Posted by : Ahsan Khan Thursday, 7 February 2013



MICRO VS MACRO ECONOMICS

Introduction:
            The terms ‘micro-‘ and ‘macro-‘ economics were first invented and used by Ragnar Frisch (3 March 1895 – 31 January 1973 was a Norwegian economist and the co-winner with Jan Tinbergen of the first Nobel Memorial Prize in Economic Sciences in 1969) in 1933 from Oslo University of Norway. Micro-economics studies the economic actions and behaviour of individual units and small groups of individual units. In micro-economics, we are chiefly concerned with the economic study of an individual household, individual consumer, individual producer, individual firm, individual industry, particular commodity, etc. Whereas, when we are analyzing the problems of the economy as a whole, it is a macro-economic study. In macro-economics, we do not study an individual producer or consumer, but we study all the producers or consumers in a particular economy.

A. Micro-Economics or Price Theory:
The term ‘micro-economics’ is derived from the Greek word ‘micro’, which means small or a millionth part. Micro-economic theory is also known as ‘price theory’. It is an analysis of the behaviour of any small decision-making unit, such as a firm, or an industry, or a consumer, etc. For micro-economics, in contrast to macro economic theory, the statistics of total economic activity are valueless as far as providing clues to policy decisions. It does not give an idea of the functioning of the economy as a whole. An individual industry may be flourishing, whereas the economy as a whole may be suffering.
According to Prof. K. E. Boulding:
"Micro Economics is the study of particular firm, particular household, individual prices, wages, incomes, individual industries and particular commodities."
In respect of employment, micro-economics studies only the employment in a firm or in an industry and does not concern to the aggregate employment in the whole economy. In the circular flow of economic activity in the community, micro-economics studies the flow of economic resources or factors of production from the resource owners to business firms and the flow of goods and services from the business firms to households. It studies the composition of such flows and how the prices of goods and services in the flow are determined.
A noteworthy feature of micro-approach is that, while conducting economic analysis on a micro basis, generally an assumption of ‘full employment’ in the economy as a whole is made. On that assumption, the economic problem is mainly that of resource allocation or of theory of price.

The field of microeconomics is concerned with things like:
  • Consumer decision making and utility maximization
  • Firm production and profit maximization
  • Individual market equilibrium
  • Effects of government regulation on individual markets
  • Externalities and other market side effects

Scope of micro economics.


As a branch of economics theory, micro-economics covers the following aspects:
1. Allocation of resources.
Micro-economics studies the allocation of resources. It assumes full employment of resources. It assumes the total quantity of resources as given being (fixed) and explains how the resources are allocated among production of different goods. It determines what to produce, how to produce.
2. Theory of product pricing.
The allocation of resources in production of different goods depends on the prices of goods. The price of a good is determines by demand for and supply. The demand for a good depends on tastes of the consumer, prices of substitutes, availability of substitute’s execution of consumer etc. On the other hand, the supply of a good depends on the behavior of the entrepreneur and the cost condition. Therefore, the theories of demand and product are also studies under product pricing.
3. Theory of factor pricing.
The determination of the prices of factors of production is also studied under micro-economics, which is termed as "theory of Distribution". It studies the determinations of prices of different factors like land, labour, capital and organization. In other words, it studies how rent, wages, interest and profit are determined.
4. Theory of economics welfare:
The theory of economic welfare is an important component of micro-economics theory. The theory of economic welfare studies about the economic efficiency. The economic efficiency here refers to the allocation of resources so as to maximize people's welfare. The efficiency in production, distribution, and constipation are needed for overall economic efficiency. The field covered by micro-economic can be shown as blow.

Importance of Micro-Economics:
Micro-economics occupies a very important place in the study of economic theory.

