For many years, macroeconomics was the subject of great controversy. Some people argued that the economy is a dynamic thing, a matter of forces beyond individual control. Others were more practical, arguing that economic policy must be guided by the logic of the market. However, the debate has subsided with the advent of macroeconomic theory as well as the widespread use of economic modeling tools such as the Phillips Curve.
Macroeconomics is the study of economic activity at a national level. The theory behind this is that economies respond to certain forces beyond the control of individuals. For example, if there is a war, then demand for goods and services increases because of the increased need. But in a non-war economy, the increased demand is offset by increased supply, causing the economy to adjust back to a state of equilibrium. And when demand exceeds supply, the economy experiences a recession.
Micro economics on the other hand, deals with the micro-economic theory of business cycles. Business cycles refer to those economic cycles that occur between cycles in which prices have been dropping and prices have been increasing, or vice versa. The cause of this imbalance in the economy is the fact that in one cycle, prices are falling and in another cycle, they are rising. As the price level falls, so too does the quantity of money available to purchase the goods and services.
In most economic models, business cycles are caused by shifts in expectations of future demand. The theory behind this is that when people are uncertain about what they will actually spend money on in the future, then they begin to anticipate less spending. This leads to reduced consumption, which results in lower employment. The only way to resolve this problem is to create more uncertainty by making future demand predictions. For instance, if there was a huge decline in demand for a particular product, then it would be possible to predict that demand would continue to decline until supply became higher than demand.
There are many different types of economic model used. Each of these models can be used in order to examine different aspects of the economy. The standard textbook model is one that attempt to explain how the economy works, but does not deal with the microeconomics of business cycles. Another is the general equilibrium model, which is similar to the Phillips Curve. and is often referred to as the Austrian theory of the business cycle. While these models have been around for a long time, newer models are based on micro-level economic theories of demand and supply, which have been around for decades.
Microeconomics may seem foreign to some of you, and that is the point. Many people consider the study of microeconomics as something that cannot be understood but understanding it can help you to create an economic model that accurately depicts a specific type of business cycle. This knowledge will allow you to make decisions that are not only in your best interest but also in the best interest of the market.