Economic Theories<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Standard economic can be divided into two major fields. The first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins and rental changes. Microeconomics assumes that people behave rationally. Consumers try to spend their income in ways that give them as much pleasure as possible. As economists say, they maximize utility.

The second field, macroeconomics, deals with modern explanations of national income and employment. Macroeconomics dates from the book, The General Theory of Employment, Invest, and Money(1935),by the British economist John Maynard Keynes. His explanation of prosperity and depression centers on the total or aggregate demands for goods and services by consumers, business investors, and governments. Because, according to Keynes, inadequate aggregate demand increases unemployment, the indicated cure is either more investment by business or more spending and consequently larger budget deficits by government.

Microeconomics, branch of economics, deals with small units, including individual companies and small groups of consumers. Economics is concerned with the allocation of scarce means among competing ends. People have a variety of objects, ranging from the satisfaction of such minimum needs as food, clothing, and shelter, to more complex objectives of all kinds, material, aesthetic, and spiritual. However, the means available to satisfy these objectives at any point in time are limited by the available supply of factors of production (labor, capital, and raw materials) and the existing technology. Microeconomics is the study of how these resources are allocated to the satisfaction of competing objectives. It contrast with macroeconomics, which is concerned with the extent to which the available resources are fully utilized, or increase over time, and related issues. It is not always possible to make a distinction between microeconomics and macroeconomics. For example, the difference between conflicting schools of thought in macroeconomics is sometimes traced to differences in assumptions related to microeconomics.

The central components of microeconomics are demand, supply and market equilibrium. Demand refers to how individuals or household form their demands for different goods and services. Supply refers to how firms decide which and how much goods and services they will supply and what combination of factors of production they should employ in supplying them. Market equilibrium refers to how market enables these supplies and demands to interact.

Macroeconomics, branch of economic is concerned with the aggregate, or overall economy. Macroeconomics deals with economic factors such as total national output and income, unemployment, balance of payments and the inflation. It is distinct from microeconomics, which is the study of the composition of output such as the supply and demand for individual goods and services, the way they are traded in markets, and the pattern of their relative prices.

At the basis of macroeconomic is an understanding of what constitutes national output, or national income, and the related concepts of gross national product (GNP). The GNP is the total value of goods and services produced in an economy during a given period of time, usually a year. The measure of what a country’s economic activity produces in the end is called a final demand. The main determinants of final demand are consumption (personal expenditure on items such as food, clothing, appliances, and cars), investment (spending by business on items such as new facilities and equipment), government spending, and net exports.

Macroeconomic theory is largely concerned with what determines the size of GNP, its stability and its relationship to variables such as unemployment and inflation. The size of a country’s potential GNP at any moment in time depends on its factor’s of production—labor and capital—and its technology. Over time the country’s labor force, capital stock, and technology will change, and the determinations of long-run changes in a country’s productive potential is the subject matter of one branch of macroeconomic theory known as growth theory.

The study of macroeconomics is relatively new, generally beginning with the ideas of British economist John Maynard Keynes in the 1930s. Keynes’s ideas revolutionized thinking in several areas of macroeconomics, including unemployment, money supply, and inflation.