Many subjects are studied on various levels.’ Consider biology, for example. Molecular biologists study the chemical compounds that make up living things. Cellular biologists study cells, which are made up of many chemical compounds and, at the same time, are themselves the building blocks of living organisms. Evolutionary biologists study the many varieties of animals and plants and how species change gradually over the centuries.
Economics is also studied on various levels. We can study the decisions of individual households and firms. Or we can study the interaction of households and firms inmarkets for specific goods and services. Or we can study the operation of the economy as a whole, which is the sum of the activities of all these decision makers in all these markets.
The field of economics is traditionally divided into two broad sub fields. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economywide phenomena. A microeconomist might study the effects of rent control on housing in New York City, the impact of foreign competition on the U.S. auto industry, or the effects of compulsory school attendance on worker’s earnings. A macroeconomist might study the effects of borrowing by the federal government, the changes over time in the economy’s rate of unemployment, or alternative policies to raise growth in national living standards.
Microeconomics and macroeconomics are closely jntertwined. Because changes in the overall economy’ arise from the decisions of millions of individuals, it is impossible to understand macroeconomic developments without considering the associated microeconomic decisions. For example, a macroeconomist might study the effect of a cut in the federal income tax on the overall production of goods and services. To analyze this issue, he or she must consider how the tax cut affects the decisions of households about how much to spend on goods and services.
Despite the inherent link between microeconomics and macroeconomics, the two fields are distinct. Because they address different questions, each field has its own set of models which are often taught in separate courses.