Understanding microeconomics - Essay Example

?[Your full full April 19, Introduction Analysis of economy is of extreme importance for the proper growth and development of a country. Economy represents the financial system, wealth, education standards, and social and industrial structure of a country. There are four major divisions of economy, which include primary, secondary, tertiary, and quaternary divisions. Economics is one of the fields of study related to economy, which examines and analyzes all divisions of the economy. Two major categories of economics include microeconomics and macroeconomics. Microeconomics deals with the study of human actions and behaviors, which have the tendency to affect the supply and demand system, whereas macroeconomics deals with the behavior of the whole economy. In this paper, we will not only discuss different indicators of macroeconomics. Along with that, we will also analyze the importance of aggregate demand and aggregate supply in the field of economics. We will also discuss the reasons for the shifts in the aggregate demand curve and the aggregate supply curve in order to get a better understanding of the importance of aggregate demand and aggregate supply in the field of macroeconomics. Macroeconomics Macroeconomics is one of the major branches of economics and it is deals with the performance and structure of the overall economy of any specific country. “The field of economics known as macroeconomics focuses on the behaviors of a national economy, or a regional economy, as a whole” (Bram). The study of macroeconomics leads economists to the use of governmental policies to create an economic change in order to avoid depressions and other shocks related to the economy. “Macroeconomics can be best understood in contrast to microeconomics which considers the decisions made at an individual or firm level” (Moffatt). Macroeconomics focuses on the behavior and dimensions of the whole economy and is primarily concerned with a number of large-scale indicators of economy. The economists need to consider many factors in order to properly analyze the economy of a country. Some of the main factors, which the economists take into account while analyzing the economy, include rate of inflation, general behavior of price, unemployment, and production of goods and services. Macroeconomists perform a thorough analysis of these indicators in order to understand the current position and functioning of any domestic economy. In this paper, we will discuss unemployment, inflation, and production, which are the most important indicators of economy. Let us discuss these factors in some detail in order to get a better understanding of how these indicators reflect the economy of a country. Unemployment Unemployment is one of the most important phenomenons related to cyclical fluctuations in the economy. Unemployment rate is the ratio of the unemployed workforce to the overall size of the labor force of an economy. “In a healthy economy, a certain degree of unemployment indicated as a percentage reflects the fact that there constantly are job seekers and employers voluntarily running after better opportunities for their own good” (Yang). There are various types of unemployment, which reflect the reasons of unemployment in an economy. Some of the major types of unemployment include frictional unemployment, structural unemployment, seasonal unemployment, and cyclic unemployment. The economists find the rate of unemployment by dividing the total number of unemployed people by the labor force of a country which is the sum of total number of employed and unemployed people. Increased rate of unemployment is not a good sign for the economy of a country because unemployment is a factor, which not only results in loss of output but also decreases the income of the people living in any specific country. Inflation Inflation is another large-scale indicator of economy, which is associated with the rate of change in the level of prices. “By inflation, we mean a continuing upward movement in the general price level” (Barro 237). The economists measure the rate of inflation on a monthly basis in order to examine all minor and major inflation shifts. Inflation rate is one of the most influencing forces of economy that the economists weigh considering the value of a country’s currency in a consistent manner. Changes in the rate of inflation affect the overall economy of a country. When the rate of inflation is high, product prices also get high which results in increasing the overall cost of living in the country. There are many reasons behind fluctuations in the rate of inflation. One of the major reasons is the printing of more than required money by the government of a country, which results in creating financial crisis. Inflation is considered to be one of the major threats not only to the rates of products and purchasing power of the people but also to the stability of the economy of a country. Production The third large-scale indicator of an economy is the production of goods and services in a country. Production of goods and services and economy of a country are directly and closely related to each other. High