1.3 Concepts and differences of micro and macro economics
Microeconomics and Macroeconomics
The overall subject matter of economics is included into two branches microeconomics and macroeconomics. These words in economics were first used by Ranger Frisch in 1933. Since then the words are used all over the world.
Concept of Microeconomics
Concept of Microeconomics
The word 'Micro' was derived from Greek the word 'Mikos' which means small. So, the term micro denotes small. Hence, microeconomics is the study of the behavior of individual units. It studies how a particular firm maximizes profit or how an individual consumer maximizes satisfaction from his purchase
According to K.E. Boulding, "Microeconomics is the study of particular firms, particular households, individual prices, wages, income, individual industries, particular commodities."
In microeconomics, the unit of study is the part rather than the whole. The studies the small components of national economy. The study is concentrated on particular unit, not the aggregate of all units. For example, micro-economics explains how the single firm determines the price for a particular product; that amount ismate
of output will maximize its profit. It also seeks to explain how the individual consumer distributes his total expenditure among various goods and services so as to maximize utility.
Scope of Microeconomics
The study of individual units or individual consumers, individual firms or their small groups, form the scope of microeconomics. Broadly speaking, the scope of microeconomics covers the following topics:
i). Theory of demand
- The goods are produced due to the consumer demand. Hence, at first, the theory of demand and the theory of consumer behaviour are studied. This includes the meaning, types, laws and determinants of demand, law of diminishing marginal utility, law of equi-marginal utility, indifference curve analysis and so on.
ii) Theory of production and cost
- The theory of production consists of the factors of production, concept of different types of product and the theories like law of variable proportion, law of return to scale, least cost combination of inputs and so on. Similarly, the theory of cost
consists of the different concept of cost, nature of short-run and long-run cost etc. also included in microeconomics.
ii). Theory of product pricing
- Macroeconomics studies the determination of price of goods and services in different market conditions. So, it is also known as price theory. If studies, how price and output are determined in different market conditions such as perfect competition, monopoly, monopolistic competition, oligopoly and so on. Microeconomics studies the process of pricing of goods in these markets.
(iv) Theory of factor pricing
- Theory of factor pricing is another branch of microeconomics. It is also called the theory of distribution. In theory of factor pricing, the determination of rent, wages, interest and profit is studied. There are different traditional and modern theories regarding the determination of the reward of factor production are studied in microeconomics.
V). Theory of economic welfare
- The theory of economic welfare studies about the economic efficiency. It is also an important
factor to the allocation of resources so as to
maximize people's welfare. The efficiency in production,
consumption and distribution are needed for overall
economic efficiency.
Concept of Macroeconomics
The word 'Macro' derived from Greek the word, 'Makros' which means large. So, the term macro denotes big or large. Macroeconomics deals with the functioning of the economy as a whole. It studies the aggregate form of an economy. So, it is also known as income theory as it studies national income, national output, general price level, level of employment, saving and investment.
Thus, macroeconomics explains about aggregate income, aggregate saving, aggregate consumption, aggregate demand, aggregate supply, National income, national output, national expenditure etc.
J.M. Keynes called Macroeconomics as "Theory of Income and employment".
In the words of K.E. Baulding, "Macroeconomics deals not with individual quantities but with aggregate of these quantities, not with individual income but with national income, not with individual prices but with price-level, not with individual
output but with national output."
Scope of Macroeconomics
Macroeconomic studies the aggregate form of the economic activities. Hence, the study of the economy in aggregate forms the scope of macroeconomics. The scope of macroeconomics consists of national income, national output, level of employment, price level and so on. It consists of the study of following subject matter:
i) The theory of income and employment
To much economics, we study about the determination of income and employment of factors of production in an economy. The value of national income and level of employment is determined with the help of the study of aggregate demand. Aggregate demand is the sum of total consumption demand by final consumers.
Theory of general price level.
Macroeconomics is related to how the general price level is determined. Inflation is the main subject related to general price level.
In the view of J.M. Keynes inflation occurs due to the success of aggregate demand.
iii) Theory of economic growth
The theory of economic growth is related with the determination of aggregate prices of factors of production land, labour, capital and organization in the form of rent, wages, interest and profit respectively.
(iv) Study of macroeconomic issues.
- Macroeconomic studies about different types of macroeconomic issues such as:
Economic growth
Trade cycles
Unemployment
Inflation
Study of various economic policies
Macroeconomic studies about different types of policies. These policies help to achieve high economic growth rate. Such policies are:
Monetary policy
Fiscal policy
Trade policy
Export policy
Import policy etc
Distinction between Microeconomics and Macroeconomics
Microeconomics
The term microeconomics was derived from the Greek word 'Mikros' meaning small.
- The objective of microeconomics on the demand side is to maximize utility where as on the supply side is to maximize profit.
