Understanding Economics: Microeconomics, Macroeconomics, and Economic Principles

What is Economics?

Economics is the science of economic phenomena such as consumption, production, and distribution. The objective of economics is to explain and predict economic behavior.

Economic Theory

Economic theory is a set of general principles about the economy. It is divided into two main branches:

Microeconomics

Microeconomics analyzes the behavior of individual economic units such as families, businesses, workers, goods, prices, production companies, and consumption.

Microeconomic Problems:

• Consumption, production, and distribution in various market forms (perfect competition, imperfect competition, monopoly, oligopoly).
• Remuneration of production factors (rent, interest, wages, profit).

Macroeconomics

Macroeconomics studies the economy as a whole, including national income and national product.

Macroeconomic Problems:

• Consumption and investment
• Inflation and deflation
• Full employment and unemployment
• The general price level at the national level
• Short-term and long-term economic fluctuations (money, monetary claims, economic cycles like prosperity and depression)
• Problems of economic development and underdevelopment

What is the Economy?

The economy is a social science that studies how goods and wealth are distributed in a nation. It examines how individuals obtain and manage their assets to meet individual and collective needs. In other words, the economy studies human activities aimed at acquiring wealth, fulfilling needs, or achieving material welfare.

Classification of Economy

The economy is divided into several parts, depending on the defined scope:

Positive Economics

Studies what is, or how a society solves economic problems in practice.

Normative Economics

Considers what should be, or how a society ought to solve economic problems.

Theory of Demand and Supply

Demand

Demand refers to the quantities of goods and services consumers are willing to buy at a certain price and time, assuming all other factors affecting demand remain constant.

Theory of Demand

The theory of demand states that the quantity consumers are willing to purchase varies inversely with the price of the good or service. Higher prices lead to lower quantities demanded, and lower prices lead to higher quantities demanded.

Graphic Function

The demand curve is negatively sloped, indicating that consumers are willing to buy more units if each additional unit is priced progressively lower.

Elements of Production and Stages

Production involves several elements called factors of production:

1. Material Factors: Nature (land), capital (buildings, machines, raw materials, etc.).
2. Personal Factors: Labor (technicians, employees, workers), direction (business management).

Production Stages

1st Stage: Between O and B, the slopes (Pt+) continue to grow. Marginal Product (Pmg) is larger than Average Product (PME). The fixed factor is used extensively, and the variable factor is used intensively.

2nd Stage: Between B and C, the efficiency of the variable factor decreases, and the efficiency of the fixed factor increases.

3rd Stage: From C onwards, there is intensive use of the fixed factor.

Key Points

• A = Turning point: Maximum Pmg.
• B = Technical Optimum: Where Average Product (QI) = Pmg and elasticity equals 1 (intensive margin).
• C = Maximum Pt: Where Pt reaches its maximum and equals Pmg (extensive margin).

Indifference Curves

Indifference curves are geometric representations of different combinations of goods that provide the same utility to an individual, making them indifferent between these combinations. They are continuous sets of points representing combinations of goods that yield the same utility, represented in two or more dimensions. Indifference curves change over time and reflect an individual's ability to substitute one good for another. They are used to construct indifference maps.

Properties of Indifference Curves

1. Convex to the Origin: Utility increases as more is consumed, but the marginal utility decreases.
2. Negative Slope: The slope is measured by a tangent line, showing the inverse relationship between goods. To maintain the same satisfaction level, one must consume fewer units of one good to consume more of another.
3. Do Not Intersect: Each curve represents a unique utility level.
4. Higher Curves Represent Higher Utility: Curves further from the origin represent higher levels of utility and greater amounts of goods.

Microeconomics vs. Macroeconomics

1. Microeconomics: Studies the laws and uniformities of individual economic units and their interactions. It has four main chapters:
   • Theory of Consumption
   • Theory of the Market
   • Theory of Production
   • Theory of Distribution

   Microeconomics analyzes the behavior of companies, markets, buyers, sellers, and competition.

2. Macroeconomics: Studies the laws and uniformities of the economic system as a whole. It has five main chapters:
   • Theory of Money and Credit
   • Theory of the National Economy
   • Theory of the International Economy
   • Theory of Economic Fluctuations
   • Theory of Economic Growth

   Macroeconomics studies the wealth and distribution of a country, its relationship with the rest of the world, how it generates income, and how it distributes it.

Why Demand Has a Negative Sign

The demand for a product increases as its price decreases. This inverse relationship between price and quantity is reflected in the downward-sloping demand curve, indicating that more of a good is demanded at a lower price. This is known as the law of demand.