Micro economics leads the way

Micro EconomicsThe Economist wrote in one its ‘Leaders’ that macro economists could learn a lot from their micro economist colleagues. Micro economists tend to focus more on individual markets or firms and through the use of technology are able to acquire huge amounts of data on each producing amazingly accurate forecasts of human behaviour. Rather than taking the standard textbook supply and demand, the new breed of micro economists help nudge the two into line. An example that they use is Uber – the taxi service – where prices surge during peak hours and this attracts more drivers onto the road.

Another example that The Economist use is the online book market. Research from MIT showed that used books (335 titles) typically sold for $17.50 which is 50% more than in book stores. By accessing all the readers interested in a book through the Internet you create more demand for the book which translate into higher prices. Furthermore the reader is better off as without the Internet they would not have found the book. One of the authors of the research bought a 30 year old book on pharmaceuticals online as the MIT library didn’t have it. She paid $20 for the book but was surprised to see that on the inside cover it had been priced in the second hand bookshop at $0.75.

The macro economists seem to create theoretical models before testing them against the data whilst the micro economists let computers spot patterns from the actual data.

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