2.1 Microeconomics and Macroeconomics

2026 📋 Syllabus Objectives

By the end of these notes, you should be able to:

  • 2.1.1 Understand what microeconomics is and who the decision makers are in microeconomics.
  • 2.1.2 Understand what macroeconomics is and who the decision makers are in macroeconomics.
  • Explain the difference between microeconomics and macroeconomics.
  • Understand how microeconomics and macroeconomics are connected.

📖 Main Content

https://cambridgeassistant.com

What is Economics?

Before we look at the two branches, it helps to understand what economics actually is.

Economics is a social science — meaning it studies how people behave and make decisions. Specifically, it studies how people, businesses, and governments deal with one big challenge: we have unlimited wants but only limited resources to satisfy them.

In simple terms: there is never enough of everything for everyone, so choices have to be made about how best to use what is available.

Economics is divided into two main branches: microeconomics and macroeconomics.

2.1.1 – Microeconomics

What is Microeconomics?

The word "micro" comes from the Greek word meaning small. So microeconomics is the study of the small-scale parts of the economy.

More precisely, microeconomics is the study of the behaviour and decisions of individual households and firms, and how individual markets perform.

Think of it this way: microeconomics zooms in on specific people, businesses, and markets — like looking at one piece of a puzzle up close.

Examples of Microeconomic Topics

  • Why does the price of a particular product (e.g. a litre of milk) go up or down?
  • How much of a product does one firm decide to produce?
  • How do individual consumers decide what to buy?
  • What happens in the market for clothing when costs of production rise?

Decision Makers in Microeconomics

The people and groups who make decisions are called economic agents. In microeconomics, the key decision makers are:

1. Households

A household is an individual person or a family group. Households play three important roles in the economy:

  • As consumers/buyers — they purchase goods and services. As consumers, households want low prices and good quality products.
  • As workers — they work for firms and earn wages. As workers, households want good working conditions and high pay.
  • As savers — they save money in banks or other places. As savers, households want their money to be safe and to earn a good return (interest).

2. Firms

A firm is a business that produces goods and/or provides services. Firms also employ workers and use other resources (called factors of production) to create what they sell.

  • Firms in the private sector — which means businesses that are not owned by the government — usually aim to make as much profit as possible.

3. The Government (in microeconomics)

The government also acts as a decision maker in individual markets. For example:

  • The government might tax the sale of cigarettes to discourage people from buying them.
  • It might regulate how a particular industry behaves to protect consumers.

Sign in to view full notes