Economics is typically divided into two
categories, Microeconomics and Macroeconomics.
The fundamentals of the two courses of study are given as follows.
Microeconomics
Microeconomics is the major category of economics concerned with individuals
(consumers, investors, workers, wage earners, and family members) and business
firms.
Topics studied in microeconomics include
important matters relevant to individual business
firms, such as markets for
goods and services, supply and demand for certain goods and services (during a
given period and over time), prevailing conditions in certain industries
(housing, automobiles, durable goods, and nondurable goods), hourly wages and
salaries paid to employees, capital expenditures (labor, equipment, buildings,
advertising), stock market performance of individual firms, corporate income
and sales taxes as they affect performance of business firms, and business
profitability as affected by government policy and market conditions also falls
within the study of microeconomics.
Important matters pertinent to individuals
that fall within the scope of microeconomics include consumer decisions and the
reasons for them; consumer
confidence; individual investments in
stocks, bonds, and real estate; wages
and salaries earned by employees;
working conditions; and household
budgets.
Key Terms in Microeconomics
1)
goods >>>>>
industrial or agricultural items sold to consumers in stores; examples include
groceries, shoes, cars, appliances, and
pharmaceuticals (medicines)
2)
services >>>>>
actions taken by business operators in behalf of consumers willing to
pay
for satisfaction of wants or needs; examples include hair styling,
restaurant-provided food, auto repair,
landscaping, and plumbing
3) wage
>>>>> payment to a worker calculated on a per hour
basis, generally paid weekly or biweekly
4)
salary >>>>> payment
to a worker calculated on an annual basis, generally paid monthly
5)
market >>>>>
consumers considered together for their willingness to buy certain goods
or services
6)
producers >>>>>
those who manufacture goods and provide services
7) consumers
>>>>> those who use
(consume) goods or services provided by others
8) supply >>>>> the amount of a good or service provided by
producers
9)
demand >>>>> the
amount of a given good or service sought by consumers
10) the
economy >>>>> the system
whereby businesses supply goods and services to meet consumer
demand,
and whereby workers are paid for their labor
11)
consumer confidence >>>>>
the level of optimism or pessimism felt by consumers as to the present
and future of the economy
10)
Consumer Confidence Index >>>>> a calculation of consumer confidence in a
given year as
compared to consumer confidence that prevailed
in a base year (base year is currently 1985); the comparison is given on a
scale in which the base year is assigned the number of 100.
11)
durable goods >>>>>
a good that lasts a long time, such as cars, washing machines, and ovens
12)
nondurable goods >>>>>
goods that are consumed quickly, such as food and pharmaceuticals
13)
stock >>>>> a
share in a company sold to investors, paid back in dividends
14)
bond >>>>> a loan
to a private company or government, to be repaid in principal and interest
15)
principal >>>>>
the original amount provided by a lender
16)
interest >>>>> the
percentage that a borrower agrees to pay to a lender for the use of her or his
money, in addition to repayment of principal
15)
real estate >>>>>
land that has commercial value and thus is bought and sold
Fundamental Concept in Microeconomics: the Law of Supply and Demand
The fundamental concept in microeconomics is
the Law of Supply and Demand. This law predicts that producers will provide
the amount of goods and services demanded by consumers.
Under ideal conditions, supply and demand are
in equilibrium; that is to say,
producers provide the exact level of goods and services that consumers demand,
according to their wants and needs.
Under less than ideal conditions, supply and
demand are out of sync (not in equilibrium, not in balance, not
well-matched). This disequilibrium
occurs when consumers want more of certain goods and services than producers
can provide; or when producers provide
more of certain goods and services than consumers are willing to buy. Under conditions in which supply and demand
are not in sync, inflation or deflation occur. These concepts are covered in the following
section on macroeconomics.
Macroeconomics
Macroeconomics is the major category of economics concerned with aggregate production
and consumption, the functioning of the national economy taken as a whole, and involving policy made at the national
level of governance.
Topics studied in macroeconomics include
federal fiscal and monetary policy in drawing up the federal budget, the
resulting structure of the federal budget, as well as national debt and
national deficit. Monetary policy
requires the release of money by the Federal Reserve System into the
economic system of consumers and producers;
inevitably, this policy responds to and affects conditions of inflation
and deflation, and conditions of recession and depression.
Macroeconomics also involves matters pertinent
to Gross National Product (GNP), Gross Domestic Product (GDP); standard of living; median income; taxation as affecting workers, businesses,
and industries; sectoral divisions
indicating categories of the national economy include the primary sector
(agriculture); secondary sector
(industry); and tertiary sector
(service).