1. Functioning of free enterprise economy.
It explains the functioning of a free enterprise economy. It tells us how millions of consumers and producers in an economy take decisions about the allocation of productive resources among millions of goods and services.
2. Distribution of goods and services.
It also explains how through market mechanism goods and services produced in the economy are distributed.
3. Determination of prices.
It also explains the determination of the relative prices of various products and productive services.
4. Efficiency in consumption and production.
It explains the conditions of efficiency both in consumption and production and departure from the optimum.
5. Formulation of economic policies.
It helps in the formulation of economic policies calculated to promote efficiency in production and the welfare of the masses.

Thus the role of micro-economics is both positive and normative. It not only tells us how the economy operates but also how it should be operated to promote general welfare. It is also applicable to various branches of economics such as public finance, international trade, etc.

Limitations of Micro-Economics.  
Micro-economic analysis suffers from certain limitations:
1. It does not give an idea of the functioning of the economy as a whole. It fails to analyze the aggregate employment level of the economy, aggregate demand, inflation, gross domestic product, etc.
2. It assumes the existence of ‘full employment’ in the whole economy, which is practically impossible.


B. Macro-Economics or Theory of Income and Employment:
The term ‘macro-economics’ is derived from the Greek word ‘macro’, which means a large part. Macro-economics is an analysis of aggregates and averages of the entire (large) economy, such as national income, gross domestic product, total employment, total output, total consumption, aggregate demand, aggregate supply, etc. Macro-economics is the economic theory which looks to the statistics of a nation's total economic activity and holds that policy change designed to alter these total statistical aggregates is the way to determine economic policy and promote economic progress. Individual is ignored altogether. Sometimes, national saving is increased at the expense of individual welfare.
It analysis the chief determinants of economic development and the various stages and processes of economic growth. Different macro-economic models of economic growth have been suggested, one of which most famous is Harrod-Domar Model. It can be applied to both developed and under-developed economies.

Some topics that macroeconomists study are:
  • The effects of general taxes such as income and sales taxes on output and prices
  • The causes of economic upswings and downturns
  • The effects of monetary and fiscal policy on economic health
  • How interest rates are determined
  • Why some economies grow faster than others

Nature and Scope of Macro Economics

        The scope of macro economics has been explained as under:-
1. Theory of National Income:-
Macro economics studies the concept of national income, its different elements, methods of its measurement and social accounting.
2. Theory of Employment:-
It studies the problems of employment and unemployment. There are different factors which determine employment. They are like effective demand, aggregate demand, aggregate supply, total consumption ,total savings and total investment etc.
3.Marco Theory of distribution:-
There are macro economic theories of distribution. These theories try to explain how the national output is distributed among the factors of production.
4. Economic development:-
UDC's are blessed with mass poverty and low per capita income curve for economic development. Economic development is a long run process. In it, we analyze the problems and theories of development.
5. Theory of International Trade:-
It also studies principles of determination trade among different countries. Tariff's protection and free-trade polices fall under foreign trade.
6. Theory of Money:- 
Changes in demand and supply of money effect level of employment. Therefore, under macro economics functions of money and theories relating to money are studied.
7. Theory of Business Fluctuations:-
It also deals with the fluctuations in the level of employment, total expenditure, and general price level.
8. Theory of General Price Level:-
A continuous rise in the price level is called inflation. It distorts production. It increases inequalities in the distribution of income and wealth. The common man is injured by inflation. Deflation is the opposite of inflation. The general price level falls continuously. Output and employment levels fall. Macro economics provides explanation provides for the occurrence of inflation and deflation.

Importance of Macro-Economics.
1. It is helpful in understanding the functioning of a complicated economic system. It also studies the functioning of global economy. With growth of globalization and WTO rule, the study of macro-economics has become more important.
2. It is very important in the formulation of useful economic policies for the nation to remove the problems of unemployment, inflation, rising prices and poverty.
3. Through macro-economics, the national income can be estimated and regulated. The per capita income and the people’s living standard are also estimated through macro-economic study. It explains the fluctuations in national income, per capita income, output and employment.