3 The basis of microeconomics
is price mechanism, which operates with the help of individual demand and supply.
- Microeconomics is based on the assumption of full employment of resources.
Microeconomics is based on the partial equilibrium analysis.
Macroeconomics
The term macroeconomics was derived from the Greek word 'Makoos' meaning large
The objectives of macroeconomics are full-employment price stability, and economic growth and favorable balance of payment.
The basis of macroeconomics is the general level of price, which is determined by aggregate demand and aggregate supply.
Macroeconomics is based on under employment of resources.
Macroeconomics is based on the general equilibrium analysis.
Is microeconomics a positive or normative science?
It's important to understand the difference between positive and normative science before getting into whether microeconomics is a positive or normative science. According to J.M. Keynes, a positive science is organised knowledge about what exists right now, while a normative science is concerned with what should exist and focuses on values instead of facts.
Friedman makes it even clearer that the goal of a positive science is to come up with theories or ideas that can predict things that haven't happened yet in a way that makes sense. He argues that the goal of normative science is to come up with ideas about what should happen based on values and ideals.
When we apply these concepts to economics, we see that they cover both positive and normative phenomena. And this is because, as a social science, economics looks at both the present situation ("what is") and the ideal state of things ("what ought to be"). As a result, microeconomics, which is a branch of economics, has parts of both positive and normative science.
Microeconomics uses positive analysis to understand how individuals make decisions based on self-interest and normative analysis to evaluate whether those decisions lead to efficient outcomes. For example, in microeconomics, a positive analysis may involve studying how consumers choose to allocate their income among different goods and services based on their preferences and budget constraints.
On the other hand, a normative analysis could involve evaluating whether government intervention in the form of price controls or subsidies would lead to a more equitable distribution of resources among society. Let's look into the aforementioned issues further.
Microeconomics as a Positive Science
Microeconomics is a wonderful field of economics that tries to break down and explain economic events in their most basic form. Microeconomics is a positive study that looks into basic questions like "what is," "why is it that way," and "what will be." Take a look at these questions: 1. What factors influence consumer decisions when choosing between luxury and essential items? 2.
How do changes in technology impact the production processes of businesses in the digital era? 3. What motivates individuals to invest in sustainable and environmentally-friendly products? 4. How do global economic trends affect the pricing strategies of multinational corporations? 5. What role does government policy play in shaping income distribution within a society?
Microeconomic analysis is built around these questions, which are based in the positive world. Microeconomics is a positive science that tries to figure out how people make economic decisions in certain situations. Microeconomics shows how complex the relationships are between small-scale economic factors by looking at how they change when the economy does.
Fundamentally, microeconomics tries to figure out what causes what in economic events and how to predict them.
Friedman said it so well: "The positive form of economics is made up of tentatively accepted generalisations that can predict what will happen when things change." This feeling is very strong in microeconomics, where making generalisations is the main way to predict what will happen in the economy at the micro level.
Microeconomics as a Normative Science
The normative nature of microeconomics means that it tries to answer the basic question of "what should be" based on social norms and ideals. When you look at "what people do" or "what happens in the market," you can see that some acts might not be good for society. Take the profitable trade in drugs like cigarettes and drink as an example.
Even though the things are profitable, people should think about whether or not making and selling them is good for society. Because this question comes from the public interest, microeconomics, which is a social science, looks at whether or not these kinds of actions are good for society.
To figure out whether these things are desirable to society, they are carefully weighed against the social costs and benefits of making and selling them. Consider a pressing issue in urban transportation, particularly in densely populated cities like São Paulo, Brazil. With increasing urbanization and limited infrastructure, unregulated ride-sharing fares could surge, disproportionately impacting commuters.
Hence, the crucial question arises: "Should ride-sharing fares be determined solely by market forces, or should governmental interventions be introduced to ensure fair pricing and accessibility for all?" This ethical dilemma, rooted in societal welfare, prompts microeconomics to scrutinize and advocate for a transportation pricing model that serves the interests of both commuters and service providers.
Microeconomics is a normative study, which means it makes value judgements about what is "good" or "bad" for society. People have these beliefs because they want to be moral, ethical, social, and political. Microeconomics is a prescriptive science because it tells us how to fix bad economic situations. It uses this power to help solve problems in society.
Think about the strange situation of the world producing too many food grains while many people are hungry and malnourished in many areas. In positive microeconomics, the rules that set prices in global food markets are broken down. In normative microeconomics, on the other hand, the important question of how to control food grain costs to end world hunger is raised.
This two-pronged method shows how complex microeconomics is; it includes both positive analysis and normative considerations, especially when trying to solve global problems like food insecurity that are hard to solve. However, it's important to remember that microeconomics is a positive study at its core.
It takes on a moral role when economic theories are used to look at economic events from the point of view of what is good for society, support changes in public policy, and judge government actions.