Question

Microeconomics and macroeconomics are the two different perspectives on the economy. Microeconomic perspective focuses on parts while macroeconomic perspective focuses on the economy as a whole. Keeping this in mind, provide a clear description of the difference between microeconomics and macroeconomics. Provide at least ten differences with examples. 

Answer 1

Microeconomics-

1. It studies the behaviour of individual firms or a person. For example: what goods they but out of their income

2. It studies how the individual firms or a person uses the available sacarce resources to maximize his satisfaction. For example: whether with given income the person consumes more burgers or cola.

3. It studies the different market structures in the economy and determines the output and the price level of the good. For example studying monopoly, oligopoly etc.

4. It studies the surplus, the consumer and the producer gets when they settle for a price and quantity combination. For example, total surplus is maximized when the price of the good is equal to its marginal cost.

5. It studies how demand for good reacts to its price. For example, increase in price of butter leads to decrease in its demand i.e. price and demand for butter are inversely related

6. It studies the change im quantity supplied of a good if the price of the good changes. For example, if price of butter increases, firms will like to produce more because their profits will increase.

7. It studies the interaction of demand and supply in the market and how the market comes to equilibrium. For example, when the price the consumer is willing to pay for butter equals the price at which the producer is willing to sell butter are equal then the market for butter is said to be at equilibrium.

8. It studies the cost of production of the good and revenue from selling that good to get to the equilibrium level of production. For example a seller sells that quantity of butter where the last sold butter’s marginal cost equals it margianl revenue.

9. It studies the production pattern of the firm to determine the level of inputs it should employ in short run and in long run. For example, the firm will employ the labour till the point where each additional labour unit is able to produce revenue that is equal to or greater than the wage he is getting.

10. It studies the effect of government intervention on the efficiency of the market. For example, a tax increases the deadweight losses in the economy.

Macroeconomics -

1. It is the study of economy is a whole. For example, all the consumers, all the production units etc.

2. it studies how an economy as a hole allocates its scarce resources. For example, how much it invests in manufacturing and how much in social welfare

3. it studies how the production done in the economy fulfills the demand in the economy.

4. It studies the investment in the economy due to increase or decrease in inventory levels. For example: in the time of boom the production units find their inventories ending up fast so they inveat in inventories increasing production and output

4. It studies the behaviour of aggregate demand in the economy which depends on the interest rate. For example a decrease in interest rate increases investment and hence, aggregate demand.

5. It studies the behaviour of agreements supply which decreases with price level in long run. For example: an increase in price level decreases real wages of workers, so, they demand more wages decreasing the aggregate supply dur to increase in cost of production

6. It studies the interaction between aggregate demand and aggregate supply. For example, when both aggregate supply and demand are equal them the economy is said to be in equilibrium and it differs for both long run and short run.

7. It studies the international markets as well. For example how an change in exchange rate changes the level of GDP

8. It studies how the external shocks to economy affect the cost of production and employment. For example an increase in price of oil will lead to increase in unemployment

9. It studies the barious types of unemployment and inflation and the realtion between the two. For example, Philips curve gives the realtion between unemployment and inflation.

10. It studies the behaviour of the government and the central bank on how they stabilise various macroeconomic variables. For example, central bank controls money suppy which it uses to affect inflation and interest rate.