Fundamentals of Economics

ECONOMICS FUNDAMENTALS
Introduction
Economics is the social science that seeks to describe the factors which
determine the production, distribution and consumption of goods and services.
The term economics comes from the Ancient Greek (oikos, "house") and
(nomos, "custom" or "law"), hence "rules of the house (hold for goods
management)". 'Political economy' was the earlier name for the subject, but
economists in the late 19th century suggested "economics" as a shorter term
for "economic science" to establish itself as a separate discipline outside of
political science and other social sciences.
Economics focuses on the behavior and interactions of economic agents and

how economies work. Consistent with this focus, primary textbooks often
distinguish between microeconomics and macroeconomics.
Microeconomics examines the behavior of basic elements in the
economy, including individual agents and markets, their interactions, and
the outcomes of interactions. Individual agents may include, for
example, households, firms, buyers, and sellers.
Macroeconomics analyzes the entire economy (meaning aggregated

production, consumption, savings, and investment) and issues affecting
it, including unemployment of resources (labor, capital, and land),
inflation, economic growth, and the public policies that address these
issues (monetary, fiscal, and other policies).
Other broad distinctions within economics include those between positive
economics, describing "what is," and normative economics, advocating "what
ought to be
The ultimate goal of economics is to improve the living conditions of people in
their everyday life.
I. MICROECONOMICS :markets, market structure
Economists study trade, production and consumption decisions, such as those

that occur in a traditional marketplace.
1 TEACHER YAYA NAPO tel 06 80 96 78
In Virtual Markets, buyer and seller are not present and trade via
intermediates and electronic information.
In theory, in a free market the aggregates (sum of) of quantity demanded by
buyers and quantity supplied by sellers will be equal and reach economic
equilibrium over time in reaction to price changes; in practice, various issues
may prevent equilibrium, and any equilibrium reached may not necessarily be
morally equitable. For example, if the supply of healthcare services is limited by
external factors, the equilibrium price may be unaffordable for many who
desire it but cannot pay for it.
Various market structures exist. In perfectly competitive markets, no
participants are large enough to have the market power to set the price of
ahomogeneous product. In other words, every participant is a "price taker" as
no participant influences the price of a product. In the real world, markets
often experience imperfect competition.
II. MACROECONOMICS
Macroeconomics examines the economy as a whole to explain broad

aggregates and their interactions "top down", that is, using a simplified form of
general-equilibrium theory. Such aggregates include national income and
output, the unemployment rate, and price inflation and subaggregates like
total consumption and investment spending and their components. It also
studies effects of monetary policy and fiscal policy.
Macroeconomic analysis also considers factors affecting the long-term level
and growth of national income. Such factors include capital accumulation,
technological change and labor force growth.
A. Economic growth

Growth economics studies factors that explain economic growth , the increase
in output per capita of a country over a long period of time. The same factors
are used to explain differences in the level of output per capita between
countries, in particular why some countries grow faster than others, and
whether countries converge at the same rates of growth.
Much-studied factors include the rate of investment, population growth, and
technological change. These are represented in theoretical and empirical forms
(as in the neoclassical and endogenous growth models) and in growth
accounting.
B. Business cycle
A basic illustration of economic/business cycles.
The economics of a depression was the spur for the creation of

"macroeconomics" as a separate discipline field of study.
Over the years, understanding of the business cycle has branched into various
research programs, mostly related to or distinct from Keynesianism. The
neoclassical synthesis refers to the reconciliation of Keynesian economics with
neoclassical economics, stating that Keynesianism is correct in the short run
but qualified by neoclassical-like considerations in the intermediate and long
run.
New classical macroeconomics, as distinct from the Keynesian view of the
business cycle, posits market clearing with imperfect information. It includes
Friedman's permanent income hypothesis on consumption and "rational
expectations" theory, lead by Robert Lucas, and real business cycle theory.
In contrast, the new Keynesian approach retains the rational expectations
assumption; however it assumes a variety of market failures. In particular, New
Keynesians assume prices and wages are "sticky", which means they do not
adjust instantaneously to changes in economic conditions.
Thus, the new classical assume that prices and wages adjust automatically to
attain full employment, whereas the new Keynesians see full employment as
being automatically achieved only in the long run and hence government and
central-bank policies are needed because the "long run" may be very long.

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ECONOMICS FUNDAMENTALS

Economics focuses on the behavior and interactions of economic agents and

Macroeconomics analyzes the entire economy (meaning aggregated

I. MICROECONOMICS :markets, market structure

Economists study trade, production and consumption decisions, such as those

Macroeconomics examines the economy as a whole to explain broad

2 TEACHER YAYA NAPO tel 06 80 96 78

A basic illustration of economic/business cycles.

The economics of a depression was the spur for the creation of

4 TEACHER YAYA NAPO tel 06 80 96 78

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