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What determines the products, and how many of each, a firm will produce and
sell? What determines what prices a firm will charge? What determines how a firm
will produce its products? What determines how many workers it will hire? How will
a firm finance its business? When will a firm decide to expand, downsize, or even
close? In the microeconomic part of this book, we will learn about the theory of
consumer behavior and the theory of the firm.
What determines the level of economic activity in a society? In other words,
what determines how many goods and services a nation actually produces? What
determines how many jobs are available in an economy? What determines a nation’s
standard of living? What causes the economy to speed up or slow down? What causes
firms to hire more workers or to lay workers off? Finally, what causes the economy
to grow over the long term? An economy's macroeconomic health can be defined by
a number of goals: growth in the standard of living, low unemployment, and low
inflation, to name the most important. How can macroeconomic policy be used to
pursue these goals? Monetary policy, which involves policies that affect bank
lending, interest rates, and financial capital markets, is conducted by a nation’s
central bank. Fiscal policy, which involves government spending and taxes, is
determined by a nation’s legislative body. These are the main tools the government
has to work with. These are just some of the issues that will be explored in the
macroeconomic chapters of this book.
Economists see the world through a different lens than anthropologists,
biologists, classicists, or practitioners of any other discipline. They analyze issues and
problems with economic theories that are based on particular assumptions about
human behavior, that are different than the assumptions an anthropologist or
psychologist might use. A theory is a simplified representation of how two or more
variables interact with each other. The purpose of a theory is to take a complex, real –
world issue and simplify it down to its essentials. If done well, this enables the
analyst to understand the issue and any problems around it. A good theory is simple
enough to be understood, while complex enough to capture the key features of the
object or situation being studied. Sometimes economists use the term model instead
of theory. Strictly speaking, a theory is a more abstract representation, while a model
is more applied or empirical representation. Models are used to test theories, but for
this course we will use the terms interchangeably. For example, an architect who is
planning a major office building will often build a physical model that sits on a
tabletop to show how the entire city block will look after the new building is
constructed. Companies often build models of their new products, which are more
rough and unfinished than the final product will be, but can still demonstrate how the
new product will work.
Economists carry a set of theories in their heads like a carpenter carries around
a toolkit. When they see an economic issue or problem, they go through the theories
they know to see if they can find one that fits. Then they use the theory to derive
insights about the issue or problem. In economics, theories are expressed as diagrams,
graphs, or even as mathematical equations. Economists do not figure out the answer
to the problem first and then draw the graph to illustrate. Rather, they use the graph
of the theory to help them figure out the answer. Although at the introductory level,
you can sometimes figure out the right answer without applying a model, if you keep

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