Read this article to learn about micro economics, macro economics and their difference.
Microeconomics is the observe of macroeconomics. It is the analysis of the economy’s constituent elements—’Micro’, of course, being Greek for ‘small’.
As the name suggests, it is not aggregative but elective; it seeks to explain the working of markets for individual commodities and the behaviour of the individual buyer and seller.
Microeconomics; is the study of particular individual household, firm or industry, or of individual prices, wages or income.
In micro-economy we study the various constituents or parts of the economy and not as a whole. It is in microeconomics that concept of marginal analysis assumes special importance, as some of the important laws of microeconomics are based on it. Here, we study the economic motives and behaviour of individual consumers and producers and the principles involved in organizing and operating the individual firms or industries.
For example, we lake an individual consumer and see how he attains the equilibrium; we, therefore, need not study the consumption of the economy as a whole. Similar is the case with demand. In microeconomics, we study the demand of an individual firm or industry. Coming to prices, we study the price level of the economy. If we want to know something about the employment of labour in the microeconomics, we study the employment of a particular type of labour. In a nutshell, it focuses attention entirely on the individual or single firm or industry to the exclusion of the social system.
According to Prof. K.E. Boulding, “Microeconomics is the study of particular firms, particular households, individual, prices, wages, incomes, individual industries, particular commodities”. According to Brooman, “it seeks to explain the working of markets for individual commodities and the behaviour of individual buyer and seller.”
An important fact to be borne in mind about microeconomics is that there we assume the prevalence of full employment in the economy as a whole. Given this presumption, we proceed to know as to how a consumer or a producer attains equilibrium; as such “microeconomics deal with division of total output among industries and firms, and the allocation of resources among competing uses.
It considers problems of income distribution. Its interest is in relative prices of particular goods and services.” In other words, while the behaviour of a particular unit is under study, it has to be assumed that the environmental data are given. That is, if the environmental data—the stimuli—what they are, we would say that the unit would behave in a particular manner. A truly microeconomic study of a unit would, therefore, enable us to know the behaviour of a particular unit and determine certain magnitudes like the quantum of things it would buy, produce or sell.
Thus, it would tell us the position in which the unit would be in equilibrium. The unit of study is the part rather than the whole. For example, microeconomics may explain how single firm decides the sale price of a particular product, what amount of output will maximise its profits, and how it determines the lowest cost combination of labour, capital, materials and other inputs. It also concerns how the individual consumer determines the distribution of its total expenditure amongst many products and services so as to attain maximum utility.
In its approach microeconomics takes, as given, the total output, employment and spending for all goods and services and proceeds to examine how output and employment are allocated among various individual industries and firms and how the prices of various products of these individual firms are established.
“The term macroeconomics’ applies to the study of relation between broad economic aggregates”. “Macroeconomic Theory is the theory of income, employment, prices and money.” Macroeconomics is the study of economic system as a whole. It is that branch of economic analysis which studies the behaviour of not one particular unit, but of all the units taken together, like total national income, output and employment, total consumption, saving and investment, aggregate demand and supply and general level of prices.
Macroeconomics, thus, becomes the study in aggregates and is often called ‘aggregative economics’ as it studies the behaviour of these aggregates over time and space. According to Prof. K.E. Boulding, “Macroeconomics deals not with individual quantities as such, but with aggregates of these quantities, not with individual income but with national income, not with individual price but with price level, not with individual output but with national output”.
The study which analyses the determination and fluctuation of various aggregates and averages in the economy as a whole is called macroeconomics, ‘macro’ being the Greek for ‘larger’. According to Gardner Ackley, “Macroeconomics deals with economic affairs in the large.” It concerns the overall dimensions of economic life…to use a metaphor, “it studies the character of the forest independently of the trees which compose it”.
In other words, “Macroeconomics is that part of economics which deals with great aggregates and averages of the system rather than with particular items in it and attempts to define these aggregates in a useful manner, and to examine how they are related and determined.” The theoretical concepts and statistical measures involved are generally wide aggregates or average, such as national income or total employment.
The idea is to explain ups and downs of these magnitudes and their interrelations. It is done on the basic assumption that not much attention need be given to the constituents of the aggregates, i.e. while behaviour of particular households, industries, firms or regions. In short, macroeconomics attempts to answer the truly big questions of economic life—full employment or unemployment, capacity or under-capacity production, a satisfactory or unsatisfactory rate of growth, inflation or price level stability.
The questions which provide the basis of macroeconomics are:
(a) What determines the magnitude of the total output of a country during some given period of time?
(b) What determines the rate at which the output grows?
(c) What determines the level of prices?
(d) What determines the direction and rate of change of prices?
(e) What provides employment to nation’s work force?
(f) What determines the levels of a country’s exports and imports?
In attempting to answer these questions we shall be considering the theory of employment, the theory of price level and the theory of economic growth. In other words, we shall be examining such aggregates as output, employment, consumption, investment, supply of money, general price level, exports and imports. Besides, our study will require an appreciation of the role of government in determining the levels of these aggregates and the manner in which it uses its policy instruments for these objectives.
Distinction between ‘Micro’ and ‘Macro’ Economics:
The distinction between micro and macroeconomics is not very clear cut—because what is macroeconomics in one situation or from one view point may become microeconomics in another situation or from another viewpoint. For example, in the case of a closed economy a study of income, saving, consumption, employment etc. for the whole economy is macroeconomics—as it is the study of aggregates.
If, however, the country has trade relations with other nations, then a single country becomes just one unit in the international set-up and the study of its economic entries becomes microeconomics. In this sense, it seems that a micro-economy is an open economy while a macro-economy is a closed one.
Microeconomic theories are concerned with the analysis of price-output determination under different market conditions and the allocation of economic resources to particular uses; whereas macroeconomic theories are concerned with the analysis of the levels of national product and employment.
Microeconomic theory depends upon the technique of partial equilibrium analysis on the assumption of ceteris paribus. It examines the problem of relative prices and changes in these prices. Macroeconomic theory, on the other hand, depends on the technique of general equilibrium analysis and studies the interdependence between different market prices and outputs of goods and services produced in the economy.
What microeconomics takes essentially as given—namely, the total output for the economy as a whole—is what microeconomics takes– as the main variable whose size or value is to be determined. Similarly, what macroeconomics takes as given—namely, the distribution of output, employment, expenditure amongst particular goods and services of individual industries and firms—are all variables in microeconomics. Again, microeconomics takes the general price level as given and relative prices as variables; whereas macroeconomics treats general price level as variable and relative prices as given.