Microeconomics deals with small parts of economics, focusing on individual units. In contrast, macroeconomics deals with the entire economy and its aggregate activities.
Difference Between Microeconomics and Macroeconomics
The word “Micro” comes from the ancient Greek word ‘Mikros,’ which means small, while “Macro” comes from the Greek word ‘Makros,’ which means large.
Microeconomics deals with individual entities separately, limiting its scope. Macroeconomics, on the other hand, deals with the economy as a whole.
Microeconomics analyzes individual economic behavior and partial equilibrium. Macroeconomics analyzes aggregate variables and aggregate equilibrium.
Micro variables are related to individual units of the economic system, while macro variables are related to the entire economic system.
Microeconomic analysis is detailed and specific, while macroeconomic analysis focuses on the overall behavior of the economy and may simplify complex issues.
Macroeconomics includes variables that are sums of two or more micro variables. For example, national income (Y) is the sum of consumption expenditure and investment expenditure (C+I). Microeconomics analyzes individual variables separately.
Microeconomic variables are analyzed separately, leading to limited interrelationships between them. In contrast, macroeconomic variables are closely interrelated.
Microeconomics often assumes other factors to remain constant when analyzing the relationship between two variables. Macroeconomics does not always impose such conditions.
Microeconomic analysis is more important for individual and institutional welfare, while macroeconomic analysis is crucial for the welfare of the economy as a whole. Micro models focus on individual units of the economy, while macro models consider the entire economy.
Micro analysis provides a partial economic picture by analyzing small parts of the economy. Macroeconomic analysis focuses on the overall economic behavior, providing a comprehensive view.
| Aspect | Microeconomics | Macroeconomics |
|---|---|---|
| Definition | Deals with small parts of economics, focusing on individual units. | Deals with the entire economy and its aggregate activities. |
| Origin | The word ‘Micro’ comes from the ancient Greek word ‘Mikros,’ which means small. | The word ‘Macro’ comes from the Greek word ‘Makros,’ which means large. |
| Scope | Deals with individual entities separately, limiting its scope. | Deals with the economy as a whole. |
| Equilibrium System | Analyzes individual economic behavior and partial equilibrium. | Analyzes aggregate variables and aggregate equilibrium. |
| Variables | Micro variables are related to individual units of the economic system. | Macro variables are related to the entire economic system. |
| Analysis | Detailed and specific analysis. | Focuses on the overall behavior of the economy and may simplify complex issues. |
| Joint Variables | Analyzes individual variables separately. | Includes variables that are sums of two or more micro variables. |
| Interrelationship of Variables | Variables are analyzed separately, leading to limited interrelationships between them. | Variables are closely interrelated. |
| Assumptions | Often assumes other factors to remain constant when analyzing the relationship between two variables. | Does not always impose such conditions. |
| Importance | More important for individual and institutional welfare. | Crucial for the welfare of the economy as a whole. |
| Difference in Model | Models focus on individual units of the economy. | Models consider the entire economy. |
| Economic Picture | Provides a partial economic picture by analyzing small parts of the economy. | Focuses on the overall economic behavior, providing a comprehensive view. |
Relative Importance of Microeconomics and Macroeconomics
Microeconomics and macroeconomics are complementary to each other. There are differences between the scopes of microeconomics and macroeconomics. Despite this, these two branches of economics are not competitive or substitutes for each other; rather, they are complementary. The mutual dependency relations between the two are discussed below.
Microeconomics discusses the activities of an individual or an individual institute. For complete economic analysis, both micro and macro analysis is needed.
A root of any problem cannot be measured without micro analysis. On the other hand, without macro-level analysis, an overall evaluation of anything is not possible. A partial representation of anything cannot help to draw conclusions.
Sometimes a change in a micro variable may be the cause of change in a macro variable. Similarly, sometimes a change in a macro variable may be the cause of change in a micro variable. For example, if aggregate demand increases, then demand for individual goods separately increases. Similarly, if the rate of interest decreases, then the propensity to invest increases.
Consequently, demand for labor increases. For that, family income may increase. In this way, per capita income, per capita production, employment opportunity, and production cost of a firm may change due to a change in aggregate income.
Moreover, the value of a micro variable may influence the macro variable. For example, a change in individual, family, and firm productivity may cause changes in national income.
Therefore, micro analysis and macro analysis are mutually dependent on each other. The sum of micro is macro, and part of macro is micro. Macro analysis is impossible without micro analysis.
For the proper and complete analysis of the economic system of a country, neither microeconomics nor macroeconomics is complete as a unique basis, and both micro and macro analysis are necessary. The economist Professor Samuelson truly said, “There is no opposition between micro and macroeconomics. Both are absolutely vital.”
Scope/Subject Matter of Microeconomics
Individual Economic Activities
Microeconomics deals with the economic activities of individuals in a society. How to earn money and how to spend the earned money, different problems regarding these activities, and how to solve these problems, all these are discussed in microeconomics.
Determining the Prices of Commodities
The main task of microeconomics is to discuss how prices of commodities in the market are determined through the interaction of demand and supply of commodities. How much goods and services are transacted at those prices is discussed in the microeconomic analysis.
Determining the Input Price
The four major factors of production are land, labor, capital, and organization. The returns for the factors are rent, wage, interest, and profit. How to determine rent for land, wage for labor, interest for capital, and profit for the organization are discussed in microeconomics.
