Question

Compare and contrast the major microeconomic failures and macroeconomic, Identify and summarize the dynamics involved in both kinds of market failure presented and How are these different economic breakdowns similar and different?

Answer 1

Economics widely has been categorized into two different segments which are known as micro and macroeconomics. Micro economics studies the behavior of people, individuals and companies whereas Macroeconomics researches the same at the level of the entire nation taken as a whole entity.

Thus, the key variables of micro economics include consumer and market demand, and on the other hand that of macroeconomics includes the demand of the entire nation combined. This is just an example and other variables such as production capacity, labor, capital and other similar policies can be explained accordingly.

Failure of governments and of people alike happens in an economy since all decisions which are taken with a positive outlook may not always result in the same. This happens because at any given point of time any decision has multiple points of delivery therefore, a decision is not reflected upon one single variable but on others also which in turn might not react as intended.

Therefore, failures arise and are common in both the Macro and Micro economic context. Both explained are as follows:-

Micro-economic failures:-

Micro economic failures occur at an individual firm or consumer level and effect the people we are looking at. For example an individual firm, which does not realize whether market demand is sufficient enough to influence the supply increase and therefore occurs a loss by expanding business.

Firms that do not take into perspective that their decision is not independent and has to be taken considering all other variables are most likely to see micro economic failures rapidly.

Macro-Economic Failures:-

Macroeconomic failures, though arise from similar conditions are decisions which are reflective of poor governance. One such incident happened in the United States wherein even after the occurrence of mass recession post the Great Depression, the country did not reduce its interest rates until it realized that it was a counteractive policy.

The government gave various reasons such as devaluation of the currency as a reason for not undertaking interest rate deductions seriously however they failed to realize that unless this happened in a recession, production and demand creation would not increase.

Thus Macro Economic failures are those that happen at the level of the government as a whole and lead to ramifications for the entire society than one single entity.

Differences and Similarities:-

The differences in Macro and Micro economic failures arise from their core difference i.e. that macroeconomics views the entire country as a whole whereas microeconomics is focused on viewing decisions of an individual and a firm respectively. The difference arises thus in the approach and the quantum of each of these.

The similarity occurs, since both are dependent on each other, macroeconomics is all firms combined. With all failing, they would have their effects on all smaller firms also and vice versa i.e. all firms have some contribution towards macroeconomics and failure of them effects macroeconomics also.

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