Skip to main content

Interdependence of Microeconomics and Macroeconomics

Since microeconomics and macroeconomics are the two approaches to the study of the same economy, their study is not conducted separately in two watertight compartments. The distribution between microeconomics and macroeconomics is made to help us understand behavior of economic units both from micro-perspective and macro-perspective. Moreover, the distinction drawn between microeconomics and macroeconomics is just to emphasize that the knowledge of both microeconomics and macroeconomics is essential through understanding of economics activities in an economy. In fact, the basic goal is the same for both branches of economics; the social welfare maximization. Thus, the microeconomics and macroeconomics are interdependent.

The existence of the differences between microeconomics and macroeconomics does not imply that they are independent. In fact, macroeconomic theory has a foundation in microeconomic theory and microeconomic theory has a foundation in macroeconomic theory, i.e., the changes in the variables of microeconomics affect the macroeconomic variables and vice versa.

 

Micro-economics foundation of Macro-economic analysis:

Macroeconomic theory examines the determination of general price level and inflation considering the relative price of commodities and factor of production. But the theory of production and factor pricing is the subject matter of microeconomics.

Similarly, macroeconomic theory is concerned with analyzing aggregate variables such as output and National Income, level of national employment, consumption, investment etc. These variables are also affected by the behavior of individual consumers, firms etc. But the theory of consumers’ and producers’ behavior is studied in microeconomics. Hence, Microeconomics is foundation of Macroeconomics.

 

Macro-economics foundation of Micro-economic analysis:

In microeconomic theory, we examine the consumption and saving behavior of a household in relation to the rate of the interest which is extremely given to the household. At the macro level, we look at how households saving plans and their demands for financial assets interact with the investment and financial plans of firm to determine the level of interest rate in the economy.

Similarly, the behavior of individual consumers and firms which are the part and parcel of microeconomics are also affected by the overall macroeconomic condition. Hence, Macroeconomics is foundation of Microeconomics.

 

Conclusion:

Thus, in gist, relationship between microeconomics and macroeconomics does exist. They are interdependent can be summarized cases as follows;

· It may be emphasized that neither of micro or macro approaches can alone adequately help us in analyzing the working of economic system.

·  It is very essential therefore to integrate the two approaches, if we wish to get correct solutions of our main economic problems.

· If we take a period of unprecedented prosperity in he economy. Even in such boom conditions, it is not uncommon to come across examples of individual industries, which may be more dead than alive.

·  Like wise, in the period of deep depression, there may yet be some individual industries, which may be enjoying great prosperity.

 

Labels:

Comments

Post a Comment

Popular posts from this blog

Market Economy Vs Command Economy

Generally, there are two fundamentally different ways of organizing an economy. Market and Command Economy. A market economy is one in which individuals and private firms make the major decisions about production and consumption. In a market economy, decisions are made in markets, where individuals and enterprises voluntarily agree to exchange goods and services, usually through payments of money. A system of prices, of markets, of profits and losses, of incentives and rewards determines the what (profits), the how (costs) and the form whom (reward for inputs). [Laissez-faire economy] A command economy is one in which the government makes all important decisions about production and distribution. In a command economy, the government owns most of the means of production; it also owns and directs the operations of enterprises in most industries; it is the employer of most workers and tells them how to do their jobs; and it decides how the output of the society is to be divided among ...
Post a Comment
Read more

Let's discuss the government budget

A government budget is a financial plan that outlines the revenues and expenditures of a government for a specific period. It is a crucial tool for managing a country's finances efficiently to achieve economic and social goals like promoting growth, reducing poverty, and providing public services. Monitoring and adjusting the budget as needed is essential for fiscal stability and sustainability.  In Nepal, the tradition of presenting an annual budget dates back to the 1950s, with the first budget presented in 1951 covering the period from March 1951 to February 1952. This change followed the overthrow of the Rana regime in February 1951. During this transitional phase without a legislature, the first budget was presented at the end of the year BS 2007 through Radio Nepal. The budget amount was Rs. 52,529,000, with a tax collection target of Rs. 30,619,000. The then Finance Minister, Subarna Shamsher, presented the budget as part of the council of ministers led by Prime Minister Mat...
Post a Comment
Read more

Economic Efficiency

A given economic arrangement is efficient if there can be no rearrangement which will leave someone better off without worsening the position of others. One important aspect of overall economic efficiency is productive efficiency. Productive efficiency occurs when an economy cannot produce more on one good without producing less of another good.
Post a Comment
Read more