.
Price elasticity measure the responsiveness or sensitivity of consumers to
price changes
Producers are interested in the price elasticity of demand for their
product because it indicates what will happen to their total revenue when
the price of the product changes
The price elasticity of demand is different at each point along a linear
demand curve
Marginal utility is the extra or additional utility that a consumer derives
from the consumption of one additional unit of good
Marginal utility will decline if identical units of a good are consumed one
after the other
Nominal wage is the amount of money actually received by a worker per
hour, week, day, month, or year
A real wage is the quantity of goods and services that can be purchased
with the nominal wage
Equilibrium condition for the individual firms demand for labour -
MRP=W or MPP x P=W
Labour is a derived demand because labour is not demanded for its own
sake, but rather for the value of the goods n services that can be produced
when labour is combined with other factors of production.
Excess supply – when the quantity supplied is greater than the quantity
demanded
When there is a market shortage the quantity produced will increase
The price of a product will decrease when there is a market surplus
Equilibrium in the market – Qd=Qs
2
, Consumer to be in equilibrium – the weighted marginal utilities of the
condition of goods are of equal utility from the last rand spent on each
product
Primary sector – raw materials are produced
Secondary sector – manufacturing part of the economy
When all firms earn normal profit = industry in equilibrium in the long
run
The economic problem arises from the coexistence of unlimited wants
and limited resources
Normative statement – factual , unemployment is the most important
economic problem worldwide
Factor of production – a national road, labour of households, arable land
used for sowing
Economic systems are based on any or a combination of 3 coordinating
systems;(i) tradition,(ii) command and (iii) market
Market capitalism-most of the factors of production are privately owned
with limited government intervention.
The demand for labour is a flow variable
Capital is s stock variable
A decrease in demand together with an increase in supply = fall in
equilibrium price
Fixing a minimum price above the equilibrium price will result in an
excess supply
If producers are faced with a unit elastic demand curve , they cannot raise
their total revenue by increasing or decreasing the price of product
When the percentage change in quantity demanded is relatively small
compared to the percentage change in price it can it can be said that the
demand is relatively inelastic
If the income elasticity of demand is negative the product is an inferior
good
The larger the number of substitutes and the closer the substitutes are
and in the case of luxury goods and services the more elastic the price
elasticity is
In the analysis of consumer behavior the aim of the consumer is to obtain
the highest attainable level of total utility
Perfect competition exists if all the buyers and sellers have perfect
knowledge of market conditions and all the factors of production must be
perfectly mobile
Monopoly – have the ability to control market output and the firm is a
price setter.
Demand refers to quantity of a product that potential buyers are willing
and able to buy
Demand is a flow variable
A fall in the price of a product will not shift the demand curve for a
product
A market supply curve is a horizontal summation of the individual supply
curves
3
, An increase in the price of the a substitute product will increase the
demand for a product
A decrease in the price of flour used to make bread is most likely to
increase the supply of bread
When the quantity demanded is greater than the quantity supplied the
price will rise to the equilibrium price
A change in the price of a product will not shift the supply curve, ceteris
paribus (other things being equal).
