Monday, May 25, 2009

Concept VI: Micro vs Macro

Microeconomics deals with the economic problem of the individual. The amount to spend given an income for the consumer. How quantity to produce given the capacity for the producer and the market price.

Price theory says every supply curve and every demand curve is an optimal position.

Given the income and the capacity, (1) there is a price that the supply quantity and the demand quantity meets; and (2) there is a quantity that the supply price and the demand price meets.

At every price, therefore, the income and capacity of the individual remains unchanged.

In macroeconomics, the problem is to think about changes in the income and the capacity at any or every price point. (When Keynes did this, the Neoclassical economists accused him of having a fixed price model.)

How do income and capacity change?

Capacity increases with investment which gets the economy to move on notch up.

At constant prices, the economic growth is the amount of the investment in real terms. There is an increase in the demand for capital goods.

When the investment is put into increase more capital goods, the process of growth continues in the expansion of the productive capacity and in R&D - all that which we all work so hard to put our children into.

When the investment is put to produce consumer goods - such as China for exports to the US - the investment process stops when the US consumer become bankrupt.

In a local economy such as Malaysia, priming the economy through consumer demand and not investment is to ask banks to keep lending to consumers until our consumers become bankrupt.

Business people think of making a profit - just like any other individuals, including politicians.

Economists try to create a conducive environment for investment - and investment and investment.

The moment investment fails, the economy stops growing.

The insufficiency of consumer demand can only be a problem for the individual producer.

When there is a mistake made by an investor, he is deemed incapable and therefore should let another investor make use of the asset and expand, most likely by selling at a loss.

The old investor dies, but the economy and economic growth live on in the new investor.

Motor manufacturers may have to become makers of turbines for wind power towers.

No comments: