Lesson 2: Branches of Economics
Lesson Objective
Dear learner,
At the end of this lesson, you will be able to:
- Distinguish between microeconomics and macroeconomics.
- Describe the fundamental problem of microeconomics and macroeconomics
Brainstorming Question
The foundation of modern economics rests on its two major branches. What are they?
Key Terms and Concepts
- Microeconomics
- Macroeconomics
- Inflation
- National output
- Aggregate
Microeconomics is the branch of economics that focuses on the behavior and decision-making of individual agents, such as consumers, firms, and workers.
Macroeconomics is the branch of economics that studies the economy as a whole, focusing on aggregate indicators and broad economic factors.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power over time.
National output, often referred to as Gross Domestic Product (GDP), represents the total value of all goods and services produced within a country’s borders over a specific period, usually a year
Aggregate refers to the total or collective amount of something in an economy, such as production, demand, or supply.
Dear Learner,
In the previous lesson, we learned what economics is and its nature. We defined economics as a social science that focuses on how resources are allocated to satisfy unlimited human wants. We also discussed that economics is both a science and an art. This lesson also provided you with a basic understanding of economics, including its branches. Please read the notes carefully and answer the quiz questions.
Student, the foundation of modern economics rests on its two major branches: microeconomics and macroeconomics. Below, we discuss them in detail.
Microeconomics and Macroeconomics
The field of economics is vast and constantly evolving. Over time, new branches have emerged to study different aspects of economic behaviour and systems. Some of these include development economics, environmental economics, behavioural economics etc. However, the foundation of modern economics rests on its two major branches: microeconomics and macroeconomics.
To begin, microeconomics is all about understanding the economic decisions and interactions of individual units, such as households, firms, and industries. It examines how these individual decision-makers allocate scarce resources to meet their needs and wants. In other words, microeconomics helps us understand pricing, production, and the factors that influence individual economic choices.
On the other hand, macroeconomics takes a broader view. Unlike microeconomics, which focuses on the individual, macroeconomics looks at the overall performance and behaviour of the economy as a whole. Macroeconomists study factors like GDP, unemployment rates, inflation, and the effects of government policies on the economy. Their goal is to understand the interrelationships between different economic variables and how they impact the economy at an aggregate level.
Essentially, microeconomics and macroeconomics each have a distinct fundamental problem they aim to address. Microeconomics is concerned with how individuals and firms allocate scarce resources to meet their needs and wants. In contrast, macroeconomics is focused on how the collective decisions and behaviours of all economic agents (households, firms, government) affect the overall performance and stability of the economy.
By understanding the differences between these two major branches of economics, you’ll be better equipped to navigate the diverse and dynamic field of economics. Stay tuned for more insights on the fascinating world of microeconomics and macroeconomics!
Difference between Microeconomics and macroeconomics
Dear learner,
As you delve into the fascinating world of economics, it’s essential to grasp the fundamental distinction between its two major branches: microeconomics and macroeconomics. While both are interconnected and crucial to a comprehensive understanding of economic principles, they differ in their scope and approach.
Let’s explore these differences in a way that makes it easy for you to understand and apply in your studies.
| Microeconomics | Macroeconomics |
| Studies individual economic units in an economy | Studies an economy as a whole and its aggregates |
| Deals with income, prices, outputs, etc. | Deals with national income and output and general price level. |
| Its central problem is price determination and allocation of resources. | Deals with the determination of equilibrium income and employment at an aggregate level. |
| Its main tools are the demand and supply of particular commodities and factors. | Its main tools are aggregate demand and aggregate supply of an economy as a whole. |
| It helps to solve the central problems of what, how and for whom to produce. | Helps to solve the central problem of full employment of resources in the economy. |
| microeconomics would explore the price of specific commodities like teff or oranges, or the income and saving patterns of individual households. | macroeconomics would analyze the overall inflation rate or the Gross Domestic Product (GDP) of a country. |
In summary, the key difference between microeconomics and macroeconomics lies in their scope and focus.
Microeconomics examines the decision-making processes and behaviours of individual economic units, such as households and businesses. It looks at how these smaller players make choices, determine prices, and allocate scarce resources to meet their needs and wants. For example, microeconomics would explore the price of specific commodities like teff or oranges, or the income and saving patterns of individual households. On the other hand, macroeconomics takes a broader view, studying the economy as a whole. Instead of focusing on individual units, macroeconomics looks at overall economic performance and trends, including factors like national income, employment levels, and the general price level. While microeconomics might look at the price of a particular product, macroeconomics would analyze the overall inflation rate or the Gross Domestic Product (GDP) of a country.