What are the Difference between Micro and Macroeconomics?
Micro-economics is the study of individual units. On the contrary, macro-economics is the study of all the units combined together or the economy as a whole. But the distinction between them is not clear-cut. Micro in one situation may be macro in another situation. For example, national income is a macro concept in the context of a country but is a micro concept in the international context. Yet some differences can be found between them. The distinction between them does not lie in subject matter but in methodology. The main points of difference between Micro and Macroeconomics are as follows:
1. Literal meaning
The term micro-economics was derived from the Greek word mikros' meaning small. Likewise, the term macro-economics was al from the Greek word 'makros' meaning large. Thus, despite same origin micro-economics is the study of small individual units and macro-economics is the study of the aggregates of those units.
2. Study of aggregate variables
Since micro-economics is the study of individual units it includes the study of the price of a commodity, income of an individual, output of a firm, demand and supply of a commodity. But macro-economics includes the study of the aggregate variables such as aggregate demand, aggregate supply, national income, national saving, level of employment, level of price etc.
3. Study of aggregates in relation to economy as a whole
Micro-economics also studies the small aggregates such as market demand, market supply, industry and so on. But these aggregates are not related to the economy as a whole. On the other hand, macro-economics studies the big aggregates or the aggregates related to the economy as a whole.
4. Partial and general equilibrium analysis
Micro-economics studies the individual equilibrium process by using partial equilibrium analysis. It focuses on the study of particular consumer, firm, demand, output, price and expenditure. On the other hand, macro-economics uses general equilibrium analysis for the study of the economic behaviour of the economy as a whole. For example, we study the factors that determine the particular prices, but in macro-economics we study the factors that determine the general price level.
5. Scope of micro and Macroeconomics
Micro-economics covers the areas such as the pricing of products, pricing of factors of production, theories of economic welfare and so on. Macro-economics, on the other hand covers the area as such as theories of income and employment, theories of money and price level, banking system, theories of economic growth and so on.
6. Assumption of full employment
Micro-economics assumes full employment of all factors including labour. Hence, it takes total employment, total output, and expenditure as given. Macro-economics does not assume full employment. A Hence, it regards the variables like total employment, total output etc. as flexible.
7. Solution of present day problems
The study of micro-economics is not of much help to solve the important present day problems such as decline in national income, hyper inflation, widespread unemployment and so on. On the other imp hyper in hand, macro-economics studies the causes, effects and possible res for the solution of these problems. Macro-economics helps to solve these problems.
8. Development of micro and macro-economics
Mainly classical and Neo-classical economists developed micro- economics. They had confined economic analysis to the study of individual aspect of economic behavior. They used to generalist the results of individual analysis to explain the aggregate behavior of the whole economic system. Mainly J.M. Keynes developed macro-economics. In his opinion aggregate economic behavior cannot be the sum of individual activities. The aggregate economic behavior has its own modes and courses. Hence, the micro level study cannot be extended to get the knowledge of the economy as a whole.
Micro-economics has the utility maximization objective on the demand side and profit maximisation objective on the supply side. On the other hand, macro-economics has the objectives of full stability, economies growth, favorable balance of payment.
10. Static and dynamic analysis
Micro-economics studies the equilibrium at a particular point of time. It does not explain the time factor. Hence, micro-economics is regarded as the static analysis. On the other hand, macro-economics is based on time-lag, rate of change, past and expected value of variables. Hence, macro-economics is regarded as the dynamic analysis. In micro-economics, the economic basis is explained under the assumption of 'ceteris paribus' to ignore the time lag. Macro- economics does not make such unrealistic assumptions.
Price mechanism is the basis of micro-economics. The forces of demand and supply operate the price mechanism. These forces help to determine the equilibrium price. On the other hand, national income, output and employment are the basis of macro-economics These factors are determined by aggregate demand and aggregate supply.