When you study basic economic principles, these principles are almost always divided up into those covering microeconomics versus macroeconomics. Microeconomics deals with the behavior of individual markets and the businesses, consumers, investors and workers that make up the economy. Three major areas of analysis include, one, how consumer theory helps explain market demand, how production theory helps explain market supply, and how market prices are set in equilibrium by the forces of demand and supply; two, how forms of market structure ranging from perfect competition and oligopoly to pure monopoly determine the strategic choices and conduct of businesses even as they affect the efficiency and performance of markets, and the third focus of microeconomics is this: why market failures ranging from pollution externalities and imperfect information to the public goods problem may require government intervention into the free market. In contrast, the word macro means big or large, and macroeconomics deals with a much larger picture of how national economies and the broader global economy perform. Key macroeconomic problems range from inflation, unemployment and slow growth to budget deficits and trade imbalances. Possible policy solutions range from fiscal, tax and monetary policies to trade policies and regulatory reforms. Because of the business focus of this macroeconomics course, we also are very much interested in how both corporate executives and investors strategize in a world of continually changing macroeconomic conditions. A key theme of this course is that business executives and investors who have a strong command of macroeconomics will outperform their rivals and peers through the diligent practice of strategic business cycle management. Take a few minutes now to study this figure carefully as it is, in effect, a handy little roadmap for this course. When you are ready, let's move on to a discussion of one of the key differences between microeconomics and macroeconomics related to the idea of self-correcting markets. In microeconomics, the typical presumption among mainstream economists is that the forces of supply and demand in the market will eliminate any shortages or surpluses in that market. Moreover, through the wonders of Adam Smith's invisible hand, competitive markets for individual goods and services will tend to provide the most efficient allocation of society's resources. Thus, in the absence of market failures, like externalities and the public goods problem, any kind of government intervention into the market is likely to be both unnecessary and undesirable. In contrast, most mainstream macroeconomists believe the broader macroeconomy is not always self-correcting. Instead, in many cases and possibly for long periods of time, an economy can suffer from chronic unemployment or galloping inflation or burgeoning trade deficits and absent government intervention, the situation may not improve, and may even get worse. Thus, it may be necessary for the government to stimulate the economy out of recession or purposely rein in the economy to curb inflation or devalue the currency to improve the trade balance. This the government can do through the application of discretionary policy tools such as fiscal, monetary and trade policies. From a business perspective, however, whenever the government gets involved in the economy, such intervention may not always end well. On the one hand, properly applied macroeconomic policies can create a climate of prosperity and growth. However, improperly applied discretionary macroeconomic policies can actually make problems like unemployment, and inflation and slow economic growth worse and sometimes much worse. And that's a very big reason the business executives need to pay very close attention to the macroeconomy and what the government might do to influence it.
