Microeconomics and Macroeconomics

  • Post last modified:27 February 2022
  • Reading time:11 mins read

What is Microeconomics?

Microeconomics is the study of the economic behavior of individual consumer and producer and of individual economic variables i.e. production and pricing of individual goods and services.

Microeconomics studies how consumers and producers make their choices and how their decisions and choices affect the market demand and supply conditions.

Briefly speaking, theory of consumer behavior, theories of production and cost of production, theory of commodity and factor pricing, efficient allocation of output and factors of production (called welfare economics) constitute the main themes of microeconomics.

Meaning of micro economics

The subject matter of economics has been classified into microeconomics and macroeconomics. These terms were first coined and used by Ragnar Frisch and have now been adopted by economists all over the world. The term ‘microeconomics’ is derived from the Greek word mikros‘, meaning ‘small’.

Microeconomics deals with a small part of a small component of the national economy of a country. it is concerned with specific economic units and a detailed consideration of the behavior of these individual units.

Advantages of Microeconomics

Microeconomics has acquired a lot of importance in economic analysis. it is useful, both practically as well as theoretically. There are some advantages of microeconomics are following:

  • Working of free economy: it helps in understanding the working of an economy, particularly a free enterprise economy. Various economic decisions such as what to produce, how much to produce, how to produce, how to distribute, etc.


  • Are influenced by the behavior of individuals. in a free enterprise economy, an individual is the center of all activities. in such an economy, there is an absence of central planning in taking these economic decisions.


  • Formulation or framing of policies: This approach is also useful in formulating or framing various economic policies. Pricing policies or distribution policies can be appropriately framed with the help of this approach.


  • Allocation and utilisation of resources: it is further useful in making optimum allocation and utilisation of resources. it is essential that resources, which are scarce and have alternative uses, should be allocated and utilised in an optimum manner.


  • Important objectives such as economic growth with full employment and stability can be better realised by ensuring optimum allocation and utilisation of productive resources.

Disadvantages of Microeconomics

Though this approach is very useful in the various aspects mentioned above, it suffers from the following disadvantages are:

Unrealistic assumption

This approach is based on the assumption of full employment in the economy. it is a rare phenomenon.

Laissez-faire philosophy as basis

One of its foundations is the philosophy of laissez-faire (the theory or system of government that upholds the autonomous character of the economic order, believing that government should intervene as little as possible in the direction of economic affairs).

Marginalism

One of the principles of this approach is what has come to be called ‘marginalism’. The principles of marginal utility, marginal product, marginal revenue, marginal propensity to consume etc constitute what is known as ‘marginalism’. However, all these principles have their own limitations and as such this approach, which is based on the same (marginalism), cannot be accepted as valid.

Inadequacy

Another charge that is levelled against this approach is that it suffers from in adequacy. it is said that it is difficult to derive accurate and reliable conclusions about the whole or entire economy based on conclusions derived based on analysis of an individual phenomenon or unit. Therefore, it is said to be inadequate.

Misleading conclusions

It is further argued that the conclusions derived from this approach cannot only be inadequate but also misleading.

Also Read : What is Business Economics?


What is Macroeconomics?

Macroeconomics studies the working and performance of the economy as a whole. it analyses behavior of the national aggregates including national income, aggregate consumption, savings, investment, total employment, the general price level and country‘s balance of payments.

According to Bounding, Macroeconomics is the study of the nature, relationship and behavior of aggregates and averages of economic quantities. He contrasts macroeconomics with microeconomics in the following words:

Macroeconomics deals not with individual quantities, as such, but aggregates of these quantities—not with individual incomes, but with the national income, not with individual prices but with price levels, not with individual output but with the national output.

Meaning of Macro Economics

Macroeconomics is the word ‘macro’ is derived from the Greek word makros‘ meaning ‘large’. Therefore, macroeconomics is concerned with the economic activity as a whole. it analyses the behaviour of the whole economic system in totality or entirety.

In other words, macroeconomics studies the behaviour of the aggregates such as total employment, the national product or income, the general price level of the economy etc. Hence, it is often called aggregative economics.

Advantages of Macroeconomics

The analysis of macroeconomics has an unique theoretical and practical significance. its merits can be seen from the following:

  • It provides an exploration to the functioning of an economy in general: By using macroeconomic tools and the technique of economic analysis, one can understand the working of the economic system in a better way.

  • Empirical evidences: Macro studies are based on empirical evidence of theoretical issues. Macroeconomics is more realistic.


  • A policy-oriented science. it employs policy measures such as fiscal policy, monetary policy, income policy etc to deal with complex economic problems like unemployment, poverty, inequality, inflation, etc. faced by the country in modern times.


  • Understanding of national income: Macroeconomics teaches the computation, use and application of national income data. With the help of national income statistics and accounting, one can understand and evaluate the growth performance of an economy over a period.


  • Income and employment theory and monetary theory: Economics of employment and income and monetary economics are the major fields of macroeconomics, which have utmost practical relevance. Planning and policy-making is not possible without the basic understanding of these two fields.

Disadvantages of Macroeconomics

Although the macroeconomic approach is useful in certain respects, it also suffers from certain limitations. These are discussed below:

  • Disregard for individuals : This approach is criticised because it ignores the individual altogether and considers the whole economy. it is not proper that the individual should be disregarded.


  • Individual differences are ignored: it is further pointed out by critics that this approach ignores individual differences. For example, the economy as a whole may be doing well but an individual firm may not be daring well. Such differences cannot be properly understood by the macroeconomic approach.


  • Accurate measurement not possible: it is also pointed out that the macroeconomic approach analyses various phenomena in general. Such an approach does not give an accurate measurement or picture of the situation.

FAQ

What is Microeconomics?

Microeconomics is the study of the economic behavior of individual consumer and producer and of individual economic variables i.e. production and pricing of individual goods and services.

What is Macroeconomics?

Macroeconomics is the study of the nature, relationship and behavior of aggregates and averages of economic quantities.

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