Studying the subject matter of economics like Theory of demand and supply , consumer behavior, national income , balance of payment , unemployment, etc. We come across two broad categories of economics one is macroeconomics, taking the economy as a whole and other is microeconomics.
Distinction between the two will not be easy until we see the scope and importance of both the categories. So here it begins.
Microeconomics (from Greek prefix mikro- meaning “small” + economics) , here microeconomics is made from two words i.e micro which means Small + Economics that means economics studied at small scale.
It studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individual. Microeconomics generally applies to markets of goods and services and deals with individual and economic issues.
The specific concepts being focused under microeconomics are:
1.marginal utility and demand.
2. diminishing returns and supply.
3. elasticity of demand.
4. elasticity of supply.
5. market structures (excluding perfect competition and monopoly)
6. role of prices and profits in determining resource allocation.
Some Important microeconomic theories on :
1. Consumers .
3. Cost production
4.Opportunity cost theory
The major importance of Microeconomics is as given below:
1 . It helps in price determination and also explains how the prices of various factors of production are determined.
2. Microeconomics theory also helps in understanding the working of the free market economy as in free market economy , decisions are based on the preference of the consumer or demand for the product.
3. We understand many international trade aspects like effects of tariff, determination of exchange rates, gains from international trade etc. It is also useful in public finance to analyze both, the incidence as well as effect of a particular tax in microeconomics.
3. microeconomics also explains how we can utilize our scarce resources effectively and efficiently and how can we maximise our output.
Not only is it useful in efficiently allocating the scarce resources to productive uses but it also helps control the use of the allocated resources as well.
4 . Theories of microeconomics also help managers in taking rational busienss decisions .
5. Microeconomic Concepts also helps governments and policymakers in framing policy for the country for the welfare of our economy.
6. As , microeconomics help in optimum utilization of resources thus it helps in zero wastage of our resources.
If we talk about SCOPE OF MICROECONOMICS then microeconomics includes variour concepts like :-
1. COMMODITY PRICING : Helps in determining the price of a perticular comodity.
2 . FACTOR PRICING : It helps us in studying how prices of factors are detrimined .
3. SOCIAL WELFARE : optimum utilization of resources will eventually leads to efficient allocation of scarce resources thus contributing to social welfare.
Summing up , we conclude that Microeconomic approach of economics helps us study and understand the practical working of the economy. The entire economy is complex and complicated for a layman to analyze. However, microeconomics facilitates easy comprehension of the economic system.
Macroeconomics is a branch of economics that studies how an overall economy—the market systems that operate on a large scale—behaves. It studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.
If we talk about SCOPE OF MACROECONOMIC then it covers following topics :-
1. National income.
4. Postulate of General price level.
5. Idea of economic growth.
Importance of Macroeconomics:
1. Helps to understand the functioning of a complicated modern economic system. It describes how the economy as a whole functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.
2. Assist us in achieving the goal of economic growth, higher level of GDP and higher level of employment. It analyses the forces which determine economic growth of a country and explains how to reach the highest state of economic growth and sustain it.
3. It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control Inflation and deflation.
4. Macroeconomics explains factors which determine balance of payment. At the same time, it identifies causes of deficit in balance of payment and suggests remedial measures.
5. Provides a way to solve economic problems like poverty, unemployment, business cycles, etc., whose solution is possible at macro level only, i.e., at the level of whole economy.
6. With detailed knowledge of functioning of an economy at macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies.
7. Last but not the least, is that macroeconomic theory has saved us from the dangers of application of microeconomic theory to the problems of the economy as a whole.
CONCEPT OF MACROECONOMICS :
▪︎ Income and Output
One of the most important concepts of macroeconomics is income and output. The national output is the total amount of all goods and services produced in a country during a specific period. And when production units or organizations sell everything they produce, they generate an equal amount of income
Another important component of macroeconomics is unemployment. Economists measure the unemployment rate in an economy by calculating the percentage of individuals without jobs.
▪︎Inflation and Deflation
The study of inflation and deflation is another important aspect of macroeconomics. The term inflation refers to an increase in the prices of goods and services across the country. On the other hand, the term deflation refers to a decrease in the prices of goods and services.
MACROECONOMIC POLICIES :
The two main macroeconomic policies that a government may apply to bring about stability are the monetary policy and the fiscal policy.
The monetary policy is an important process, which is under the control of the monetary authority of a country. This monetary authority is usually the central bank or the currency board. The monetary policy is usually implemented by the central bank to stabilize prices and to increase the strength of a country’s currency.
The monetary policy also aims to reduce unemployment rates and stabilize GDP. It also controls the supply of money in an economy.
The fiscal policy is a process that makes use of a government’s revenue generation. It also utilizes expenditure as tools to control economic windfalls. The government uses the fiscal policy to stabilize the economy during a business cycle.
Summing up , we conclude that Macroeconomics deals with the performance, structure, and behavior of the entire economy. In contrast to microeconomics, it is less focused on the choices made by individual actors in the economy (like people, households, industries, etc.)