Tutor profile: Clifton R.
What is the difference between microeconomics and macroeconomics? Give some examples of microeconomics and macroeconomics.
Microeconomics examines small segments of the economy, such as an individual, a company, and the price of a particular good or service. Concepts in microeconomics include elasticity, supply and demand, market equilibrium, forms of competition, and profit maximization. Macroeconomics surveys the economy as a whole and provides the big picture. In macroeconomics, concepts such as the gross domestic product, inflation, and the unemployment rate are explored. In microeconomics, individual markets for goods and services are examined (such as the market for strawberries). Changes in supply and demand determine the new prevailing price in the market. For example, an increase in demand increases the price of a good or service. In macroeconomics, the whole economy is considered, meaning that all goods and services are included. The aggregate demand and aggregate supply curve are studied in macroeconomics Another word for aggregate is "total;" thus, aggregate demand is synonymous to total demand. Instead of relying on a single price of a good or service, inflation is explored in macroeconomics, which is the general increase in prices in the economy. The Bureau of Labor Statistics records prices of approximately 80,000 goods and services in the economy, and if price levels generally increase, the economy is experiencing inflation. In terms of production, microeconomics examines the specific quantity of a good or service being supplied in a market, whereas macroeconomics includes the production of all goods and services within a country (referred to as the gross domestic product, or GDP).
Why does raising the price for inelastic goods and services increase total revenue for companies?
Inelastic goods and services are goods and services in which consumers are not responsive to price changes. Consumers are not responsive to price changes because consumers need these goods and services. Therefore, a helpful way to remember inelastic goods is to classify them as "needs." No matter what the price is (even if the price increases), consumers will still buy the good or service, which allows companies to experience increases in revenue due to higher prices being charged. The healthcare sector is notorious for high prices. However, consumers ultimately depend on the consumption of these goods and services because their lives are at stake since they suffer health complications. For example, someone diagnosed with type 2 diabetes is more vulnerable to heart disease, strokes, high blood pressure, nerve damage, and many other adverse health conditions. This consumer needs to purchase prescription drugs to address their type 2 diabetes, and regardless of the price increasing, the consumer will ultimately purchase these prescription drugs for the betterment of their health. This is why many pharmaceutical firms accumulate massive profits because they charge very high prices for their goods and services since they are considered very inelastic, as many people cannot live without them.
When the Federal Reserve conducts expansionary monetary policy and increases the money supply, why does the interest rate decrease?
When the money supply increases, there is more money circulating in the economy for consumers and businesses. Despite there being more money available in the economy, consumers and businesses may be reluctant in holding this additional money and spending it because interest rates are too high. To incentivize consumers and businesses to increase consumption and investment, interest rates must be lowered to spur spending and investment. For example, when businesses have more money in a relatively low interest rate environment, they may consider expanding their operations and undertaking new projects. The demand for money must equal the supply of money, and this can only be accomplished when the interest rate is lowered. This analysis is very similar to a traditional supply-and-demand model when considering any good or service. Consider the stock market. When there is an increase in the supply of stocks (meaning that investors are selling) and the demand for stocks is unchanged, the price of stocks must be lowered to stimulate demand (i.e., to encourage people to buy stocks). If stock prices did not fall in response to the increase in the supply of stocks, investors would probably not bother purchasing stocks.
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