In this video, we're going to talk about the differences between microeconomics and macroeconomics. So let's begin our discussion with economics. Economics is the study of how people make decisions when faced with scarcity and how limited resources are allocated to satisfy the wants and needs of the people, which can sometimes be unlimited. Now there's two branches of economics that you need to be concerned with. That is microeconomics and macroeconomics.
These two branches are interdependent of each other. Microeconomics, this focuses on the actions of, here's the key, individual agents within the economy. So think about consumers, households, I meant to put workers, and businesses.
So microeconomics focuses on how these agents behave within an economy. The prefix micro means small. Macro, on the other hand, means big or large. So macroeconomics tend to focus not on the individual agents, but on the economy as a whole.
It focuses on broad issues such as unemployment level, GDP or gross domestic product, inflation, interest rates, government deficits, and things like monetary policy and fiscal policy. Now macroeconomics is used to measure the overall economy. And that's important because sometimes the economy could be in trouble.
It could be in recession. Or sometimes it could be expanding too quickly. And so governments tend to use monetary policy and fiscal policy to adjust the economy accordingly.
For instance, let's say that we are in a recession. How can the government... battle of a session.
What are some tools that they have to speed up the economy in a situation like this? Well, the Federal Reserve can affect bank lending by adjusting the levels of interest rates. As interest rates fall, loans become more attractive to investors because it's better to apply for a loan where the interest rates are low as opposed to when they're high.
So as interest rates falls, more investors will be applying for loans to invest in projects that they might be interested in, and this causes more money to flow into the economy. And this will create more jobs and thus stimulate the overall economy. So as interest rates fall, the economy tends to grow.
So that's one way in which the Fed can affect a recession. At least they can. slow down a recession or cause the economy to speed up.
Now another tool that the government could use is fiscal policy. In that case the government could decrease taxes. As taxes go down people have more money in their hands. Businesses they spend less on taxes so they have more money to invest in other things and because businesses and people will have more disposable income Typically, they'll spend more money, either on the things they want to buy, or on investments, and vice versa, and this will stimulate the economy. Another way that the government can employ fiscal policy is by increasing government spending.
As the government spends more money, that will also stimulate the economy. That will create more jobs, certain businesses will become more profitable, and... the economy will grow as a result. And so this falls under the realm of macroeconomics because you're dealing with broad issues that are faced with the economy.
So monetary policy, fiscal policy, interest rates, unemployment level, those are factors that fall in the realm of macroeconomics. Now let's go over some examples or situations where I want you to distinguish if this falls in the realm of microeconomics or macroeconomics. So let's say that a business acquires 50 new clients and as a result the income generated by this business goes up.
What will happen to the consumption or the spending of this business? would you expect the spending of this business to go up or down well as a business generates more income chances are their expenses will increase too they're going to spend more money they might spend money in terms of expanding their operations hiring more people but typically as income goes up expenses usually go up as well now will this be considered microeconomics or macroeconomics in which category would it fall under this would fall in the realm of micro economics because you're focused on just a small segment of the economy one business you're not focused on the entire economy as a whole Now let's consider another example. Now let's say that the economy is expanding rapidly due to inflation and so there is an inflationary increase of all prices. So the prices of goods and services they're all going up. What's going to happen to the aggregate consumer demand?
As prices increase in general, will the aggregate consumer demand increase or decrease? Well, as prices go up, demand typically falls. So this would fall in the realm of, would you say, microeconomics or macroeconomics? Well, we're dealing with broad issues.
We're not focusing on just an individual segment or an individual agent within the economy. So inflation would fall in the category of macroeconomics because that can affect the economy as a whole. So hopefully this video helps you to see the difference between microeconomics versus macroeconomics.
Just remember micro means small, macro means large. So when dealing with macroeconomics, you're dealing with the economy as a whole. When dealing with microeconomics, you're dealing with a small portion of the economy.
You're focusing on the individual actors within an economy.