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Microeconomics is the study Microeconomics Versus Macroeconomics
of how individuals, households,
and firms make decisions and We have presented economics as the study of scarcity and choice and described
how those decisions interact. how, at its most basic level, economics is about individual choice. The branch of
economics concerned with how individuals make decisions and how those deci-
A household is a person or group sions interact is called microeconomics. Microeconomics focuses on choices made
of people who share their income.
by individuals, households, or firms — the smaller parts that make up the economy
A firm is any organization that as a whole. A household is a person or group of people who share their income.
produces goods or services for If you have a parent or guardian who provides your food and housing, the two of
sale. you are members of the same household. A firm is any organization that produces
goods or services for sale, such as a hair salon, bank, software company, grocery
Macroeconomics is concerned
with the overall ups and downs store, or carrot farm.
of the economy. Macroeconomics, in contrast, focuses on the bigger picture — the overall ups and
downs of the economy. Consider this analogy: If microeconomics is the study of indi-
vidual trees, macroeconomics is the study of the entire forest. When you
study macroeconomics, you learn how economists explain these fluctu-
ations and how governments can use economic policy to minimize the
resulting damage. Macroeconomics focuses on economic aggregates — eco-
nomic measures such as the unemployment rate, the inflation rate, and
gross domestic product — that summarize data across many different
Abstract Aerial Art/Getty Images microeconomic version of the question appears on the left, paired with
markets.
Table 1.1-1 lists some typical questions that involve economics. A
a similar macroeconomic question on the right. By comparing the ques-
tions, you can begin to get a sense of the difference between microeco-
nomics and macroeconomics.

Table 1.1-1 Microeconomic Versus Macroeconomic Questions
Microeconomic Questions Macroeconomic Questions
How many years of education should I receive How many people are employed in the
before I start my career? economy as a whole this year?
What determines the salary that Citibank offers What determines the average salary paid to
to a new college graduate? workers in the economy?
What is the cost to a high school of offering a What is the overall level of prices in the
new course? economy as a whole?
What government policies would encourage What government policies would promote
more students to choose to attend college? employment and growth in the economy as
a whole?
What determines the number of iPhones What determines the overall trade in goods,
exported to France? services, and financial assets between the
United States and the rest of the world?

As these questions illustrate, microeconomics focuses on how individuals and firms
make decisions, and the consequences of those decisions. For example, a school will
use microeconomics to determine how much it would cost to offer a new course, which
includes the instructor’s salary, the cost of class materials, and so on. By weighing
the costs and benefits, the school can then decide whether or not to offer the course.
Macroeconomics, in contrast, examines the overall behavior of the economy — how the
actions of all of the individuals and firms in the economy interact to produce a par-
ticular economy-wide level of economic performance. For example, macroeconomics
is concerned with the general level of prices in the economy and how high or low they
are relative to prices last year, rather than with the price of a particular good or service.

6 Macro • Unit 1 Basic Economic Concepts
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Strictly for use with its products. For review purposes only. Not for redistribution.

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