A decrease in demand together with an increase in supply will definitely
result in an increase in equilibrium price
Equilibrium occurs when quantity demanded equals quantity supplied
When there is excess supply in the market the price will decrease
Fixing the minimum price below the equilibrium price will not disturb the
market
Simultaneous increase in supply and demand will lead to an uncertain
change in equilibrium price and equilibrium quantity will increase
Price elasticity of demand is a proportionate change in quantity
demanded divided by a proportionate change in price
Demand is inelastic when the proportionate change in quantity
demanded is less than a proportionate change in price
If the price elasticity of demand coefficient is greater than one then an
increase in price will cause a decrease in total revenue
Total utility decreases when marginal utility is negative
The aim of rational consumers is to maximize their utility given the
available means and alternatives at their disposal
A consumer is in equilibrium if the combination of goods are affordable
According to the law of diminishing returns total product is reaching a
maximum when MP=0
The U shape of the marginal cost curve reflects the law of diminishing
returns
Marginal product reaches a maximum when a corresponding marginal
cost is at a minimum
Perfect competition occurs when none of the individual market
participants can influence the price of a product
No collusion means each seller must act independently
Characteristic of perfect competition – identical goods are sold in the
market, there is no government intervention, factors of production are
perfectly mobile
Shut down rule and the profit maximizing rule are the rules for profit
maximization of any firm in the short run
Monopolistic competitive market – firms produce similar but slightly
different products
Market participants under Perfect Competition are price takers
Monopolistic competition is characterized by incomplete information
The demand curve of a monopolist equals the market demand curve
Under oligopoly there are only a few firms
Uncertainty is one of the features of an oligopoly
4
DIFFERENCES BETWEEN MICROECONOMICS AND MACROECONOMICS
MICROECONOMICS MACROECONOMICS
The price of a single product The consumer price index
Changes in the price of a single Inflation
product
The production of a product The total output of all goods and services
The decisions of individual consumers The combined outcome of the decisions of all
consumers in the country
The decisions of individual firms or The combined decisions of all firms in S.A
businesses
Microeconomics – the focus is on individual parts of the economy.
Decisions or functioning of decision makers such as individuals,
households, firms or other orgs. Are considered in isolation from the rest
of the economy.
Macroeconomics – is concerned with the economy as a whole. An overall
view of the economy and aggregate economic behavior is studied.
Emphasis on topic such as total production, income and expenditure,
economic growth, aggregate unemployment, inflation etc. is studied.
The problem of economizing is essentially one of deciding how to make
the best use of limited resources to satisfy unlimited wants
Opportunity cost is best defined as the value of the best alternative
sacrificed when a choice is made
An unskilled labourer would be viewed by economists as a factor of
production.
A technological improvement in the production of a good or service will
cause a rightward/outward shift of the PPC
Interest is income from capital
A capital intensive production system is dominated by capital goods
Capital, wealth and natural resources are stock variables, whereas
investment, profit and losses are flows.
Firms are the purchasers of capital goods in a simple circular flow
The bars above symbols in formula for law of demand implies that the
ceteris paribus rule applies
Under perfect competition the maximum loss a firm will make in the short
run is equal to the total fixed cost.
Under perfect competition information is complete and collusion is
impossible
Monopoly – the ability to influence the market price and the market
output
Oligopoly – the market is dominated by few large firms with market
power ,the strategy can be to join forces and it is called cartel forming
A change in the price of the other factors of production will shift labour
demand curve
1
, A trade union that bargains only for an increase in wages will cause
unemployment
Minimum wages are propagated as a way to avoid exploitation of
workers.
An important similarity between the monopolistic competitor and
oligopolist is that both have incomplete information about market
condition
Monopoly – has thorough knowledge of market conditions
Law of demand implies that as prices fall quantity demanded increases
Demand curve will shift right if there is an increase in the price of the
substitute product
Supply curve will shift left when there is an increase in the price of inputs
An increase in supply and a decrease in demand will always cause a
decrease in the equilibrium price.
An increase in both demand and supply will increase an equilibrium price
Under perfect competition market the participants(firms is a price taker
If a firm under in a perfectly competitive market raises its price above the
market price sales will drop to zero
Demand curve under PC – the demand curve is indicated by a horizontal
line at the given market price
A firm can expand production in the short run by employing more units of
the variable factor of production.
Price elasticity measure the responsiveness or sensitivity of consumers to
price changes
Producers are interested in the price elasticity of demand for their
product because it indicates what will happen to their total revenue when
the price of the product changes
The price elasticity of demand is different at each point along a linear
demand curve
Marginal utility is the extra or additional utility that a consumer derives
from the consumption of one additional unit of good
Marginal utility will decline if identical units of a good are consumed one
after the other
Nominal wage is the amount of money actually received by a worker per
hour, week, day, month, or year
A real wage is the quantity of goods and services that can be purchased
with the nominal wage
Equilibrium condition for the individual firms demand for labour -
MRP=W or MPP x P=W
Labour is a derived demand because labour is not demanded for its own
sake, but rather for the value of the goods n services that can be produced
when labour is combined with other factors of production.