Terms most likely to need clarification are
given below:
1) federal fiscal policy
>>>>> policy made by
decision-makers at the national level as to
expenditures and revenue
2)
federal monetary policy >>>>> policy made by decision-makers at the
national level as to
supply of money
from the Federal Reserve
` `
3)
Federal Reserve System >>>>> the system of 12 banks into which national
currency printed at the
National Mint is deposited and from which
currency is released through loans and transfers
4)
federal budget >>>>>
structure of expenditure and revenue identified by policy makers at the
national level of governance
5)
balanced budget >>>>> situation in which expenditure and
revenue are in equilibrium (perfectly
matched or in sync)
6)
national deficit (federal deficit) >>>>> situation for a given year in which the
federal government has less revenue than expenditure; this was $476 billion fiscal year 2014
7)
national debt (federal debt) >>>>> accumulated national deficits resulting in total
federal
government expenditure exceeding total
revenue; this was about $18.15 trillion
in fiscal year 2014
8)
inflation >>>>>
situation in which prices rise because demand exceeds supply; or because banks and consumers hold dollars
for which the availability for needed or wanted goods and services are not
available
9)
deflation >>>>>
situation in which prices decline because supply exceeds demand; or because banks and consumers hold too few
dollars to pay for needed or wanted goods and services
10)
fiscal quarters >>>>>
division of the year into three-month groups for measuring economic growth
11)
economic growth >>>>>
percentage increase of the Gross Domestic Product, annually or quarterly
12)
Gross Domestic Product (GDP) >>>>> total value of goods and services provided
within the nation
13)
Gross National Product (GNP) >>>>> total value of goods and services provided by
domestic
companies
for sale within the nation or in foreign countries
14)
standard of living >>>>> quantitative measure of the
ability of consumers to pay for the goods and services that they want or need
15)
median income >>>>>
the level of income that falls exactly at the middle in a distribution
of
income from highest to lowest (or lowest to
highest)
Fundamental Aspects of Macroeconomics: Fiscal Policy, Monetary Policy, and Economic
Growth
In the realm of macroeconomics, the most
important are those pertinent to fiscal policy, monetary policy, and economic
growth.
Fiscal
Policy
Fiscal policy at the national level (federal
governmental level) concerns decisions made in constructing the federal
budget.
Federal Budget
The exact composition of the federal budget
varies but features broad structural similarities from year to year. The following figures are from a budget
proposed during winter 2015 during the Obama administration:
(Winter 2015)
Spending
>>>>> $3.9
trillion
Revenue
>>>>> $3.5
trillion
Deficit >>>>> $0.4 trillion
($400 billion)
Taxes are by far the largest source of revenue
for the government, comprising approximately 94% and include the following:
Federal Government Revenue
Personal Income taxes >>>>> 46%
Payroll taxes >>>>> 31%
Corporate taxes >>>>> 14%
Excise >>>>>
3%
Subtotal >>>>> 94%
Other >>>>> 6%
Federal Government
Revenue________________________________
Total >>>>> 100%
Federal Government
Revenue
On the spending side, the Mandatory
(Entitlement) Programs of Social Security, Medicare, and Medicaid comprise
approximately 47% of all expenditures.
Mandatory spending as a whole (including
interest on debt, immigration reform, and programs falling under the category,
“other”) totals 71% of all spending.
Defense is the largest category of
discretionary spending at approximately 16% of all federal government
expenditures as proposed in the Obama budget;
discretionary spending as a whole takes approximately 29%.
Federal government spending falls into two
broad categories:
discretionary
spending
>>>>> optional spending
on programs deemed to be important
mandatory
(entitlement) spending
>>>>> spending that must
meet a certain dollar amount as
a result of payments fixed by
congressional statute (law passed by the U. S. Congress)
Note >>>>>
Entitlement spending refers especially to the programs of Social
Security, Medicaid, and Medicare.
Mandatory spending is typically understood as the broader term
covering entitlement spending and all other spending fixed by congressional
statute.
