Market forces, an invisible hand

Micro and macro-economics are the two vantage points from which the economy is viewed. One is obviously the “big picture” and the other, a specific smaller picture.

Macro-economics studies facts and figures relating to the total output of a nation. It also considers the way the nation allocates its limited resources of land, labour and capital in an attempt to maximise production levels as well as promote trade and growth for future generations.

After observing the society as a whole, Adam Smith (the father of modern economics) noted that there was an “invisible hand” turning the wheels of the economy. We know this as the market force that keeps the economy functioning.

Micro-economics looks into similar issues, but on the level of the individual person and corporations within the economy. It tends to be more scientific in its approach, and studies the parts that make up the whole economy individually. By analysing certain aspects of human behaviour and what drives the decision making process, micro-economics allows us to monitor how individuals and firms respond to changes in price and why they demand what they do at particular price levels.

Micro and macro-economics are intertwined. As economists gain understanding of certain phenomena, they can advise both nations and individuals to make more informed decisions when allocating resources.

The systems by which nations allocate their resources can be placed on a spectrum where the command economy is on the one end and the market economy is on the other. The market economy advocates forces within a competitive market, which constitute the “invisible hand,” to determine how resources should be allocated.

The command economic system relies on the government to decide how the country’s resources would best be allocated. In both systems, however, scarcity vs unlimited wants force governments as well as individuals to decide how best to manage resources and allocate them in the most efficient way possible. But don’t forget, there are always limits to what the economy and government can do.