Microeconomics Vs. Macroeconomics : Economics notes class11-12

Introduction

Branches of Economics

There are two main branches of economics –

Microeconomics
Macroeconomics

Microeconomics

The prefix ‘micro’ is derived from the Greek word ‘mikros’ meaning small.
Microeconomics is the study of economic behaviour of individual economic units and individual economic variables.
Example – the study of economic behaviour of households, firms and industry.
Thus microeconomics deals with the individual units such as individual consumers, the individual producers and different factors of production which are used to produce a commodity.
Microeconomics also deals with how resources are used in the product and factor markets.

Macroeconomics

The prefix ‘macro’ is derived from the Greek word ‘makros’ meaning ‘large’.
Macroeconomics is the study of the economy as a whole. Therefore the unit of study in macroeconomics is the entire economy rather than a part of the economy.
Macroeconomics deals with the functioning of the economy as a whole.
It deals with national income, output, aggregate demand, aggregate supply, economic growth, problems related to international trade and public finance.
It addresses the important issues of unemployment, ow rate of growth, economic instability related with depression and inflation, adverse balance of payments and their causes as well as remedies.
Macroeconomics also studies how, with effective monetary and fiscal policies of government can tackle the above problems.

Difference between Microeconomics and Macroeconomics :

Unit of Study

Microeconomics

Macroeconomics

Microeconomic
studies the economic behaviour of individual economic units.

It is
concerned with how the individual units make decision.

The main
individual economic units are household, firms, industries and individual
markets.

The unit of
study in macroeconomics is the entire economy rather than parts of the economy.

Macroeconomics
is concerned with the behaviour of the economy as a whole.

Focus of Study

Microeconomics deals with the determination
of prices and quantities in individual markets.

It is
concerned with allocation of resources among individuals, firms and
industries.

It examines
how the output produced is shared among those resources owners who co operate
in the production of this output.

Microeconomics
deals with the functioning of both commodity market and factor market.

Macroeconomics
deals not with individual quantities as such but with aggregate of these
quantities, not with individual income but with national income,not with
individual price but with the price level, not with individual output but
with the national output.

Basic Parameters of the Subject Matters

Price is the
basic parameter of the subject matter of microeconomics

Economic units
like households and producers take their economic decisions on the basis of prices in different markets.

Income is the
basic parameter of macroeconomics.

Economic decisions
relating to aggregate consumption, aggregate investment, etc are taken on the
basis of national income.

Different Perspectives

Microeconomics
is the bottom – up view of the economy.

Macroeconomics
is the top – down view of economy.

Method of Study

Microeconomics
uses the Partial equilibrium analysis
(PEA).

In partial
equilibrium analysis we make the assumption of ceteris
paribus order, i.e. other things
being equal or constant.

Example –
while studying the law of demand, we study the relationship between price and
demand assuming the factors other than price of the commodity remain
constant.

Macroeconomics
uses the technique of quasi – general equilibrium analysis (QGEA).

Mutual
dependence of macroeconomic variables is the centerstage of macroeconomics.

Macroeconomic
studies the interdependence of macroeconomic variables like aggregate demand,
aggregate supply, aggregate consumption, aggregate investment etc.

Nature of Assumption

In
microeconomics it is assumed that total output, income and employment, general
price level etc. (economic variables of Macroeconomics) are given or known.

On the basis of these assumptions,
microeconomics explains how allocation of resources takes place and how the
prices of different commodities are
determined.

Macroeconomics
assumes allocation of resources, distribution of output, spending on various
goods and services, relative prices (economic variables of Microeconomics) are given or known.

On the basis
of these assumption macroeconomics explains how aggregate output, income and
employment and price level are determined in the economy as a whole.

Interdependence of Micro and Macroeconomics

Microeconomic analysis and macroeconomic analysis are complementary to each other, they do not supplant but supplement each other.
Both microeconomic theory and macroeconomic theory are important in their own way. The entire economy is made up of its parts. Therefore macro and microeconomic theory are equally important.
Basic goal of both microeconomic and macroeconomic theories is the same; the maximisation of material, welfare of the people and the entire economy.

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