In recent years, the subject matter of economics is divided into two broad areas. One of them is called Microeconomics and the other is called Macroeconomics.
These two terms microeconomics and macroeconomics were first coined and used by Ranger Frisco in 1933. In recent years, division of economic theory into two separate parts has gained much importance.
Relationship and Difference between Microeconomics and Macroeconomics:
The relationship and difference between micro and macro economics is made clear below:
(1) Microeconomics (Price Theory):
Microeconomics is a Greek word which means small.
“Microeconomics (Price Theory) is the study of specific individual units; particular firms, particular households, individual prices, wages, individual industries particular commodities. The micro economic theory or price theory thus is the study of individual parts of the economy”.
It is economic theory in a microscope. For instance, in micro economic analysis we study the demand of an individual consumer for a good and from there we go to derive the market demand for a good (that is demand of a group of individuals for a good). Similarly, in micro economic theory we study the behavior of individual firms the fixation of prices output. In the words of Samuelson:
“Microeconomics we examine among other things how individual prices are set, consider what determines the price of land and capital and enquire into the strength and weaknesses of market mechanics”.
In the words of Leftwitch:
“Microeconomic theory or price theory deals with the economic behavior of individual decision making units such as consumers, resources owners, business firms as well as individuals who are too small to have an impact on the national economy”.
(i) Microeconomics and allocation of resources. The micro economic theory takes the total quantity of resources as given. It seeks to explain how they are allocated to the production of goods. The allocation of resources to the production of goods depends upon the price of various goods and the prices of factors of production. Microeconomics analyses how the relative prices of goods and factors are determined. Thus the theory of product pricing and the theory of factor pricing (rent wages, interest and profit) fall within the domain of micro economics.
(ii) Micro economics and economic efficiency. The micro economic theory seeks to explain whether the problems of scarcity and allocation of resources so determined are efficient. Economic efficiency involves (a) efficiency in consumption (b) efficiency in production and distribution and (c) over all economic efficiency. The price theory shows under that conditions, such efficiencies are achieved.
Importance, Advantages and Uses:
The importance and uses of micro economics in brief are as under.
(i) Helpful in understanding the working of private enterprise economy. The micro economics helps us to understand the working of free market economy. It tells us as to how the prices of the products and the factors of production are determined.
(ii) Helps in knowing the conditions of efficiency. Micro economics help in explaining the conditions of efficiency in consumption, production and in distribution of the rewards of factors of production.
(iii) Working economy without central control. The micro economics reveals how a free enterprise economy functions without any central control.
(iv) Study of welfare economy. Micro economic involves the study of welfare economics.
Limitations and Disadvantages:
Microeconomics is not free from limitations (disadvantages). They in brief are:
(i) Assumption of full employment in the economy which is unrealistic.
(ii) Assumption of liaises fair policy which is no longer in practice in any country of the world.
(iii) It studies part of the economy and not the whole.
Summing up, microeconomics is the study of the decisions people and businesses and the interaction of those decisions in the market. It analyses the ‘trees’ of the economy as distinct from the ‘forest’.
The term macro is derived from the Greek word ‘uakpo’ which means large. Macroeconomics, the other half of economics, is the study of the behavior of the economy as a whole. In other words:
“Macroeconomics deals with total or big aggregates such as national income, output and employment, total consumption, aggregate saving and aggregate investment and the general level of prices”. In the words of Boulding:
“Macroeconomics deals not with individual quantities as such but with aggregates of these quantities, not with individual i.e., but with the national Income, not with individual prices but with the price level, not with Individual outputs but with the national output. It studies determination of national output and its growth overtime. It also studies the problems of recession, unemployment inflation, the balance of international payments and the policies adopted by the governments to deal with these problems”.
Explanation, Advantages and Uses:
The main advantages, uses and issues which are addressed in macroeconomics are in brief as under:
(i) It helps understanding determination of income and employment. Late J.M. Keynes laid great stress on macro-economic analysis. In his revolutionary book, “General Theory, Employment, Interest and Money”, brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.
(ii) Determination of general level of prices. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.
(iii) Economic growth. The macro-economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.
(iv) Macro economics and business cycles. It is in terms of macroeconomics that causes of fluctuations in the national income are analyzed. It has also been possible now to formulate policies for controlling business cycles i.e. inflation and deflation.
(v) International trade. Another important subject of macro-economics is to analyze the various aspects of international trade in goods, services and balance of payment problems, the effect of exchange rate on balance of payment etc.
(vi) Income shares from the national income. Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricardo theory, have presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend upon the ratio of investment to national income.
(vii) Unemployment. Another macro economic issue is to explain the causes of unemployment in the economy. Stagflation is another important issue of modern, economics. The Keynesian and post Keynesian economists are putting lot of efforts in explaining the causes of cyclical unemployment and high unemployment coupled with inflation and suggesting remedies to counteract them.
(viii) Macro Economic Policies. Fiscal and monetary policies affect the performance of the economy. These two major types’ policies are central in macro economic analysis of the economy.
(ix) Global Economic System. In macro economic analysis, it is emphasized that a nation’s economy is a part of a global economic system. A good or weak performance of a nation’s economy can affect the performance of the world economy as a whole.
Limitations or Disadvantages:
The main limitations or disadvantages of macroeconomics are as follows:
(i) The macro economies ignore the welfare of the individual. For instance, if national saving is increased at the cost of individual welfare, it is not considered a wise policy.
(ii) The macro economics analysis regards aggregates as homogeneous but does not look into its internal composition. For instance, if the wages of the clerks fall and the wages of the teachers rise, the average wage may remain the same.
(iii) It is not necessary that all aggregate variables are important. For instance, national income is the total of individual incomes. If national income in the country goes up, it is not necessary that the income of all the individuals in the country will also rise. There is a possibility that the rise in national income may be due to the increase in the incomes of a few rich families of the country.
Interdependence of Micro and Macro Economics:
The classical approach to macroeconomics is that individuals and firms act in their own best interest. The wages and prices adjust quickly to achieve equilibrium in the free market economy.
The Keynesian approach to macroeconomics is that wages and prices do not adjust rapidly and unemployment may remain high for a long time. The Keynesians are of the view that government intervention in the economy can help in improving economic performance.
The micro and macro economics are interdependent. They are complementary and not conflicting. We cannot put them in water tight compartments. Both these approaches help us in analyzing the working of the economy. If we study one approach and neglect the other, we are considered to be only half educated.
We should integrate the two approaches for the successful analysis of the working of economic system. The macro approach should be applied where aggregate entities are involved and micro approach when individual cases are to be examined. If we ignore one and lay emphasis on the other, it will lead to wrong or inadequate conclusions.