Question

Discuss how the “all other things equal” assumption and the fallacy of composition explain the distinctions between macroeconomics and microeconomics.

Answer 1

All other things equal assumption is also known as " Ceteris paribus " ( Latin ) in economics . On the other hand fallacy of composition is simply the mistaken belief that what is true for the individual or a particular entity in a big group , must be true for the group as a whole .

Macroeconomics - the gross domestic product, unemployment ,inflation and things that can affect the economy as a whole .
Microeconomics- the study of economics at an individual, group, or company level .

The fallacy of composition can easily explain the difference as what is good for a single firm ( like a lower wage rate , fall in prices of inputs ) may not be equally good for whole economy as fall in prices of overall inputs means a recession .

Aa other things equal assumption works when we consider the demand curve for a single product or in a single market , we only assume price and quantity inverse relation . This is the market demand curve . But in macro level when we consider aggregate demand curve we use the IS-LM model , which finds the relation between overall price level and national income .