Question

How do you distinguish between concept of D and S functions in Microeconomics and the concept of AD and AS functions in Macroeconomics. Why they are different?

Answer 1

microeconomics is a study of an individual, a firm. Macroeconomics is a study of economy as a whole. If I say that strawberry demand has gone up due to its health benefits as I am talking about one crop, it is microeconomics.

If I say there is decrease in aggregate demand in economy due to less consumer confidence then as I am talking about all goods as an average it is macroeconomics.

In microeconomics demand is affected by two key factors: Price and non price factors like income, population, availability of substitutes, tastes and preferences. Price leads to movement on demand curve, non price factors lead to shift in demand curve to left or right.

Similarly, in macroeconomics there is not demand but aggregate demand as it comments about whole economy. Average price change leads to movement on aggregate demand curve and other non price factors like consumer confidence, government spendings, investments and exports lad to shift in Aggregate demand curve.

Supply in microeconomics is affected by costs of production, tax or subsidy, technology changes. All these lead to shift in supply curve and price leads to movement on supply curve.

In macroeconomics, supply is aggregate supply, it is affected by average price leading to movement and non price factors like supply shocks, business taxes, change in wages etc.

As shown in the figure below, microeconomics demand supply graph has quantity on x axis and price on y axis, graph a shows movement and graph b shows shift of demand curve. Coffee market.

As shown in the figure below, macroeconomics aggregate demand supply graph has real GDP on x axis and average price on y axis.Graph shows shifts in AD and AS due to non price factors.