Micro and Macro Economics Explained
Microeconomics: – The term Microeconomics is derived from the Greek word “MIKROS”. Meaning “Small”. The term was first coined by economist Rangar Frish in 1933. Thus, it is the Micro Scopic study of an economy.
According to Prof. Boulding, “Microeconomics is the study of particular firms, particular households, individual price, wages, income, individual industries, and particular commodities.” For example, microeconomics is concerned with how the individual household oats (earns) his income and distributes among various goods and services so as to maximize utility, how the individual firms minimize the cost of production, how much to produce, how to determine the scale price of the product to maximize its profit.
Microeconomics also examines whether resources are efficiently allocated and spells out the conditions for the optimal allocation of resources so as to maximize the output and social welfare. It is thus a study of a particular unit rather than all the units combined. Therefore, to explain the phenomena of resource allocation, it focuses on how relative prices of goods and factors of production are determined.
The theory of product pricing seeks to explain that how prices of various goods & services such as i- phones, watch, shoes, clothes, etc. are determined individually. Similarly, how wages (price paid to labor), rent (price paid to the landowner), interest (payment for the use of capital), and profit (reward for the entrepreneur) are determined.
The prices for each good & service or FOP depend upon their respective forces of demand and supply. Therefore, the theory of product pricing and the theory of factor pricing are two branches of microeconomics theory.
And thus, it is also known as ‘Price Theory’.
Some of the specialized areas of microeconomics covered under Applied microeconomics are:
– Financial economics: – topics such as optimal portfolios (is one that maximizes your risk for a given level of return or maximizes your return for a given level of risks), the rate of return to capital, an econometric branch of economics concerned with the use of mathematical and statistical tools in describing economics systems
– Public economics/ Public Finance: – it is the study of government policy such as tax and expenditure policies to improve social welfare.
– Political Economics: – It refers to how the political, economic, and legal systems of a country are interdependent.
– Health economics: it examines the organization of health care systems including the role of the health care workforce and health insurance programs.
– Energy Economics: It studies human utilization of energy resources and energy commodities and the consequences of that utilization.
– Business Economics: it studies financial, organizational, market- related and environmental issues faced by corporations.
which examines the challenges faced by cities, such as sprawl, air and water pollution, traffic congestion, and poverty, draws on the fields of urban geography and sociology.
Macro Economics: – The term Macroeconomics is derived from the Greek word ‘MAKROS’ meaning ‘large’. The term was first coined by economist Rangar Frish in 1933. Thus, it is a big picture of economics that is concerned with how the overall economy works.
According to MC Connel, “Macroeconomics examines the forest and not the trees. Thus, it analyses and established the functional relationship between large aggregates”.
Macroeconomics is the branch of economics that studies the behavior & performance of an economy as a whole.
It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product, aggregate demand, aggregate supply, etc. For example, macroeconomics seeks to explain how the economy’s total output of goods and services and total employment of resources are determined.
The government is a major object of analysis in macroeconomics- for example, studying the role it plays in contributing to overall economic growth or fighting inflation.
NOTE: It was not always this way. In fact, from the late 18th century until the great depression of the 1930s’ economics was economics- the study of how much societies organize the production, distribution, and consumption of goods and services.
The field began with the observation of Scottish philosopher “ADAM Smith” credited as being the father of economics. Smith’s notion of an invisible hand that guides someone seeking to maximize his or her own well-being to provide the best overall result for society as a whole is one of the most compelling nations in the social sciences. In other words, economists believed that the study of individual markets would adequately explain the behavior of what we now call aggregate variables such as unemployment and output.
So, it was due to the severe and prolonged global collapse of 1930s economics of that time that could not explain that extreme “market failure” and gave birth to macroeconomics. The famous economist John Maynard keyness (J. M. Keyness) emphasized the role of government and the theory of the determination of employment and output in his famous book “The general” Theory of employment, interest, and Money in 1936.
Difference between Micro and Macro Economics.
Interdependence between Micro Economics and Macro Economics
Though there is a sharp distinction between Micro Economics and Macro Economics still Micro and Macro Economics are the two sides of the same coin. There is close interdependence between the two. Every Micro Economics issue involves Macro Economics analysis.
According to Prof. Paul A Samuelson has rightly remarked, there is really no opposition between Micro and Macro Economics, both are vital, you are less than half-educated if you understand one while being ignorant of the other.
Micro Economics is dependent on Macro Economics:
The demand for the product for a firm depends on the total employment, income, and demand of the entire country for the product. Similarly, the amount of one firm is related to and depends upon the wages of other firms in the economy.
Macro Economics is dependent on Micro Economics:
The proper idea of the working of the entire economic system is only possible through the study of individuals, households, firms, and industries. For example, to study national income, Economists must have to calculate the income of individuals.
Thus, we cannot attain a complete understanding of the economic system unless we integrate the two approaches in a judicial manner.