In this article, we will understand what an Economy and we will be covering two very important comparisons of Economics. These comparisons are very important to understand the basics of Economics. Understanding of these comparisons will be very helpful when studying Economics in the future.
First, let us understand what Economy is. In the simplest terms, Economy is about money being made and money being spent. Who has money, who doesn’t have money, are people getting richer or poorer. This is what we talk about when we talk Economy. An economy is made up of buyers and sellers. Sellers sell their goods and services to people who want to buy it. The buyer gives money in return. Sellers use that money to get more goods and services. They sell that to buyers who again give them money in return. This chain continues and this is an overview of what the economy is. It is a combination of buyers and sellers. More complex discussion of the economy shall be held for higher levels. Now we shall compare the two important types of Economics.
Micro Vs Macro
The first comparison that will be covered here is the two types of Economics. One is called Microeconomics. The other is called Macroeconomics. There is a lot of difference between these two. It is quite simple to understand the differences.
First, we will understand what Microeconomics is. It is the study of how people and companies make economic decisions. To explain it in simpler terms, we will use certain examples. Mohan works as a bus driver. He earns a salary for the work he does. He must pay for food, clothes, water, rent and other basic things. This is important for him to survive. He also wants to have fun because it makes him feel happy. He cannot spend all of his money on fun. But he also doesn’t want to spend all of his money on basic things. He must make a decision on how to spend his money. The decision he makes will affect mostly him and his family.
Similarly, McDonald’s is a company. They earn money by selling food. They must spend on rent, salaries, trucks etc. It is how they keep their business going. They also have to make a decision. The decision is between keeping more money to themselves. Or they can give more money to their labor. Their decisions affect mostly McDonald’s and its workers.
In both the examples, the decisions made mostly affect a few people or the company only. This is what Microeconomics. It studies economic decisions made by the individual.
Now we will understand what Macroeconomics is. In an economy, we talk of buyers and sellers. When we look at these buyers and seller separately, it is Microeconomics. But when we look at all of them together, it becomes Macroeconomics. Macroeconomics does not look at individual people or companies. It looks at all of them together. It looks at how many people have work. It looks at how much better the economy is getting as a whole. It looks at whether people are earning more. It looks at how much we buy from outside the country and how much we sell outside the country.
Microeconomics basically take a small-scale view, whereas Macroeconomics takes a large-scale view.
Money vs Barter
The next very important comparison we will look at here is Money vs Barter.
We all know what money is. To buy anything from the market, we need notes and coins. If we don’t have them, we cannot buy anything. We need money to buy things.
Let us understand the basics of the barter system.
Let us say that there is no money in the world. You need to buy a loaf of bread. You have five bananas, ten apples, one plate, one cake, and ten toffees with you. You go to the shop to get the bread. The shopkeeper wants three bananas. You will give him three bananas and get a loaf of bread in exchange. This is how barter system works. You do not use money to buy things. Instead, you exchange what you have in return for something that you want.
The barter system is not used in the world for a reason. It is very important to understand this.
In the above example, you gave three bananas and got a loaf of bread in exchange. Now you want to get a packet of chips from the market. So you go to the shop again. You ask for a packet of chips and the shopkeeper says he needs two chocolates in return. You don’t have a chocolate with you. You offer something else to the shopkeeper but the shopkeeper says he will only give chips if you have chocolates with you. You try at many shops but they all say the same. You cannot get chips because you don’t have what the shopkeeper wants. This is the problem with bartering. If you don’t have what people want, you cannot make an exchange. Everyone accepts money. If you have the money, every shopkeeper will give you chips. This is why we use money over the bartering system.
The two comparisons in this article are very important in Economics and their understanding is very helpful when studying further.