Microeconomic Thinking and Macroeconomic Models

Microeconomics is the study of how households and firms make decisions andhow these decisionmakers interact in the marketplace.A central principle of microeconomicsis that households and firms optimize—they do the best they canfor themselves given their objectives and the constraints they face. In microeconomicmodels, households choose their purchases to maximize their level of satisfaction,which economists call utility, and firms make production decisions tomaximize their profits.Because economy-wide events arise from the interaction of many householdsand many firms, macroeconomics and microeconomics are inextricably linked.When we study the economy as a whole,we must consider the decisions of individualeconomic actors. For example, to understand what determines total consumerspending, we...

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What Macroeconomists Study

Why have some countries experienced rapid growth in incomes over the past century while others stay mired in poverty? Why do some countries have high rates of inflation while others maintain stable prices? Why do all countries experience recessions and depressions—recurrent periods of falling incomes and rising unemployment—and how can government policy reduce the frequency and severity of these episodes? Macroeconomics, the study of the economy as a whole, attempts to answer these and many related questions.To appreciate the importance of macroeconomics, you need only read the newspaper or listen to the news. Every day you can see headlines...

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