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Macroeconomics and Microeconomics difference - Essay Example

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Microeconomics is the study of the behaviour of individual households and firms whereas macroeconomics is involved with the study of the behaviour of the economy as a whole (Baumol & Blinder, 2011)…
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Macroeconomics and Microeconomics difference
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Macroeconomics and Microeconomics difference

Download file to see previous pages... Microeconomics deals with individual demand and supply of individual goods and services in the market. The law of demand states that as price increases, the quantity of goods demanded decreases other things held constant hence quantity demanded and price are inversely related. The law of supply on the other hand, states that as price increases the quantity of goods supplied increases other things held constant hence a positive relationship between quantities supplied and price. The magnitude of change in quantity demanded depends on price elasticity of demand and supply (Mankiw & Taylor, 2006). However, there are many factors besides price that affects the quantity of goods demanded and supplied leading to a change in demand or change in supply. A change in price causes movements along the demand and supply curve other factors held constant. Wessels (2006) argues that there are bound to be changes which affect demand or supply such us level of income and weather changes.
The demand for a good or service is affected by the price of the good, income of household and the firm, wealth, tastes and preferences, price of other products, number of households demanding a good or service (Anderton, 2000). If the income increases, households have more purchasing power hence demand more goods and services thereby shifting the demand curve to the right and if income decreases, households reduce the demand for goods thus shifting the curve downwards. Same case applies to increase or decrease in the wealth of firms and households. However, it depends on the type of good or service. For an inferior good, an increase in income or wealth leads to decrease in quantity demanded of the good but for normal goods, an increase in income or wealth leads to more demand for the good (Beggs, 2011). Mankiw (2011) notes that a change in demand as a result of change in taste and preference or price of related products depends on the type of goods affected. For example, if a consumer changes his/her preference from Pepsi to coke which are substitute goods, the demand for coke increases while demand for Pepsi decreases. For substitute goods, an increase in price of one good leads to an increase in quantity demanded of the other good. For example, if price of coke increases relative to the price of Pepsi, consumers shift demand from coke to Pepsi which serves the same purpose. For complimentary goods, an increase in price of one good leads to decrease in quantity demanded of the other good. Macroeconomics Macroeconomics deals with aggregate demand and aggregate supply in the economy. Aggregate demand comprises of; consumption, investment, government expenditure, exports and imports or the real national output (GDP). As Kyer and Maggs (1994) puts it, macroeconomics is not concerned with price elasticity, marginal costs and revenues as well as individual choices but rather government policies and the behaviour of the economy as a whole. The aggregate demand in the economy is not affected by price but rather other factors such as; expectations of households, income, wealth, interest rates, ...Download file to see next pagesRead More
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