Excess supply – when the quantity supplied is greater than the quantity
demanded
When there is a market shortage the quantity produced will increase
The price of a product will decrease when there is a market surplus
Equilibrium in the market – Qd=Qs
2
, Consumer to be in equilibrium – the weighted marginal utilities of the
condition of goods are of equal utility from the last rand spent on each
product
Primary sector – raw materials are produced
Secondary sector – manufacturing part of the economy
When all firms earn normal profit = industry in equilibrium in the long
run
The economic problem arises from the coexistence of unlimited wants
and limited resources
Normative statement – factual , unemployment is the most important
economic problem worldwide
Factor of production – a national road, labour of households, arable land
used for sowing
Economic systems are based on any or a combination of 3 coordinating
systems;(i) tradition,(ii) command and (iii) market
Market capitalism-most of the factors of production are privately owned
with limited government intervention.
The demand for labour is a flow variable
Capital is s stock variable
A decrease in demand together with an increase in supply = fall in
equilibrium price
Fixing a minimum price above the equilibrium price will result in an
excess supply
If producers are faced with a unit elastic demand curve , they cannot raise
their total revenue by increasing or decreasing the price of product
When the percentage change in quantity demanded is relatively small
compared to the percentage change in price it can it can be said that the
demand is relatively inelastic
If the income elasticity of demand is negative the product is an inferior
good
The larger the number of substitutes and the closer the substitutes are
and in the case of luxury goods and services the more elastic the price
elasticity is
In the analysis of consumer behavior the aim of the consumer is to obtain
the highest attainable level of total utility
Perfect competition exists if all the buyers and sellers have perfect
knowledge of market conditions and all the factors of production must be
perfectly mobile
Monopoly – have the ability to control market output and the firm is a
price setter.
Demand refers to quantity of a product that potential buyers are willing
and able to buy
Demand is a flow variable
A fall in the price of a product will not shift the demand curve for a
product
A market supply curve is a horizontal summation of the individual supply
curves
3
, An increase in the price of the a substitute product will increase the
demand for a product
A decrease in the price of flour used to make bread is most likely to
increase the supply of bread
When the quantity demanded is greater than the quantity supplied the
price will rise to the equilibrium price
A change in the price of a product will not shift the supply curve, ceteris
paribus (other things being equal).
A decrease in demand together with an increase in supply will definitely
result in an increase in equilibrium price
Equilibrium occurs when quantity demanded equals quantity supplied
When there is excess supply in the market the price will decrease
Fixing the minimum price below the equilibrium price will not disturb the
market
Simultaneous increase in supply and demand will lead to an uncertain
change in equilibrium price and equilibrium quantity will increase
Price elasticity of demand is a proportionate change in quantity
demanded divided by a proportionate change in price
Demand is inelastic when the proportionate change in quantity
demanded is less than a proportionate change in price
If the price elasticity of demand coefficient is greater than one then an
increase in price will cause a decrease in total revenue
Total utility decreases when marginal utility is negative
The aim of rational consumers is to maximize their utility given the
available means and alternatives at their disposal
A consumer is in equilibrium if the combination of goods are affordable
According to the law of diminishing returns total product is reaching a
maximum when MP=0
The U shape of the marginal cost curve reflects the law of diminishing
returns
Marginal product reaches a maximum when a corresponding marginal
cost is at a minimum
Perfect competition occurs when none of the individual market
participants can influence the price of a product
No collusion means each seller must act independently
Characteristic of perfect competition – identical goods are sold in the
market, there is no government intervention, factors of production are
perfectly mobile
Shut down rule and the profit maximizing rule are the rules for profit
maximization of any firm in the short run
Monopolistic competitive market – firms produce similar but slightly
different products
Market participants under Perfect Competition are price takers
Monopolistic competition is characterized by incomplete information
The demand curve of a monopolist equals the market demand curve
Under oligopoly there are only a few firms
Uncertainty is one of the features of an oligopoly
4
