Question

- Some economist believe that in order to really understand macroeconomics, you must first understand microeconomics. How does microeconomics relates to macroeconomics?

- What is the law of demand? Give two examples of how you have observe the law of demand at work in the "real world." How is the law of demand related to the demand curve?

Answer 1

Part 1

Both Microeconomics and Macroeconomics are not independent rather depend on each other. Microeconomics relates to macroeconomics in the following ways:

- The popular Law of Demand was derived and found based on the study done on the behaviour of the group of people. Analysis of a group of people comes under macroeconomics and the study of single consumers comes under microeconomics.

- A commodity price studied in microeconomics is influenced by the general price level or inflation (Macro Concept) prevailing in the economy.

- Individual firm's profits are dependent upon the Aggregate Demand, National Income which are Macroeconomic concepts.

Part 2

Law of Demand governs the relationship between price and quantity of demanded of a good. It states that, all other factors constant, the price of the good is negatively related to the quantity demanded of the good, ceteris paribus.

Following are the two examples from the real world:

- Increase in the price of onions reduces its quantity demanded

- If the price of Ice-cream increases, the consumer demands less of ice-cream and more of its substitutes.

Law of demand formulates the shape of the demand curve. The demand curve due to the inverse relationship between price and quantity demanded is downward sloping.