Microeconomics vs Macroeconomics



Microeconomics and macroeconomics are equally important studies within economics which are crucial in maintaining the overall development and standard of the economy. They are the two most important fields in economics, and are necessary for the rise in the economy. Even if the two studies are different, they are mutually dependent, and work harmoniously with each other. Understanding the different points of distinction in the microeconomics and macroeconomics comparison makes fundamentals of economic studies. There are more differences, than similarities between these two concepts. These differences are highlighted in their name itself. Microeconomics has the focus on the smaller entities like the consumer and the producer and macroeconomics focuses on the larger entity or the aggregate economy.

Microeconomics facilitates decisions of smaller business sectors, and macroeconomics focuses on total economies and industries. Microeconomics focuses on the market’s supply and demand factors which determine the economy’s price levels. An important aspect of this economy is to observe market failure when the markets do not provide effective results. In the modern world, microeconomics has become one of the most important strategies in business and economics. Its main importance is to evaluate the economy forces, consumer behavior, and methods of determining the supply and demand of the market. It deals with the functionality and behavior of individual entities, such as business firms and households. Macroeconomics studies similar concept with a much wider perception. The focus of macroeconomics is basically on aspects such as country’s income, position of foreign trades, study of unemployment rates, GDP and price indices. Macroeconomists make different types of models and relationships between factors such as output, national income, unemployment, consumption, savings, inflation, international trade, investment and international finances. On the whole, macroeconomics deals with two major areas, economic growth and changes in the national income. Typical questions such as, “How does a consumer take decisions on the consumption of goods and services”, “How do firms price their goods and services”? are included in microeconomics. It also consider the decision making power of these individual units. Macroeconomics is the branch that deals with the functionality and behavior of the entire economy of the nation or the world. This includes concepts like national income, price level, employment, interest rates, etc. “What are Causes of Inflation? What are the effects of national debt on the economic growth of the nation”? are typical questions asked in macroeconomics. The influence of the government economic policies on all of the aggregates mentioned above is considered in macroeconomics. It looks at the economy in a broader perspective and help in studying and analyzing the conditions of the economy. Another point of distinction in the macroeconomics and microeconomics comparison is the point of the equilibrium. In microeconomics, the equilibrium occurs when the quantity demanded equals the quantity supplied. In macroeconomics, equilibrium occurs when the aggregate demand equals aggregate supply. Some aspects of these concepts coincide with each other such as an increase in the inflation will result in an increase of the price of raw material, which will in turn result in an increase in the price of end product.

In our day to day life we are going through microeconomic and macroeconomic phenomenon, knowingly or unknowingly. If you owe a small business or enterprise you are dealing with microeconomic events. You are taking decisions by considering microeconomic aspects such as cost benefit analysis or studying the competitors’ strategy etc. When you go to shopping, you see that price for mangoes have reduced to $10 per kilogram which was at $12.5 last month. You are experiencing a microeconomic phenomenon. Since this is the season of mangoes, supply has increased and price went down. You can experience a macroeconomic example in your business itself. Suppose you are hiring a worker from another country to assist you in your administrative jobs through online. You were paying that employee an amount in dollars equivalent to 1000 of his currency. Because of inflation in the economy, you have to pay him more dollars as the value of the American dollar fall down. Here you are experiencing a macroeconomic phenomenon.

In your daily life, you have to make so many decisions in your household or at your work place. Every decision you make is a choice directly affecting your own life and much often with a wide reaching impact of affecting the lives of others. Otherwise interpreting, you are putting microeconomics into practice. Instead of attending this meeting in person, I have been requested to write a letter addressing you all. Even this choice is an application of microeconomics. In our household we are taking decisions by considering aspects of microeconomics, knowingly or unknowingly. I have decided to send this letter through mail, instead of attending the meeting in person, considering cost – benefit aspects and also considering budget constraints. This decision itself is a microeconomic phenomenon. In an economic decision made by a firm or an individual, microeconomics deals with the factors that affect those decisions, and how those decisions affect others. Microeconomic decisions by both firms and individuals are forced by cost and benefit considerations. Costs can be either in terms of financial costs such as average fixed costs and total variable costs. They may also be in terms of opportunity costs, which consider alternatives to be used. Recently I decided to buy a new car while disposing the one I am using. I studied the prices trend in the car market. I made an analysis of prices for a used car also. I was informed that the prices are about to fall by 5 to 10 % after a hike for this year. Then I studied the opportunity cost of renting a taxi for some more months without spending money to repair the car, I am using. After considering the fixed costs and the opportunity cost, I made a decision to buy a new car as an alternate decision may fail depending on market conditions.

Now let us consider a macroeconomic phenomenon and will see whether the event has any impact on us. Unemployment is a macroeconomic phenomenon that directly affects people. Firstly, the lost of income for individuals and outputs for economy would arise as the costs of unemployment. For individuals and households, unemployment forces them to limit their consumption considerably and possibly have to clear up some of the assets to meet financial requirements. When a member of a family is unemployed, the standard of living of the family gets reduced. In terms of society, unemployment is harmful in many aspects. Unemployed workers stand for wasted production capability. We know that when there is unemployment, the economy is not producing at full output since there are people who are not working. All these have negative impact on the whole economy. An economy is producing substantially below its potential if unemployment rate is extremely high. In such a situation, the society loses by consuming and benefiting from less because less is produced for supply. This means that the economy is delivering less goods and services than its capacity of production. It also means that there is less money being spent by consumers, which has the potential to lead to more unemployment, beginning a cycle. The economic loss caused by unemployment can be measured as a loss in aggregate supply or aggregate demand. To be more specific it is measured as the difference of potential GDP minus actual GDP.

To conclude, Microeconomics and macroeconomics are terms that are always prominent in economics covering different topics as times and circumstances change. There are many issues which have both macroeconomic and microeconomic aspects. Microeconomics and macroeconomics are the fundamental tools to be learnt, in order to understand how the economic system is administered, and sustained.

References

Abhijit Naik, 25 May 2010. Retrieved from

Author, 2010. Retrieved from

Author, 2010. The Encyclopedia of earth. Retrieved from .

Yang Yang, 12 December 2009. Econ guru – Economics guide. Retrieved from



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