Analyzing Different Market Structures
On the basis of competition, markets are classified into two types: I. Perfect competition market. II. Imperfect competition market. Imperfect competition markets are of different types like I) Monopoly II) Duopoly etc. Different types of market structures are discussed in microeconomics.
To Analyze the Consumers’ Behavior
Rational consumers go to the market with a certain amount of money. They coordinate between the ups and downs of commodity prices and their money expenditures. Consumers’ behavior is that they will buy at lower prices. In microeconomics, consumer behavior or how a consumer attains equilibrium is discussed.
Production-Related Discussion
Producers take decisions in two different ways. Either they select the least-cost combination in producing a certain fixed amount of goods. Or they may maximize their level of production from a given cost. How the level of production attains equilibrium in their production process is discussed in microeconomics.
Optimum Distribution of Wealth
The maximization of social welfare through the optimum distribution of produced goods is discussed in microeconomics. If redistribution of wealth remains unchanged, then other consumers’ welfare will be minimum.
Similarly, if through redistribution of wealth, other producers’ production remains unchanged, when at least one producer’s production has increased, then it can be said that the optimum distribution of wealth has been ensured. All these are discussed in microeconomics.
Limitations of Microeconomics
Microeconomics deals with the behavior of small parts and units of economics and their functions. But microeconomics has some limitations which are discussed below:
Consideration of Unrealistic Assumptions
In microeconomic analysis, most of the time, we take recourse to some assumptions which are not realistic. Moreover, if these assumptions change, the theories may also change, and the theories may not operate.
Full Employment
Most of the theories of microeconomics are based on full employment. But in the real world, full employment is quite absent.
Laissez-faire
Most of the microeconomic concepts are based on laissez-faire. But the idea of laissez-faire is not available anywhere. Therefore, these theories cannot be compared to the real world.
Considering Other Things Remaining Unchanged
In microeconomics, when analyzing the relationship of one variable with another variable, other things remaining constant is considered.
Neglecting Macro Views
In microeconomics, small units are analyzed separately. Consequently, the economic system as a whole is neglected. Trying to have an overall view through summing up the small units of the economy may be fruitless.
Narrow Concepts
As microeconomic analysis is done as a small part, therefore, micro concepts are comparatively narrow, and their scope is also narrow.
Although there are some limitations in microeconomics, from the viewpoint of analyzing economic variables, microeconomics has great importance.
Scope/Importance of Macroeconomics
Understanding the Determination of Income and Employment
Late J.M. Keynes laid great stress on macroeconomic analysis. He, in his revolutionary book, “General Theory of Employment, Interest, and Money,” brought drastic changes in economic thinking. He explained the forces or factors that determine the level of aggregate employment and output in the economy.
Determination of the General Level of Prices
Macroeconomic analysis answers questions about how the general price level is determined and what is the importance of various factors that influence the general price level.
Economic Growth
Macroeconomic models help us to formulate economic policies for achieving long-run economic growth with stability. The newly developed growth theories explain the causes of poverty in underdeveloped countries and suggest remedies to overcome them.
Macroeconomics and Business Cycles
It is in terms of macroeconomics that the causes of fluctuations in national income are analyzed. It has also been possible now to formulate policies for controlling business cycles, i.e., inflation and deflation.
International Trade
Another important subject of macroeconomics is to analyze the various aspects of international trade in goods, services, and balance of payment problems, the effect of exchange rates on balance of payment, etc.
Income Shares from the National Income
Mr. M. Kalecki and Nicholas Kaldor, by making a departure from Ricardo’s theory, have presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend on the ratio of investment to national income.
Unemployment
Another macroeconomic issue is to explain the causes of unemployment in the economy. Stagflation is another important issue of modern economics. Keynesian and post-Keynesian economists are putting a lot of effort into explaining the causes of cyclical unemployment and high unemployment coupled with inflation and suggesting remedies to counteract them.
Macroeconomic Policies
Fiscal and monetary policies affect the performance of the economy. These two major types of macroeconomic policies are central in macroeconomic analysis of the economy.
Global Economic System
In macroeconomic analysis, it is emphasized that a nation’s economy is a part of a global economic system. A good or weak performance of a nation’s economy can affect the performance of the world economy as a whole.
Limitations/Exceptions of Macroeconomics
The main limitations/exceptions of macroeconomics are as follows:
Ignores Individual Welfare
Macroeconomics ignores the welfare of the individual. For instance, if national saving is increased at the cost of individual welfare, it is not considered a wise policy.
Homogeneous Aggregates
Macroeconomic analysis regards aggregates as homogeneous but does not look into their internal composition. For instance, if the wages of the clerks fall and the wages of the teachers rise, the average wage may remain the same.
Not All Aggregate Variables are Important
It is not necessary that all aggregate variables are important. For instance, national income is the total of individual incomes. If national income in the country goes up, it is not necessary that the income of all individuals in the country will also rise. There is a possibility that the rise in national income may be due to the increase in the incomes of a few rich families in the country.
Models Suited for Developed Countries
Macroeconomic models are designed mostly to suit the developed countries of the world. The developing countries face different economic realities, so they do not benefit much from them.
In conclusion, macroeconomics enriches our knowledge of the functioning of an economy by studying the behavior of national income, productivity, investment, savings, and consumption. Furthermore, it sheds much light on solving the problems of redundancy, inflation, economic instability, and economic growth.
