Distinguish between the study of microeconomics and macroeconomics.

Is it true to say that the working of economy forces will be more appreciated by supplementing microeconomics for macroeconomics? An assignment on principles economics 11 (ECO 1122)

Submitted to Dr.Ajie (lecturer) Department of social sciences VERITAS University, Abuja (obehie campus) By Onoja Adams Nelson VUG/ECO/11/328

15TH MAY, 2012

The distinguishable analysis purposes on the principles microeconomics and macroeconomics theory as glared from methodological approaches, both old and contemporary times leave one on with inescapable conclusion to wit. Both microeconomics and macroeconomics were used by the classical and neo-classical economists in their writings. But it was Marshall who developed and perfected the microeconomics as a method of economics analysis. Similarly, it was Keynes who developed macroeconomics to as a distinct method in economics theory. The word micro has been derived from the Greek word mikros which means small. Microeconomics is the study of economic actions of individuals and small groups of individuals. It includes particular household, particular firms, particular industries, particular commodities, and individual price. While macro is also derived from the Greek word makros, which means large. It deals with aggregate of these quantities not with individual incomes, but with the national income, not with individual price but with the price levels, not with individual output but with the national output. Thus microeconomics studies how resources are allocated to the production of particular goods and services and how efficiently they are distributed. But micro itself, does not study the problem of allocation of resources to the economy as a whole. It is concerned with the study of parts and neglects the whole. As pointed out by Boulding, description of a large and complex universe of facts like the economic system is impossible in terms of individual items. Thus the study of microeconomics presents an imprecise picture of the economy. But the orthodox economists, like Pigou, tried to apply microeconomic analysis to the problem of an economy. Keynes thought otherwise and advocated macroeconomics which is the study of aggregate covering the entire economy. Such as total employment, total saving, total income, total output, total investment, total consumption, aggregate supply, aggregate demand, and general price level, wage level and cost structure. The objective of microeconomics on demand side is to maximize utility whereas on the supply side is to minimize profits at minimum cost. On the other hand, the main objectives of macroeconomics are full employment, price stability, economics growth and favorable balance of payments. The basis of microeconomics is the price mechanism which operates with the helps of demand and supply forces. These forces help to determine the equilibrium price in the market. Whereas macroeconomics is national income, output and employment which are determine by aggregate demand and supply.

Microeconomics is based on different assumptions concerned with rational behavior of individuals. While macroeconomics bases its assumptions on such variables as aggregate volume of output of an economy, with the extent to which its resource are employed, with the size of the national income and with the general price level. Microeconomics is based on partial equilibrium analysis which helps to explain the equilibrium conditions of an individual, firms an industry and a factor. Whereas macroeconomics is based on general equilibrium analysis which is an extensive study of a number of economic variables, their interrelations and interdependences for understanding the working condition of the economy systems as a whole. In microeconomics, the equilibrium condition are analyzed at a particular period, it does not consider the time element. Microeconomics is a static analysis, whereas macroeconomics is based on time-lags, rates of change, and past and expected values of the variables. Microeconomics also examines various market structures. Perfect competition describes a market structure such that no participants are large enough to have the market power to set the price of a homogeneous product. Another way of putting this is to say a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells. Imperfect competition which refers to market structures where the conditions of perfect competition do not exist. Forms of imperfect competition include: monopoly, duopoly, oligopoly, monopolistic competition, monopsony, oligopsony, Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition. This has addressed a long-standing concern about inconsistent developments of the same subject. Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labour force growth Other broad distinction is positive economics (what is), and normative economics (what ought to be), as in microeconomics and macroeconomics respectively. In a nutshell, the distinguishable for analysis purpose between microeconomics and macroeconomics is not rigid, for the parts affect the whole and the whole affects the parts.

Is it appreciable for supplementing microeconomics for macroeconomics or vice versa?

A methodological approaches, microeconomics and macroeconomics are dependence on each other as the parts can be the whole and the whole can be the parts. The interdependences of these two branches of economics rely on the subject matter. Microeconomics and macroeconomics involve the study of aggregates. But the aggregation in microeconomics is different from that in macroeconomics. In microeconomics the interrelationships of individual households, individual firms and individual industries to each other deal with aggregation. For example, the concept of an industry aggregates numerous firms or even products. Consumer demand for cloths is an aggregate of the demands of many households, and the supply of cloths is an aggregate of the production of many firms. The demand and supply of labour in a locality are clearly aggregate concepts. Thus the scope of microeconomics to aggregates relates to the economics as a whole, together with subaggregates. The dependence of microeconomic theory on macroeconomics, take for instance, when aggregate demand rises during a period of prosperity, the demand for individual products also rises. If this increase in demand is due to a reduction in the rate of interest, the demand for capital goods will go up. This will lead to an increase in the demand for particular types of labour needed for the capital goods industry. The rise in wage rate is made possible by increase in profits as a consequence of increase demand for capital goods. Thus a macroeconomic change brings about changes in the values of microeconomic variables-in the demands for particular goods, in the wage rate of particular industries, in the profits of particular firms and industries and in the employment position of different groups of workers. Similarly, the overall size of income, output, employment, costs, etc. In the economy affects the composition of individual incomes, outputs, employment, and costs if individual firms and industries. When total outputs falls in a period depression, the output of capital goods falls more than that of consumer goods. Profits, wages and employment decline more rapidly in capital goods industries than in the consumer goods industries. Whereas macroeconomics theory is also dependent on microeconomics analysis. The total is made up of the parts. National income is the sum of the incomes of individuals, households, firms and industries. Total savings, total investment and total consumption are the result of the saving, investment and consumption decisions of individual industries, firms, households and persons. The general price level is the average of all prices of individual goods and services. Similarly, the output of the economy is the sum of the output of all the individual producing units. Thus, the aggregates and averages that are studied in macroeconomics are nothing but

aggregates and averages of the individual quantities which are studied in microeconomics. However, if the economy concentrates all its resources in producing only agricultural commodities, the total output of the economy will decline because the other sector of the economy will be neglected. The total level output, income and employment in the economy also depend upon income and distribution. In this junction, both microeconomics and macroeconomics approaches to the working of the economy forces are interrelated and independent, not supplementing one for other. If there is unequal distribution of income so that income is concentrated in the hands of the few rich, it will tend to reduce the demand for consumer goods. Profits, investment and output will decline, unemployment will spread and ultimately the economy will be faced with depression.

REFERENCE:
Adebayo, A. (1999). Economics: A Simplified Approach. Lagos: African International Publishing Ltd. Harcourt, G. C. (1987). Post-Keynesian Economics. The New Palgrave: Encyclopedia Britannica. Jhingan, M. L. (2010). Macroeconomic Theory. Mayur Vihari: Vrinda publications (P) Ltd.