Chapter 1 An Outline of the Course

Let’s begin with some introductory definitions.

1.1 Economics, Microeconomics, and Macroeconomics

Economics is the study of human responses to scarcity. In economics, scarcity simply means a situation in which people don’t always have everything they want. In a situation of scarcity people wage war on scarcity by doing all sorts of things they might otherwise not want to do: doing a paid job, starting or running a business of their own, enrolling in an arduous educational program, etc. Economics studies these human responses to scarcity and the various consequences of those responses.

Understandably, economics covers a vast area. It is therefore convenient to split economics into two areas: microeconomics and macroeconomics.

Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.

Macroeconomics is the study of the economy as a whole. Its goal is to explain the economic changes that affect many households, firms, and markets at once.

1.2 Macroeconomics

This course focuses on macroeconomics. Macroeconomics focuses on questions such as these:

• Why is average income high in some countries and low in others?
• Why do prices rise rapidly in some time periods while they are more stable in others?
• Why do production and employment expand in some years and contract in others?
• How do government policies affect macroeconomic variables?
• How does globalization – especially cross-country trade in goods and services and cross-country lending and borrowing – affect the macroeconomic performance of a country?
• How does globalization affect a government’s control over a country’s macroeconomic performance?

Macroeconomics focuses on measurements of the economic features of entire groups of people – usually entire countries – and tries to use those measurements to deduce effective ways of running our societies.