Questions 47-50 Economics is the systematic study of three areas of human activity: production, exchange, and consumption. The nature and magnitude of these activities and their implications for individual and social welfare constitute the focus of economics and the policies that economists make. The basic objective of all economic activity is to achieve the highest possible level of consumption of goods and services that is compatible with the supply of human and material resources available to produce them. When human and material resources are scarce, the mechanism of price is used to control demand. Choice, therefore, is the essence of economic decision making. The choice process occurs both at the level of the household and at that of the business firm. Households that are free to exercise their choices in the marketplace are assumed to behave in a manner that will yield maximum satisfaction or utility. The essence of rational behavior for a household is to spend its income on those items or services which will provide the greatest possible utility. Such choices act as signals to business about consumers’ preferences. Rational behavior in the business sector implies that firms direct their efforts toward maximizing profits. To do this they must, first, be responsive to the demands of the household sector for goods and services, and, second, combine the labor and material resources they employ in such a way as to minimize their production costs. This is the essence of efficient production. Inquiry into the nature and results of the choices that households and business firms make is the concern of microeconomic analysis, the focus of which is the behavior of the individuals, organizations, and institutions in the economy. However, the study of the behavior of households and business firms is only one part of economic analysis. The other part is the study of the behavior of economic aggregates – macroeconomics. The results of economic performance can be measured in terms of production and income. Chief among the “yardsticks” that measure the economy’s overall performance is gross national product (GNP), which aggregates the market value of all goods and direct services produced during the year. Production costs (wages, rent, interest, depreciation, managerial profits, and taxes) that are incorporated into consumer prices constitute an income stream that corresponds to GNP. The size of the GNP reflects the level of employment, another important macroeconomic aggregate. The level of employment is dependent on aggregate demand, which consists of the consumption demands of households and businesses. Macroeconomic aggregates are thus critically linked to the microeconomic decisions made in the household and business sectors of the economy. A major concern of macroeconomics is the influence of the government and the central bank on the aggregate demand through implementation of fiscal policy and monetary policy respectively.