Difference between Microeconomics & Macroeconomics
Economics is mainly divided into two parts:
1. Microeconomics
2. Macroeconomics
The brief description of Microeconomics and Macroeconomic and its concept is as follows.
1. Microeconomics
The individual level of economics is known as Microeconomics. When economic problems are studied considering small economic units like an individual consumer, or an individual producer then we refer it to Microeconomics. At the level of an individual economic unit, whether producer or consumer the basic economic problem is the problem of choice related to the problem of the scarce of resources to alternative uses.
A consumer is to allocate his given income to the purchase of different goods and services. He wants to maximize its satisfaction. How does he do it?
Economists have formulated theories or set of principles to understand consumer behavior at the individual level in Microeconomic called Theory of Consumer Behavior or Theory of Demand. Demands for goods and services and consumer's choice on the allocation of his income to different uses are the principle issues we study in the theory of consumer behavior. It is an important component of Microeconomics.
A producer is another small economic unit. He also confronted with the problem of choice. He is to choose:
1. The combination of inputs he should use and
2. the commodity he should produce. He is to allocate his resources in a manner that maximizes his profits.
Studying producer's behavior on the allocation of resources takes us to the area of production theory and the Theory of Supply. Theory of Producer Behaviour or the Theory of Supply is another important component of Microeconomics.
Studying the theory of demand relating to consumer's behavior and the theory of supply relating to producer's behavior we cannot ignore studying the market for goods and services called commodity market and the market for factors of production, like labor and capital called factor market. Microeconomics studies how prices of goods and services are determined in the commodity market and how prices of factors of production are determined in the factor market. Theories that explains market price determination are called price theories.
Main components of Microeconomics
i. Theory of Consumer Behavior: It analyzes how a consumer allocates his income to different uses so that he get maximum satisfaction.
ii. Theory of Producer Behavior: It analyzes how a producer exercises his choice on the use of different input and how he decides what to produce and how much. The producer focuses on the maximization of profit.
iii. Theory of Price: It studies how prices of goods are determined in the commodity market and how prices of a factor of production are determined in the factor market.
2. Macroeconomics
Macroeconomics refers to the study of economic problems or economic issue at the level of the economy as a whole. The basic problem continues to be the problem of rational management of scarce resources, as in Microeconomics. But, unlike microeconomics, the focus shifts from the maximization of individual's gain to the maximization of social welfare. The central problems in the Macroeconomics relate to the overall level of employment, the growth rate of national output, the general price level, national income or the stability of the economy.
Macroeconomics begins with the study of Macroeconomic variables such as Aggregate Demand (AD) and Aggregate Supply (AS). It analyzes how equilibrium level of output is struck (where Aggregate Demand = Aggregate Supply).
Following problems are analyzed and studied under the Macroeconomics:
The equilibrium level of output is analyzed as the problem of an inflationary gap or deflationary gap in the economy. Fiscal and monetary policies are studied as a measure to correct the situation of inflation and deflation. Also, issues related to exchange rate and Balance of Payment (BoP) are studied with a view to analyzing their impact on the domestic economy.
Main Component of Macroeconomics
i. Theory related to Equilibrium Level of Output and Employment: It studies how equilibrium is struck when AS=AD.
ii. Theory related to Inflationary or Deflationary Gap in the Economy: It studies how departure from full employment equilibrium output causes an inflationary gap or deflationary gap.
iii. Theory of Multiplier: It analyzes the process of income generation owing to investment expenditure in the company.
iv. Fiscal and Monetary Policies: These relate to budgetary measures and monetary measures, respectively to correct the the situations of an inflationary and deflationary gap.
v. Money Supply and Credit Creation: It studies the component of Money Supplies and how commercial banks add to money supply through credit creation.
vi. Government Budget: It focuses on the measurement and impact of budgetary deficits in the economy.
vii. Exchange rate and BoP: It analyzes how exchange rate is determined in the international money market and how BoP impacts the level of economic activity in the domestic economy.
Difference
• Microeconomics:
Microeconomic studies economic relationship or economic problems at the level of an individual- an individual firm, an individual household or an individual consumer.
Microeconomics is concerned with the determination of output and price of an individual firm or industry.
Study of microeconomics assumes that macro variables remain constant, Example- It is assumed that aggregate output is given while we are studying the determination of output and price of an individual firm or industry.
• Macroeconomics:
Macroeconomics studies economics problems at the level of the economy as a whole. For example, an Economic problem of a specific country.
Macroeconomics is concerned with the determination of aggregate output and general price level in the economy as a whole.
Study of Macroeconomics assumes that micro variables remain constant, Example - It is assumed that distribution of income remain constant when we are studying the level of output in the economy.
