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Monday, 2 May 2011

Difference between Micro and Macro Economics and also discuss their inter relationship

The study of economics is divided into two parts micro and macro economics. An economic system may be looked as a whole or in terms of small units. When we are analyzing the problems of the economy as a whole it is a macro-economic study, while an analysis of the behavior of any particular unit is a study of micro economics.

MICRO ECONOMICS OR PRICE THEORY :-
The word " micro : mean little or small when we speak micro economics we mean it is some small part of the whole economy we are analyzing. In micro economics we are chiefly concerned with the behavior of an individual house hold, individual producer. Micro analysis was mainly developed for studying process of valuation , allocation of resources and the determination of price of the factors of production.

MACRO ECONOMICS OR THE THEORY OF INCOME AND EMPLOYMENT :-
Macro-Economic analysis is closely associated with the Keynes.
Macro means large or great. It covers aggregate and averages such as national income, total employment, total savings, total investment and general level of prices.

Macro economics seeks to explain as to why the problems like unemployment and inflation relating the overall performance of the economy occur. Macro economics also studies and explains the role of a government as solver of economic problems. We can say that macro -economics is a branch of economic theory which deals with the fluctuation of the economy as whole.

IMPORTANCE OF MICRO ECONOMICS

1. EXPLAINS TAXATION PROBLEMS :-
Micro economics help us in explaining the effects of tax imposition and the determination of foreign exchange rate.

2. EXPLAINS FREE MARKET :-
It is also very helpful in understanding working of free market economy. It also explains that how the prices of goods are determined.

3. EXPLAINS THE EFFICIENCY CONDITIONS :-
It explains the efficiency conditions in production and consumption. Micro Economics also explains the efficiency of factors of product like land, labour and capital.

4. STUDY OF WELFARE :-
It also studies the welfare popup and explains that how free enterprise economy functions without control.

LIMITATIONS :-
Assumptions of free market and full employment are not true. It does not study the whole economy.

IMPORTANCE OF MACRO ECONOMICS
Its important can be judged by the following facts.

1. ECONOMIC GROWTH POLICIES :-
Macro economic analysis explain the causes of slow and rapid growth of rate in various countries of world and helps to formulate the various policies for development.

2. DETERMINATION OF PRICE LEVEL :-
Macro economic analysis explain that which factors influence the general price level and how the price level is determined.

3. DETERMINATION OF UNEMPLOYMENT :-
It explains the factors which determine the level of aggregate income and employment.

4. CAUSES OF UNEMPLOYMENT :-
It also explain the causes of unemployment. For example, during the decade of 1930, in USA unemployment rate was 25% after ten years it decreased to only 2%.

5. FLUCTUATIONS IN NATIONAL INCOME :-
It also explains the causes of fluctuations in National Income. So it is very helpful to formulate the policies for controlling the trade cycle.


INTERDEPENDENCE OF MICRO AND MACRO ECONOMICS

Keynes says : that micro analysis my proof false when those are applied to the economic system as a whole.

EXAMPLE NO.1 = An individual may rich him self by stealing money but the society as a whole can not get rich by looting each others property.

EXAMPLE NO.2 = An individual employer may increase his income by cutting the wages of the workers. It may be true for individual but not valid when it is applied to the employers class as a whole.

EXAMPLE NO. 3 = A rise in price of an individual commodity may give profit to an individual producer but the general rise in prices level leads to inflation and disturb the economy.
Macro economic analysis are very useful for the solution of practical economic problems of our times such as unemployment and inflation.
Micro and Macro, both analysis have in individual significance . In the modern age the importance of micro analysis has decreased but it does not mean that it has lost its importance. In individual cases micro has its own value.

EXAMPLE 4 = In the days prosperity period there may be some firms which are suffering losses and they may have to shut down the plants. Similarly there may be some firm in the period of depression which enjoys profit. In fact the micro and macro both analysis are very essential for building up the true picture of economy as a whole. If we ignore one it will lead to wrong conclusion.

NOTE :-
Thus it is concluded that both the approaches are equally necessary for the analysis of the economy.

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