What Is Micro and Macro Economics?
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Difference Between Macro and Micro Economics
First Published: ADawnJournal.com May 16, 2010
In our day-to-day lives, the news will often mention the concept of microeconomics and macroeconomics. These two schools of economics are not as complicated as some people believe, but the concepts are extremely important for the economy of the planet. So, why not learn about microeconomics and macroeconomics? Here are some things for you to learn about these interesting economic policies. Before we start, here are some main ingredients of Micro and Macro Economics – Microeconomics: The Law of Supply, The Law of Demand, Opportunity Cost etc. Macroeconomics: Monetary policy, Fiscal Policy, Gross Domestic Product, Consumer Price Index, Unemployment, Inflation etc .
Microeconomics
Microeconomics is a branch of economics in which there is the study of how the individual parts of the economy, made up of households and firms, make decisions in order to allocate a limited amount of resources. These decisions are usually done in markets where goods and services are being bought and sold. Microeconomics examines how all these decisions on the individual part have an impact on the supply and demand of goods, which in turn determine price and which itself determines the supply and demand of these goods and services.
Microeconomics is in contrast of macroeconomics, which looks at the total of economic activity rather than the individual parts of the economy. Microeconomics is not just about how individual parts affect the economy, but it is also about the effects of economic policies like taxation on the economy. Microeconomics also has the goal of analyzing market mechanisms in order to establish prices among goods and services and to allocate limited resources through alternative uses. Market failure is also analyzed through microeconomics, which is when markets do not produce efficient results, which allows microeconomics to describe the conditions that are needed to create the concept of perfect competition. Some places of study for microeconomics include:
· General equilibrium
· Asymmetric information
· Uncertainty choices
· Game theory
· Elasticity of products
Under microeconomics, there are four categories in which a firm’s profit may be considered since it is assumed that all firms are following a decision making process that is rational and will produce the maximum profit output.
1. When a firm has an average total cost that is less than the price of each additional product, then the firm is said to be making an economic profit. In this, the economic profit is equal to the quantity of the output when it is multiplied by the difference between the total cost and the price.
2. When the firm’s economic profit is equal to zero, which occurs when the average total cost equals the price of the product or service, then the firm is making a normal profit.
3. If the price is between the average total cost and the average variable cost, then the firm is in loss-minimizing condition. The firm produces, but if the firm stops producing then its loss would be larger. Firms continue production to offset the variable cost.
4. When the price is below the average variable cost, the firm is in the shutdown condition. Losses are therefore minimized by not producing anything. The reason for this is that production would not generate any returns that would be large enough to offset the fixed costs and a portion of the variable cost.
Macroeconomics
In contrast to microeconomics, macroeconomics deals with the performance, behaviour, decision-making and structure of the entire economy. This can be the national economy, the regional economy, or even the world economy. Typically, macroeconomics will look at GDP, unemployment rates and price indexes to determine how the economy is functioning. Macroeconomists will create models as well that look at the relationships between:
1. National income
2. Output
3. Consumption
4. Inflation
5. Unemployment
6. Savings
7. International trade
8. International finance
9. Investments
Macroeconomics, by definition, is very broad in its scope and study, but there are two areas where macroeconomists will research. These are the attempt to understand the causes and consequences of short-run fluctuations within a business cycle and the attempt to understand the determinants of the increases in national income.
Macroeconomics will help prevent depressions and recessions by allowing governments to make adjustments through changes within the macroeconomic policies. These policies are typically the fiscal policy and monetary policy of the country.
Within macroeconomics, there are two primary schools of thought; Keynesian tradition and neoclassical tradition.
· Keynesian economics is a theory that was essentially created by the economist John Maynard Keynes. Through this policy, it is believed that fluctuations within the business cycle can be reduced through fiscal policies where the government spends less or more, and the monetary policy. Early Keynesian economist supporters wanted the regular use of policy to stabilize the economy of capitalist countries. Currently, in what is called Post-Keynesian Economics, there is emphasize on the importance of demand in the long run, and the role of uncertainty, preference and liquidity of the economy.
· Neoclassical tradition challenges Keynesian tradition to ground the theory of macroeconomics in microeconomics. With this type of macroeconomics, the main policy difference is the increased focus that is put on monetary policy, like the money supply of the country and the interest rates. It was during the 1970s that this school of thought emerged.
There is one more underused form of macroeconomics school of thoughts is monetarism, which was created by Milton Friedman which says that inflation is always a monetary phenomenon. It does not include the concept of fiscal policy as it is the belief of supporters of monetarism that fiscal policy crowds out the private sector. Monetarism does not combat inflation or deflation through active demand management.
Macroeconomics and microeconomics help to influence the economy of countries around the world and many economists are not only divided between the two concepts, but the schools of thoughts within each. However, whether you understand macroeconomics and microeconomics, or you have trouble with the concept, both policies have a big impact on our lives and the economy of countries like the United States.
While there are many things to understand within economics, but if you have to choose two things to research and learn about it should be macroeconomics and microeconomics.
