The differences between macroeconomics and microeconomics - Essay Example

?Explain the difference between macroeconomics and microeconomics. How are these two fields related? Economics as defined by Alfred Marshall is the examination of mankind in the normal business of life; it analyses the actions of individuals and society which are closely associated with the achievement and utilisation of needs of well-being (Froyen, 2005, pp.22). The two branches of economics are microeconomics and macroeconomics. These two fields differ in their scope and objective. Microeconomics is defined as the branch of economics which deals with the decision making by individuals including the consumers and managers of firms and studies how the decisions of individuals determine the allocation of scare resources of a society (Bernheim & Whinston, 2008, pp.3). In short, microeconomics deals with economic issues related to individuals and social behaviour. Macroeconomics is defined as the study of operation and performance of the whole economy including the gross domestic product of economy, price level, rate of interest, employment level, trade, capital flows and exchange rate etc (Adams, 2004, pp.4). In this essay, the differences between microeconomics and macroeconomics have been identified. After identifying the differences, the interrelationship between the two fields have been discussed. The difference between microeconomics and macroeconomics is primarily related to aggregation. In microeconomics, the decisions of individuals are studied whereas, in macroeconomics, the impact of aggregate decisions of individual agents on the economy is studied (Miles & Scott, 2005, pp.6). For example, if a firm adopts new information technology which may increase the productivity of the firm by 20 percent, microeconomics theory will be helpful to study the costs incurred by firm in adopting this technology and the productivity and profits of the firm will be also considered. On the other hand, in macroeconomic context, the study will focus on how the adoption of new information technology by different firms will influence the demand of labour in the society. Moreover, macroeconomics will also focus on how combined increase in productivity of the firms after adopting the new information technology will influence the economy as a whole. Although both of the fields are contributing to study the economy however both subjects have different objectives. For example, the objective of study microeconomic theory is to understand the factors related to the optimal allocation of resources whereas, the objective of macroeconomics is to study the factors related to employment and development of scare resources in the economy. Although microeconomics objective is to focus on individual units in the economy and macroeconomics objective to focus on entire economy, both of these fields are contributing to the study of economy and individual behaviours in the economy. The difference between microeconomic theory and macroeconomic theory is that microeconomics focuses on the economic behaviours of individuals including business firms, consumers and resources owners whereas, macroeconomics focuses on economy as a whole and deals with aggregate levels of output, economy, national income and prices (Salvatore, 2006, pp.8). According to Professor G. Thimmaya (cited in Jain & Khanna, 2010) the core difference between the two fields is that price is the major determinant of problems in microeconomics whereas, income is the major determinant of problems in macroeconomics. In other words, the decisions taken in microeconomics are primarily based on price such as factors of production whereas, the decisions made in macroeconomics are based on income such as total consumption and total investments. Wessels (2006, pp.101) argues that in macroeconomics, the economy is studied as a whole whereas in microeconomics, the economic actions of people including individual firms and the individual households are studied. Wessels explains the difference between the two branches of economics. He argues that if in microeconomics the function of demand and supply determines the price of goods whereas, in macroeconomics the price level of all goods is determined. Similarly, microeconomics focuses on the number of workers employed by a firm whereas, macroeconomics studies the number of workers employed in an economy. In microeconomics when price discrimination is studied in one industry, the prices of other industries are also required whereas, in macroeconomics when average price level is under consideration, the changes in relative prices of goods in the other industries are ignored. In microeconomics when consumer spending is studied then total consumer income is given and the spending of total income on goods is observed whereas, in macroeconomics only the aggregate level of income is considered (Dornbusch & Fischer, 2005, pp.4). The idea is that methodologies of studying different aspects of economy also differ in the two fields. It can be also explained from the example of price and demand curve in microeconomics. When law of demand is studied in microeconomics, only price and demands are variables whereas, income level, habits of consumers and prices of other goods are not considered whereas, in macroeconomics, the economic variables are studied. Deepashree (2006) has identified that microeconomics can be recognised as price theory whereas; macroeconomics can be called as theory of income and employment. Moreover, microeconomics theory assume full employment whereas, macroeconomics theory does not assume full employment. Actually, these are the two assumptions of the two fields. Assuming full employment is important in microeconomics because the only objective is to determine the allocation of resources while keeping aggregate output and expenditure constant. Assuming allocation of resources as constant is important in macroeconomics because the aim is to attain the full employment. In other words, the content of macroeconomics primarily deals with determination of income and employment in the economy whereas, the content of microeconomics deals with the determination of goods’ prices. In short, macroeconomics and microeconomics have significant differences however, both of these subjects provide different techniques to study the activities in the economy, therefore, they do have a strong interrelationship. Microeconomics and macroeconomics are significantly related with each other. Major chunk of modern macroeconomics theory involves the applications of microeconomics because the aggregate outcomes in macroeconomics are usually rooted from the decision making theories of consumers and firms (Bernheim & Whinston, 2008, pp.3). In other words, the concepts and theories in macroeconomics require the study of microeconomics. Jain & Khanna (2010) argues that microeconomics is necessary for macroeconomics because the economy as a whole is the aggregate of various units and in order to understand the functions of different units in the economy, knowing the functioning of individual units become very important. Second, national income is the total income of individuals therefore, to determine the national income, calculating per capita income is very important. Third, as a result of increase in income of individuals the demand of one product may increase relative to other which may hurt one industry and benefit the other. For example, rise in income of individuals can increase the demand of luxury products thereby, reducing the demand of inferior products. The level of demand directly influences the two industries. In other words, the theories of macroeconomics and microeconomics are inter-related and the economic analysis in both of the fields is complementary to each other. Therefore, both fields are equally contributing to the analysis of economic problems and their solutions. Based on the above discussion, various differences between macroeconomics and microeconomics have been identified however; the primary difference is related to aggregation and objective of the two fields. Moreover, it has also proved that both these fields are strong interrelated and concepts and theories of microeconomics are necessary to study concepts in macroeconomics. Bibliography Adams, FG 2002, Macroeconomic for business and society: a developed/developing country perspective on the new economy, World Scientific, London, pp.4 Bernheim, BD, & Whinston, MD 2008, Microeconomics, Tata McGraw-Hill, New York, pp.3 Deepashree 2006, Macroeconomics and microeconomics environment for Ca Pe I, Edition 4, Tata McGraw-Hill, New Delhi Dornbusch, R, & Fischer, S 2005, Macroeconomics, Edition 6, Tata McGraw-Hill, India, pp.4 Froyen, RT 2005, Macroeconomics, Edition 8, Pearson Education, India, pp.22 Jain, TR & Khanna, OP 2010, Managerial economics, Vimla Kumari Jain, Delhi, pp.40 Miles, D & Scott, A 2005, Macroeconomics: Understanding the wealth of nations, Edition 8, John Wiley and Sons, England, pp.6 Salvatore, D 2006, Schaum’s outline of microeconomics, Edition 4, McGraw-Hill Professional, US, pp.8 Wessels, WJ 2006, Economics, Edition 4, Barron’s Educational Series, pp.101 Read More