1.3: The Economy

By fully understanding the foundation upon which economics sits, you can start to see how economic principles apply to the real world.

Question: What is the difference between micro and macroeconomics?

By remembering that economics is simply the study of choice, the answer to this question is remarkably simple.

Microeconomics is the study of individual choices and macroeconomics the study of group choices.

Micro

Macro

The fact that economics is the study of choice makes it a very special subject. It is special because everyone makes choices and, most importantly, everyone wants to make better choices. The study of economics is simply a way of:

• identifying your options
• measuring benefits and costs
• making the best choice given your goals and circumstances

The economy is an abstraction that measures changes in decision making by market participants.

Changing choices leads to changing behavior. Changing behavior leads to changing economic activity. Let’s think about this for a moment. How could there be a change in anyone’s activity if they made the same choices repeatedly?

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