level of productivity reflects strong economy, whereas decrease in the level of productivity reflects weak economy. Production of goods requires availability of required resources and raw material. If a country does not have enough resources and raw material available for the production of goods, the graph of production can never go high, which will result in decreasing the overall income of the people living in that country. Aggregate Demand Having discussed some important large-scale indicators of economy, let us now discuss two important terms related to economics, which include aggregate demand and aggregate supply. In economics, aggregate demand is the overall demand of goods and services within the economy at a specified price level. “AD is the sum of what consumers, governments, business and foreigners, through exports and imports spent in the nation economy” (Norton). Economists calculate aggregate demand using the following formula: AD = C + I + G + (X – M) In this formula, ‘C’ stands for consumer’s demand and expenditure for durable and non-durable goods and services. ‘I’ stands for investment spending, which means the money that the companies use to buy capital goods such as furniture, land, and building. ‘G’ stands for government spending, which means the money that a government uses to buy industrial products. “Higher Government spending will increase AD and lower taxes will increase disposable income thereby increasing Consumption and AD” (Pettinger). ‘X’ stands for exports of goods and services to other countries and organizations. ‘M’ stands for Imports of goods and services. ‘M’ is subtracted from ‘X’ in order to find the actual revenue earned through exports. Aggregate Demand Curve “The aggregate demand curve helps countries measure their gross domestic product (GDP) by using a calculation such as the consumer price index (CPI)” (Vitez). The aggregate demand curve shows the link that exists between the general price level and the GDP of an economy. Aggregate demand curve contracts due to increase in the general price, whereas the curve faces suspension in case the general price falls down. The curve faces downward shift either due to increase in the price levels or due to increase in the interest rates that increase with increase in the demand for money. Aggregate Supply “Aggregate supply plays an important role in helping to determine the current strength of the macroeconomics of a given country” (Tatum). The sum of the total number of goods and services produced within a domestic economy is termed as aggregate supply of that economy. The aggregate supply curve represents the overall aggregate supply of an economy by showing a link between the total production of goods and services within the macroeconomic environment of a country and the cost of producing the goods and services. Aggregate Supply Curves Shifts in aggregate supply curve occur either in short run or in long run. In the short run, the curve is upward sloping. Reasons for shifts in the short run include variations in the costs of raw material, variations in the wages, and variations in productions or subsidies. In the long run, the curve is vertical. Reasons for shifts in the long run aggregate supply include variations in the output growth rate, increase in the stock of capital, and increase in the levels of productivity. Conclusion (My Opinion) Summing it up, I would say that strong and stable economy is of extreme importance for the proper growth and development of a country. Macroeconomics is a very important area related to economy. The study of macroeconomics and the analysis of large-scale indicators related to macroeconomics lead economists to the use of governmental policies to create an economic change in order to avoid depressions and other shocks related to the economy. The economists should properly analyze all aspects of macroeconomics while setting economic policies for the growth and development of a country. Aggregate demand and aggregate supply are two of the most important issues in macroeconomics, which represent strengths and weaknesses present in any domestic economy. The economists need to apply such mechanisms, which should maintain a balance between aggregate demand and aggregate supply in the economy because a balance between these two aspects of macroeconomics lead the way of a country towards proper industrial and economic development. Works Cited Barro, Robert. Macroeconomics. 5th ed. U.S.A: The MIT Press, 1997. Bram, Thursday. “What is Macroeconomics?.” Wisegeek.com, n.d. Web. 19 Apr. 2011. . Moffatt, Mike. “What is Macroeconomics?.” About.com, n.d. Web. 19 Apr. 2011. . Norton, Kyle. "Macroeconomics - Understand the GDP, Business Cycle and Equilibrium." EzineArticles.com, 19 Oct. 2008. Web. 19 Apr. 2011 . Pettinger, Richard "Can A Government Increase the Rate of Economic Growth." EzineArticles.com, 22 Oct. 2006. Web. 19 Apr. 2011 . Tatum, Malcolm. “What is Aggregate Supply?.” Wisegeek.com, n.d. Web. 19 Apr. 2011. . Vitez, Osmand. “What is the Aggregate Demand Curve?.” Wisegeek.com, n.d. Web. 19 Apr. 2011. . Yang, Yang. “Macroeconomic Unemployment Explained.” Econguru.com, n.d. Web. 19 Apr. 2011. . Read More