Question

a) Distinguish the following terms as used in economics
i) Microeconomics and macroeconomics                                                            
ii) Cyclical and frictional unemployment        

Answer 1

i) Microeconomics and macroeconomics :

• Microeconomics is the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.
• Macro economics is the study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation.

Micro economics involves

• Supply and demand in individual markets.
• Individual consumer behaviour. e.g. Consumer choice theory
• Individual labour markets – e.g. demand for labour, wage determination.
• Externalities arising from production and consumption. e.g. Externalities

Macro economics involves

• Monetary / fiscal policy. e.g. what effect does interest rates have on the whole economy?
• Reasons for inflation and unemployment.
• Economic growth
• International trade and globalisation
• Reasons for differences in living standards and economic growth between countries.
• Government borrowing

The main differences between micro and macro economics

1. Small segment of economy vs whole aggregate economy.
2. Microeconomics works on the principle that markets soon create equilibrium. In macro economics, the economy may be in a state of disequilibrium (boom or recession) for a longer period.
3. There is little debate about the basic principles of micro-economics. Macro economics is more contentious. There are different schools of macro economics offering different explanations (e.g. Keynesian, Monetarist, Austrian, Real Business cycle e.t.c).
4. Macro economics places greater emphasis on empirical data and trying to explain it. Micro economics tends to work from theory first – though this is not always the case.

ii) Cyclical and frictional unemployment :

Definition:

Cyclical unemployment is a type of unemployment which is related to the cyclical trends in the industry or the business cycle. If an economy is doing good, cyclical unemployment will be at its lowest, and will be the highest if the economy growth starts to falter

Frictional unemployment is a type of unemployment. It is sometimes called search unemployment and can be based on the circumstances of the individual. It is time spent between jobs when a worker is searching for a job or transferring from one job to another.

Description:

Frictional: wokers are temporarily between jobs.

cyclical: All firms need fewer workers

cause:

frictional: Delays in applying interview and accepting jobs.

cyclical: low total demand in the economy

Remedy:

frictional: improve job information,eg: computrized job centres

cyclical: increased government spending or lower taxes.

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