0:12
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.
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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.
Dr. Peter NavarroProfessor
