Microeconomics and Macroeconomics

Microeconomics and Macroeconomics (Differences and Interdependence)

Difference Between Microeconomics and Macroeconomics

Microeconomics and Macroeconomics differ as follows:

Nature of the Study of Economic Units

Microeconomics studies the individual or small economic variables of the economy such as individual consumers’ savings, investment, and income. But macroeconomics deals with aggregates like national income, full employment and price level, etc.

The objective of the Study

The main objective of microeconomics is to study principles, problems, policies concerning the optimum allocation of resources.

The main objective of macroeconomics is to study problems, policies, and principles relating to full employment, and the growth of resources.

Subject Matter

The subject matter of microeconomics deals with the determination of price, consumer’s equilibrium, distribution, and welfare, etc. In other words, microeconomics studies the process of pricing. Hence it is called price theory.

The subject matter of macroeconomics studies employment, price level, national income, trade cycles, etc. In other words, macroeconomics studies the process of income and employment determination. Hence it is called income and employment theory.

Methodology

Laws of microeconomics are formulated on assumptions such as full employment, constant production, and income, ceteris paribus (other things being equal). With the help of these assumptions, micro laws establish relationships between the causes and effects of economic variables. In other words, micro laws such as the law of demand and the law of supply become valid on the assumption i.e. other things being equal. This method of study is also known as the ‘partial equilibrium analysis.

Macroeconomics assumes how the factors of production are distributed. On the basis of the assumption of the distribution of the factors, it explains how full employment can be achieved. In macroeconomics, economic variables are categorized into aggregate units like aggregate demand, aggregate supply, total consumption, price level, total saving, etc. The total effect of an economic factor on the economy is taken into account in macroeconomic analysis. This method of study is called ‘general equilibrium analysis.’

Components of Equilibrium

Microeconomics studies the equilibrium between the forces of market demand and market supply. Hence, the basis of microeconomics is the price mechanism, and The macroeconomics analysis deals with the equilibrium between the forces of the whole economy (i.e., aggregate demand and aggregate supply.

Static and Dynamic Analysis

Microeconomics studies the equilibrium at a particular point in time. It does not explain the time factor. Hence, microeconomics is regarded as a static analysis. In microeconomics, the economic basis is explained under the assumption of ‘Ceteris Paribus to ignore the time lag.

Macroeconomics is based on time lag, rate of change, past and expected value of variables. Hence, macroeconomics is regarded as dynamic analysis. Macroeconomics is not guided by unrealistic assumptions.

Solution of Current Issues and Problems

The study of microeconomics is not of much help to solve the important current issues and problems such as a decline in national income, hyperinflation, widespread unemployment, and so on.

Macroeconomics studies the causes, effects, and possible measures for the solution of these issues and problems. Macroeconomics helps to solve these problems.

Interdependence between Microeconomics and Macroeconomics

Microeconomics and Macroeconomics are different in their approaches. Microeconomics studies the individual units of the whole economy whereas Macroeconomics deals with the aggregates and sub-aggregates related to the whole economy. The objectives, subject matters, assumptions, etc. of microeconomics are different from those of macroeconomics.

But macro and microeconomics are interdependent. The objective of the study of economics cannot be fulfilled by the study of only one, microeconomics or macroeconomics. Again, they are dependent on each other because the parts affect the whole and the whole affects the parts. A general theory of the economy should cover both. It should explain prices, outputs, incomes, the behavior of individual firms and industries, and the aggregates of the individual variables.

Dependence of Microeconomics on Macroeconomics

Microeconomics analyzes the problems and behavior of small units of the economy. All microeconomic variables are a fraction of macroeconomic variables. For example, a particular commodity produced by a firm, the price of that commodity, individual consumption, wages of labor, etc. are analyzed under microeconomics. Macroeconomics plays an important role in the study of these aspects of microeconomics. It is explained as follows:

1. Determination of product pricing

We know that the price of a commodity is determined by the demand and the supply forces of the commodity. But this is not the end of the study. The price determination of that particular commodity also depends upon the commodities produced by other firms, quantities of commodities, nature of the commodities, cost of production, etc. Similarly, the price of the product and the quantity sold also depend upon the national income, total employment, effective demand, etc.

2. Study of factor pricing

Microeconomics also analyzes how a particular firm determines the wages of labor. But the firm cannot determine the wage rate independently; it has to study the wages given by other firms of the economy.

Similarly, the study of other factor incomes such as rent, interests, and profits is the subject matter of microeconomics but without the study of national income, the study of these factor incomes is impossible. For example, Rent = NI – (Interest + Profits + Wages). The determination of these factor incomes also depends upon other aggregates such as total saving and investment, aggregate demand, employment level, etc.

Thus, the study of microeconomics depends upon the study of macroeconomics.

Dependence of Macroeconomics on Microeconomics

Macroeconomics studies the economy as a whole. For example, general price level, national income, employment, etc. form the subject matter of macroeconomics. But the total is made up of parts. It can be proved as follows:

1. Study of national income

The national income is the sum total of the income of individuals, households, firms, and industries. Thus, it cannot be studied without the perfect information of the factor incomes such as rent, wages, interest, and profits (i.e., NI = Rent + Wages + interests + Profits).

2. Study of general price level

The general price level is the averages of all prices of individual goods and services.

3. Study of total saving

The study of total saving also depends upon the study of savings of different sectors i.e. Total saving = Personal savings + Business savings + Government saving. Thus, the aggregates and averages that are studied in macroeconomics are nothing but aggregates and averages of individual quantities which are studied in microeconomics.

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