Limitations of Macro-Economics.
Followings are the limitations of macroeconomics:
1. Individual is ignored altogether.
For example, in macro-economics national saving is increased through increasing tax on consumption, which directly affects the consumer welfare.
2. The macro-economic analysis overlooks individual differences.
For instance, the general price level may be stable, but the prices of food grains may have gone spelling ruin to the poor. A steep rise in manufactured articles may conceal a calamitous fall in agricultural prices, while the average prices were steady. The agriculturists may be ruined. While speaking of the aggregates, it is also essential to remember the nature, composition and structure of the components.


The Relationship between Microeconomics and Macroeconomics

There is an obvious relationship between microeconomics and macroeconomics in that aggregate production and consumption levels are the result of choices made by individual households and firms, and some macroeconomic models explicitly make this connection.
Most of the economic topics covered on television and in newspapers are of the macroeconomic variety, but it’s important to remember that economics is about more than just trying to figure out when the economy is going to improve and what the State Bank is doing with interest rates.
But none of the micro and macro can do the needful individually. A country can not solve its economics problems wither with microeconomics or with macroeconomics. So, there is need for integrating these both to solve economic problems. For example, if a country is making progress from collective point of view while some sectors like energy are facing crises. Again the whole country may be in the clutches of recession but the electronics industry may be growing. In such case we cannot depend upon neither entirely macro nor on microeconomics.
Micro economics eventually, generates macro economics. The total output and employment of the economy depends upon the production and employment of the firm and industries. The aggregate consumption of the economy depends upon the consumption behavior of individuals.
The price theory in microeconomics is aimed at optimal allocation of resources, while macroeconomics whishes to utilize the resources of economy fully.
According to Professor Ackly Gardener, in his book “Macroeconomic Theory”, writes that “It is difficult to draw a line between microeconomic theory and macroeconomic theory, the real general theory of the economy will consists of both the branches. Such theory will explain the individual behavior, individual outputs, individual incomes and individual price. While the summation of individual results will provide us such aggregates which would be dealing with macroeconomics”.

Different between Micro and Macro Economics

Micro Economics:
1. Micro Economics studies the problems of individual economic units such as a firm, an industry, a consumer etc.
2. Micro Economic studies the problems of price determination, resource allocation etc.
3. While formulating economic theories, Micro Economics assumes that other things remain constant.
4. The main determinant of Micro Economics is price.
5. Micro economics deals mainly with Consumer decision making and utility maximization, Firm production and profit maximization, Individual market equilibrium, Effects of government regulation on individual markets and Externalities and other market side effects
Macro Economics:
1. Macro Economics studies economic problems relating to an economy for example, National Income, Total Savings and National Investments etc.
2. Macro Economics studies the problems of economic growth, employment and income determination etc.
3. It deals with the effects of general taxes such as income and sales taxes on output and prices, the causes of economic upswings and downturns, the effects of monetary and fiscal policy on economic health, how interest rates are determined, why some economies grow faster than others.
Separate identity of Micro and Macro Economics:
Still there are so many economists who think that the separate identity of both the branches of economic theory must be maintained.
1. If a firm, particularly the firm which operates under monopoly, decreases its price, can raise its scale. But such principles are not applicable at macro economic level. As if all the firms decrease the prices this will create deflation in the economy.

2. If a firm decreases the wages they will be able to enhance their profits. But if at macro level all the firms decrease it wages, then purchasing power of the labor will fall.

3. At micro level every individual thinks to increase his savings but at macro level if all the individuals plans to save more, it may cause over productivity the economy.

4. In case of microeconomics, every one wants to maximize the profits, incomes or savings and hardly be considering the profit or loss of other economic agent. Simply saying, the topics like economics and diseconomies of scale and scope are considered only and only at macro level.

5. At micro level individuals depends upon the proportionality rule (like law of equi marginal utility) but at macro level, the consumers as well as the firms may not be in a position to follow the proportionality principles when the resources at the disposal of economy are different.

{ 1 comments... read them below or add one }

  1. Smart work! Really interesting to read the article! You deserve great appreciation and expect many more good quality articles from you! Keep writing! help with economics homework

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