June 2, 2014
Fundamentals of Macroeconomics Paper
“Macroeconomics is the study of the economy as a whole” (Colander, 2013, p. 6). Colander explains farther that macroeconomics looks into inflation, unemployment, business cycle, and growth (2013, p. 6). For the purpose of this paper, I will be explaining how certain economical activities affect four principle components of any economy, households, firms (also known as businesses, government, and foreign sectors (which will not be covered much in this paper). Activities, such as grocery shopping, employees being laid off, and decreases in taxes, are just a few of the millions of events that economists deal with daily. In order for us to understand how these activities affect households, businesses, and the government, we first need to know about how supply and demand works. Simply, demand is ability and will to pay. Supply is the quantity of produced goods or services that are in demand (Colander, 2013, p. 78). These two factors are the most basic parts to understanding any economy. In order for there to be a supply, there must be a demand. In order for there to be demand there must be desire to produce that product which becomes known as a cycle effect. The exchange of supply and demand is what creates a circular flow. One can break down the flow into four components for an economy.
Households, which are ordinary people who consume goods and services while working in order to do so (income).
Firms (also known as businesses) produce the output which will also include labor and the cost of producing goods and services.
Government is added and then we have taxes and government assistances (such food stamps and Medicaid/Medicare).
Lastly, we have the foreign sector which has external income and expenditures (i.e. exports and imports).
A good way of looking at the whole picture for the economy and how it work together is through a circular motion as I mentioned before. When dealing with just households and firms, we have a closed economy.