Federal Government Spending
Mandatory Spending (Entitlement Programs),
Total All Expenditures
Social Security >>>>> 24%
Medicare >>>>> 14%
Medicaid >>>>>
9%__
Subtotal >>>>> 47%
Other >>>>>
24%
Mandatory
Mandatory Spending >>>>> 71%
(as total of all federal
government spending)
Discretionary Spending
Defense
>>>>> 16%
Subtotal >>>>> 29%
(as total of all federal
Total >>>>>
100%
Federal Government
Spending
Monetary
Policy
Monetary policy concerns the amount of dollars
available in the economy for purchases, investments, and loans. While matters of the federal budget do affect
the money supply, the number of dollars available in the economy is powerfully
influenced by the Federal Reserve System, frequently termed simply, the Federal
Reserve, or by the even shorter appellation, “The Fed.”
The Federal Reserve System
The Federal Reserve is comprised of twelve
(12) districts in major urban centers across the United States, each
functioning as a kind of supra-bank for the member banks in its district. Banks that are federally insured by the FDIC
(Federal Deposit Insurance Corporation) and thus part of each district’s
network of banks, are required by law to maintain a certain percentage of the
money deposits in reserve, either at its own bank or at the district federal
reserve bank. The amount required for
each bank varies according to the size and value of the holdings of the bank,
but in recent years the ratio to total deposits in the bank has fallen between
8% and 18%.
The Fed monitors the health of the economy as
measured in job growth; percentage of
the work force employed; expansion of
activity by small businesses, medium-sized firms, and corporations; and the relationship of wages to prices.
When prices rise significantly faster than
wages, this condition is one indicator that inflation has become a
problem. Generally a 2% annual rate of
inflation is acceptable as long as unemployment is not much higher than about
5%. If unemployment rises above 5%, wage
growth also tends to lag, and prices rising faster than the 2% level would
become a problem.
Sustained stagnation in wage growth, business
inventories, housing construction, and automobile production serves as an
indicator that the economy needs stimulation.
While free market purists dislike heavy government spending, in recent
times (including, notably, the period during 2009 when recession [two
successive quarters of no economic growth or negative economic growth] hit the
economy) the federal government has in fact acted to inject money into the
economy. At the level of fiscal policy,
government spending stimulates the economy with investments in infrastructure
and social programs in ways that create jobs and motivate entrepreneurs to
expand businesses. At the level of
monetary policy, the Fed acts to inject additional dollars into the economy in
three main ways:
First, the Fed can reduce reserve ratios of
its member banks so as to increase the amount of money available to those banks
to lend to individuals and businesses.
Second, the Fed can set interests rates low,
so that its member banks may borrow at lower cost from the federal district
bank (one of the twelve--- the one
located in a bank’s district.)
Third, the Fed (as an institution operating at
the national level) is authorized to buy---
paying generously in making the purchases--- U. S. Treasury bonds from current holders,
who deposit the
money in their own banks, which then have more
available to lend to individual customers who want to buy cars, houses, and
other major items; and to businesses
that seek to hire more workers, purchase equipment, build new facilities.
Conversely, if the economy shows signs of
overheating--- with inflation high and
businesses seeming to expand recklessly---
the Fed may act along the same lines as given above--- but in the opposite direction--- 1) raising the reserve ratios; 2) increasing interest rates; and 3) selling bonds at favorable rates, so
as to bring dollars off the private market and into the Fed’s own vaults.
The Nobel-prizewinning economist Milton
Friedman was a monetarist who thought that the Fed would do better to
expand the money supply at a slow, steady rate,--- theoretically decreasing uncertainty--- rather than alternately to increase or
decrease the money supply. But ever
since the Great Depression, most economists have agreed that some flexibility
in decreasing or increasing the money supply is necessary.
Three Great Economists: Adam Smith, Karl Marx, and John Maynard
Keynes
Adam Smith
(1723-1790)
Adam Smith is the author of the masterpiece of
economic theory, The Wealth of Nations (1776),
which details his key ideas. Smith
asserted that there is an Invisible Hand that guides a capitalist
economy--- an economic system in
which entrepreneurs are at liberty to assume the personal risk of starting
businesses and to fail or succeed according to their judgments as to purchase
of equipment, hiring of workers (labor), investment in new buildings,
and prices charged. Smith took the lead
at the early historical stage of capitalist development in calling for a laissez faire economy in which the
government mostly stays out of private enterprise, sticking with the provision
of public order (domestic security through municipal police forces and
international security
through an appropriately strong army) and a
national infrastructure of transportation and communication networks. Smith was very optimistic about the future of
the capitalist system.
Karl Marx
(1818-1883)
The two most famous works of Karl Marx were The Communist Manifesto and Das Kapital
(Capital). The former work is
a small in size, a pamphlet running about 30 pages. The latter work provides enormous detail and
demonstrates Marx’s prodigious powers of analysis.
