Microeconomics vs Macroeconomics
Economics is divided into two branches, namely: microeconomics and macroeconomics.
Microeconomics deals with the economic problems of a single industry or organisation, while macroeconomics deals with the problems of an economy as a whole.
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Both of these branches contribute a major part in business analysis and decision-making directly or indirectly.
Let us discuss two branches of economics in detail as follows:
Also Read: What is Economics?
What is Microeconomic?
Microeconomics is a branch of economics that deals with the study of the economic behaviour of individual organisations or consumers in an economy. Moreover, microeconomics focuses on the supply and demand patterns and price and output determination of individual markets.
Microeconomics lays emphasis on decisions related to the selection of resources, the amount of output to be produced, and the price of products of an organisation. Thus, it can be said that the focus of microeconomics is always at the individual level.
Microeconomic Definition
Following are the important definitions of microeconomics:
According to Henderson and Quant, “Microeconomics is the study of economic actions of individuals and well-defined groups of individuals”
According to Ghrdener Ackley, “Microeconomics deals with the division of the total output among industries, products and firms and the allocation of the resources among competitive use. It considers problems of the income distribution. Its interest is in relating prices of particular goods and services”.
According to Prof. Boulding, “Microeconomics is the study of a particular firm, a particular household, individual price, wages, income, industry and particular commodity”.
According to Watson, “Microeconomics is the theory of the behaviour of small units, like the consumers, producers and markets”.
According to Prof. Leftwitch, “Microeconomics is concerned with the economic activities of economic units as consumers, resource owners and business firms”.
Importance of Microeconomics
The importance of microeconomics is explained as follows:
The importance and use of micro-economics are explained below:
- Price Determination: Micro-economics plays an important role in price determination and volume of production, allocation of resources etc.
- Helps in Aggregate Study of Economic Problems: The total economy is constituted of several small units. Hence, after study of small units, the study of the problem of the total economy becomes easier.
Economics studies economics problems where as in micro-economics, small units are studied, which facilitates in understanding the economy and aggregate study of bigger problem. - It Explains Various Aspects of International Trade: Microeconomics theories explain many aspects of international trade such as the emergence, nature and gains of international trade, determination of exchange rate, impact of tariffs on prices etc.
- Helps in Individual Decisions: Microeconomics studies the individual units. Hence, economic decisions in respect to individual units may be taken easily, with its help. A consumer may take decision in what quantity a commodity is to be purchased, at various prices.
Similarly, a firm or an industry can take decisions decision regarding volume of production at various levels, taking production costs into consideration. - It Teaches the Art of Economizing: microeconomic principles deal with the economizing of scarce resources and show how to use them efficiently. Microeconomic law, like the law of substitution, shows how a consumer can maximize his satisfaction by equating the ratios of marginal utilities to the prices of different goods which he buys.
Likewise, there is optimum utilization of the factors of production when their marginal products become unequal. - It Helps in Regional Policy Formulation: With the help of micro-economics the study of particular area or particular use is possible. With its help, suggestion may be given in the context of problems of any related industry, by the study of government policies.
For example problem of textile industry may be studied, with reference to Government polices and necessary suggestion may be given. - It Provides a Base to Business Decision-making: For example the knowledge of price theory has its own significance in practical business decision-making and it is useful to a business in determining the price policy. It guides in attainment of maximum productivity through optimum allocation of his given resources.
- Helpful in Economic Policy Formulation: Microeconomics is useful in determination of economic policies. The justification of various economic policies of the government is decided, in the contest of their effects on individual units.
In these policies, effects on prices, effects on price of any particular commodity, wages and personal, consumption may be tested.
Limitations of Microeconomics
Microeconomics is very important and useful for economics analysis. Below are the following limitations of microeconomics
- Unrealistic and Impractical Assumptions: Microeconomics is based on several unrealistic and impractical assumptions and hence the conclusions drawn are not correct and their desired use does not become possible.
The entire microeconomics is based on the assumption of full employment even in a short-term analysis, which is unrealistic. Microeconomic theories assume laissez faire policy and pure capitalism in their behaviouristic models.
Today there is no pure capitalism, so most of the microeconomic theories have no significant relevance to practice. Situation perceived by assumptions like perfect competition, full employment, full dynamism, etc. are not visible in real life. - Ignorance of Macro Economy: Microeconomics studies specific economic units separately from the rest of the whole economy. It explains only a part and not the whole of working of an economic system.
