Micro and Macro Analysis:
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.
Distinction/Difference Between Micro and
Macro Economics:
The distinction/difference between Micro and Macro economics
is made clear below:
(1) Microeconomics:
Definition:
Microeconomics is a Greek word
which means small.
"Microeconomics is the study of specific individual units;
particular firms, particular households, individual prices, wages, individual
industries particular commodities. The microeconomic theory or price theory thus
is the study of individual parts of the economy".
It is economic theory in a
microscope. For instance, in microeconomic 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
microeconomic 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".
Explanation:
(i) Microeconomics and
allocation of resources. The
microeconomic 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
microeconomic 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 hat conditions these efficiencies are achieved.
Importance:
Before Keynesian revolution,
the body of economics mainly consisted of micro economics. The classical
economics as well as the neo-classical
economics belonged to the domain of micro economics.
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:
Microeconomics despite its
many advantages is not free from limitations. 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’.
(2) Macroeconomics:
Definition:
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:
The main issues which are
addressed in macro economics 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 Ricarde 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:
The main limitations of macro
economics 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 macro
economics 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 macro economics 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.
Conclusion:
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.
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