Microeconomics and macroeconomics
The development of modern economics began in the 17th century. Since that time economists have developed methods for studying and explaining how individuals, businesses and nations use their available economic resources. The central problem of economics is to determine the most efficient ways to allocate the factors of production and solve the problem of scarcity created by society's unlimited wants and limited resources.
We can classify branches of economics according to the approach or methodology that is used. Many economists specialize in a particular branch of a subject. What distinguishes them is the segment of economic life in which they are interested. Labour economics deals with the problems of the labour market as viewed by firm’s employers, and society as a whole. Urban economics deals with city problems: land use, transport and housing.
Economists have two ways of looking at economics and the economy. One is the macro approach, and the other is the micro. Macroeconomics is the study of the economy as a whole; microeconomics is the study of individual consumers and the business firm.
Microeconomic analysis offers treatment of individual decisions about particular commodities or services. It is the study of the behaviour of people and organizations in particular markets. Microeconomics is concerned with things such as scarcity, choice and opportunity costs, and with production and consumption. Microeconomics gives principal emphasis to the study of prices. It looks at how prices are determined and how people respond to changes in the market (for example, changes in the demand for and the supply of products).
Microeconomics tends to offer a detailed treatment of one aspect of economic behaviour, but ignores interaction with the rest of economy in order to preserve the simplicity of the analysis.
Macroeconomics emphasizes the interactions in the economy as a whole. Macroeconomics examines the questions such as how fast the economy is running; how much overall output is being generated; how much total income is. It also seeks solutions to such macroeconomic problems as unemployment and inflation. Economic growth, employment and inflation are important factors that characterize the overall state of the economy and the efficiency of the available resources' utilization.
Inflation
Inflation is generally defined as an increase in the average price level of goods and services overtime. The average price level may fall as well as rise. A decrease in average prices a deflation - occurs when price decreases on some goods and services outweigh price increases on all others.
Inflation varies considerably in its extent and severity, from mild inflation of a few percent each year to hyperinflation, which entails enormously high rates of inflation. Inflation rate is the annual rate of increase in the average price level. The absence of significant changes in the average price level is referred to as price stability. It is officially defined as a rale of inflation of less than 3 per cent.
Inflation leads to the redistribution, of income and wealth in the society, often, hurting people with little economic power (e.g. pensioners). It affects the country s balance or payments because exports become relatively, more expensive and therefore less competitive, and imports become relatively cheaper.
There are many causes of inflation, according to economists. Two of the most important are:
Cost - push inflation. Cost-push inflation refers to the fact that firms raise prices when the costs of various factors of production go up. For example, increase in the cost of labour, machinery, raw materials, fuels and credit necessitate higher prices.
Demand - pull inflation. Demand-pull inflation refers to a are available at the time. This causes prices to rise as a means of limiting demand to the available supply.
Two or the most common measures or inflation (inflation indicators) are the consumer price index (the CPI) and the producer price index (the PPI), also known as the wholesale price index. As the names suggest, the CPI measures the price of an average market basket of goods and services for an average family (household) over time, while the PPI measures changes in the prices businesses pay for goods and services over time.
Both inflation indicators are calculated monthly and published in business periodicals. The CPI is the most closely followed, because many companies and government programs base their salary and payment' increases on it. Governments use wage indexing to keep real wages at a high and inflationary level. The PPI usually indicates future consumer prices and is therefore a barometer of future inflation (expectational inflation).