Hence, complete knowledge of specific areas becomes possible but drawing of conclusions regarding the whole economy is not possible by it. - Unusable for Studies of Certain Economic Problems: Microeconomics is not useful for study of certain economic problems. For solution and study of modern problems, Government recognizes national level as the base, which is related to macroeconomics. Intervention of Government is consistently increasing in various economic activities.
Employment policy, tariff policy, distribution of income and wealth, exportimport policy, industrialization, economic planning and population are subjects of national importance. Their study is possible only in macroeconomics and not in microeconomics. - By assuming independence of wants and production in the system, microeconomics has failed to consider their ‘dependence effect’ on economic welfare.
- Microeconomics misleads when one tries to generalize from the individual behaviour. It is improper to portray the character and behaviour of aggregate simply by generalizing from character and behaviour of the individual components
Also Read: What is Business Economics?
What is Macroeconomics?
Macroeconomics is a branch of economics that mainly deals with the economic behaviour of various units combined together.
Macroeconomics focuses on the growth of an economy as a whole by undertaking the study of various economic aggregates, such as aggregate supply and demand, changes in employment, gross domestic product (GDP), overall price levels, and inflation.
Macroeconomics Definition
Following are the important definitions of macroeconomics:
According to Prof. Chamberlin, “The macro model deals with aggregative relatives.”
According to Gardna Ackley, “Macroeconomics concerns with such variables as the aggregate volume of the output of an economy with the extent to which its resources are employed, with the size of national income and with the general price level.”
According to Prof. K. E. Boulding, “Macroeconomics deals not with individual quantities as such but with aggregates of their quantities, not with individual incomes, but with national income, not with individual prices, but with price level, not with individual output but with national output.”
According to M.H. Spencer, “Macroeconomics is concerned with the economy as a whole or large segment of it. In macroeconomics, attention is focused on such problems as the level of unemployment, the rate of inflation, the nation’s total output and other matters of economy-wide significance.”
Importance of Microeconomics
The following points explain the importance of macroeconomics:
- Macroeconomics helps in understanding the functioning of an economic system and provides a better view of the world’s economy
- It enables nations to formulate various economic policies.
- It helps economists in finding solutions to economic problems by providing various economic theories.
- It helps in bringing stability in prices by supporting detailed analysis of fluctuations in business activities.
- It helps in identifying the causes of the shortage in the balance of payment and determining remedial measures.
Macro Vs Micro Economics
| BASIS OF DIFFERENCES | MICRO ECONOMICS | MACRO ECONOMICS |
|---|---|---|
| Meaning | Microeconomics studies economic relationships or economic problems of a level of economic units like specific individual, specific firm, specification industry, etc. | Macroeconomics studies economic relationships or economic problems of the level of the economy as a whole like national income, national savings, total investments, employments etc. |
| Subject Matter | Price determination of goods and services, their allocation for various functions and determination of the remuneration of the resources are its subject matter. | Whereas, its subject matter includes level of national income, its effective factors and results, income, employment, savings, investments, etc. |
| Basic Concern | Microeconomics is basically concerned with determination of output and price for an individual firm or industry. | Macroeconomics is basically concerned with determination of aggregate output and general price level in the economy as a whole. |
| Scope | Its scope is limited to the laws based on marginal analysis. | Whereas, its scope is wide up to the analysis related to the problems of the whole economy. |
| Assumptions | Study of microeconomics assumes that macro variables remain constant; e.g. it is assumed that aggregate output is given while we are studying determination of output and price of an individual firm or industry. | Study of macroeconomics assumes that micro variables remain constant, e.g. it is assumed that distribution of income remains constant when we are studying the level of output in the economy. |
| Helpful | Microeconomics is helpful for individual units, firms and industries to achieve the optimum level. | Macroeconomics is helpful for optimum situation of the whole economy and bringing economic stability. |
| Central Issue | Macroeconomics is helpful for optimum situation of the whole economy and bringing economic stability. | Level of output (and employment) is the central issue in macroeconomics. |
| Simple / complicated | Microeconomics is simple, as compared to macroeconomics. | Whereas, macroeconomics is more complicated as compared to microeconomics. |
| Use | Microeconomics is used for determination of various policies of a firm or industry and talking decisions about them. | Whereas, macroeconomics is used for solution of national problems, taking of economic decisions at the level, determination of economic policies and policy decisions at international level. |
| Importance | The importance of this economics is getting reduced, due to increasing complex problems of the present age. | Whereas, macroeconomics is more useful in solution of these problems. Hence, importance of macroeconomics is going on increasing as compared to microeconomics. |
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