Economic Terms

Economic Terms
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1 Explain the difference between microeconomics and macroeconomics.
Microeconomics is the study of the economy on a narrow scale, focusing on individual, household, and business behaviors in economic decisions and resource allocation. It looks into issues like demand and supply, production, consumption, and factor pricing that help individuals, households, and firms to make decisions (International Monetary Fund, n.d.). In contrast, macroeconomics studies the overall economic phenomenon of the entire country. It primarily addresses economic variables such as unemployment, Gross Domestic Product (GDP), and inflation to measure the country's economic growth.
2 What are opportunity costs?
Opportunity costs are forgone costs of a good or service. It is a cost or value that an individual is willing to give up after choosing an alternative. For instance, an individual may have a choice between buying a car and purchasing a house. Considering the individual need, the car becomes an opportunity cost if the person decides to buy a house. In other words, opportunity cost involves weighing two options and making an economic decision based on individual urgent or preferred needs.
3 What is the difference between fixed costs and variable costs?
Fixed costs are expenses that remain constant throughout a specific period regardless of production. These are not affected by a firm’s specific business activities or monetary fluctuations. Examples include rent, insurance, employee salary, and loan payment (FreshBooks, 2023). On the other hand, variable costs are expenses that vary with the company's output, business activities, and performance. These expenses increase as production grows and declines as output falls (FreshBooks, 2023). Examples include direct labor, raw materials, commissions, and operational expenses.
4 How does fiscal policy differ from monetary policy?
Fiscal policy is the taxing and spending policies of the government. Monetary policy focuses on the management of interest rates and money circulation. Central banks generally carry it out to achieve economic objectives like employment, price stability, and a stable economy.
5 Explain what you understand by the principal-agent problem
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The principal-agent problem is a conflict of interest between the asset owner (principal) and the entity hired to act on behalf of the principal (agent). This conflict can occur when ...