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Economic Theory

micro insights about particular plants and animals help to understand the
overall food chain, while the macro insights about the overall food chain
help to explain the environment in which individual plants and animals
live. In economics, the micro decisions of individual businesses are

influenced by whether the macroeconomics is healthy; for example, firms
will be more likely to hire workers if the overall economy is growing. In

turn, the performance of the macroeconomics ultimately depends on the
microeconomic decisions made by individual households and businesses.
What determines how households and individuals spend their
budgets? What combination of goods and services will best fit their needs

and wants, given the budget they have to spend? How do people decide
whether to work, and if so, whether to work full time or part time? How do
people decide how much to save for the future, or whether they should

borrow to spend beyond their current means?
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.

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