Mark and his cowriter (Frederich Engels) wrote
that history proceeds so as to feature two oppositional economic classes. While there had been hunting-gathering and
early agricultural societies living under conditions of egalitarian primitive
communism, other historical stages had featured hierarchical class division
and conflict, as follows: slave
society (master versus slave) feudal society (aristocrats versus
serfs), and by Marx’s own day, capitalist
society, (bourgeoisie versus proletariat).
According to Marx, each history operates
according to a dialectic in which a thesis
is counterpoised to an antithesis,
with a resulting synthesis that is
something entirely new. This would be
true as socialism replaced capitalism
in a new synthesis. But at the socialist
stage a dictatorship of the proletariat would
rule in behalf of the working class, each member of which would have its
material needs met fairly, in accordance with the work that each laborer was
reasonably able to provide. Then, as
humanity transformed itself through more cooperative endeavors, there would be
a “withering away of the state” as communism replaced socialism and people
satisfied all of their material and cultural needs in a supreme egalitarian spirit of cooperative labor.
John
Maynard Keynes (1883-1946)
John Maynard Keynes wrote his The General Theory of Employment, Interest,
and Capital during the Great Depression of the 1930s, a time during which
capitalism seemed to be faltering.
Keynes wrote that such periods of severe
unemployment were likely to occur as capitalist owners and managers proved far
less able to adjust to changing market conditions than Adam Smith had
predicted. Keynes’s analysis of economic
history instilled in him the conviction that there would be periodic upturns
and downturns in the economy that occurred because market conditions pertinent
to labor supply, availability and
cost of key raw materials, and
fluctuations in consumer taste and purchasing capacity would at times proved
unpredictable. During times of severe
downturn, such as that of the Great Depression, labor might suffer prolonged
periods of unemployment and “underemployment equilibrium” whereby highly
skilled labor had to settle for low-skill and low-paid jobs.
Keynes held that government must step in to
provide additional spending when private capitalists are reluctant to do so or
prove unable to make those new investments that propel the free enterprise
system. Keynesian government spending policy undergirded the New Deal of Franklin Roosevelt and
continues to provide the theoretical underpinning and practical policy for
fiscal and monetary policy in the United States today. Keynesian economics, especially with regard
to the amount of government spending desirable, provides much of the context
for debates concerning government fiscal and monetary policy.
Concluding Comments
A highly developed economy such as the United
States experiences growth rates in GDP of about 3% when the economy is in a
favorable period. During such periods,
key matchups--- product supply and
consumer demand; workers’ wages and retail prices; investment willingness and production costs
(including wholesale prices)--- are in sync.
During such times, there is a near-equilibrium with just enough dynamism
to provide the conditions for economic growth.
In a less developed economy, a growth rate of
10% or more may indicate a rapidly industrializing and technologically
advancing society. Today, for example,
the economies of Brazil, India, and the People’s Republic of China are
experiencing high rates of growth amid conditions of increased production and
technological advance.
When the economy stalls, the Fed acts in ways
to stimulate the economy, and the executive branch of the federal government is
likely to increase expenditure, with a likely outcome of deficit spending. With regard to the level of spending, the
following observations apply:
Economic
conservatives favor
little action on the part of the Fed and low expenditures by the federal
government (except in matters of national defense).
Economic
liberals (progressives) favor aggressive action on the part of the
Fed and as high expenditures as they deem necessary for the federal government
to stimulate the economy and thus raise employment.
Economic
moderates (centrists, middle-of-the roaders)
favor limited, carefully considered actions on the part of the Fed and limited,
carefully considered expenditure by the federal government.
Liberals, moderates, and conservatives are
typically envisioned along a continuum moving left to right. A very few conservatives call for the kind of
pure laissez faire capitalism proposed by Adam Smith in the 18th
century. But even the monetarist Milton
Friedman once famously declared, “we are all Keynesians now.”
The debate among liberals, moderates, and
conservatives in the capitalist economy of the United States usually focuses on
the amount of governmental economic stimulus necessary. They tend to agree, however enthusiastically
or reluctantly, that federal government spending and the policy of the Federal
Reserve Board of Governors (now chaired by Janet Yellen and including six other
members who determine Fed policy) is necessary to the success of
capitalism.
Economic history strongly suggests that it was
the prescriptions of John Maynard Keynes, along with the ameliorating force
provided by labor unions which saved the system extolled by Adam Smith
from the decline and fall predicted by Karl Marx.
