Difference Micro Macro Economics

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In spite of very close relationship between the two branches of economics, they differ from each other fundamentally. As a matter of fact, in the economic system, what is true of parts is not necessarily true of the whole. The micro-economic behaviour cannot be added upto derive the macro-economic behaviour. Therefore, the application of micro-approach to generalize about the behaviour of the economic system as a whole, i.e., macro economic aggregates or vice-versa is incorrect and misleading. There is a need for an independent and separate analysis of the two.

The following instances will make it clear:

(i).        It is possible for an individual to become richer by finding a few bundles of hundred rupee notes on the road, but, no nation can become richer by just printing more currency notes.

(ii).       Saving is always a virtue for an individual. It helps him to accumulate wealth to start or expand business, for purchasing durable goods like houses, cars, etc., for education of children, for old age and so on. But, savings by all individuals may prove to be vice for the economy especially under the conditions of depression and unemployment caused by the deficiency of aggregate demand. Such collective savings on the part of the individuals often result in contraction of demand, output, employment and income. As a result, The whole economy will suffer.

(iii). An individual can buy more of a commodity at a given price. But, if many individuals try  to buy more, the price would shoot up.

(iv).      An individual can close his account with the bank by withdrawing the entire deposit. But, if all the depositors in the economy do so at the same time, banking system will collapse.

(v).      An individual may save more than he invests or he may invest more than he saves, but, for the economy as a whole actual total savings are always equal to actual total investment. Likewise, an individual may spend less or more money than he receives in a given period, but, the national income and the expenditure are always identical.

(vi).       According to the classical and the neo-classical economists, especially Pigou, a cut in money wages at the time of depression and unemployment would restrict or eliminate unemployment and depression. This conclusion of micro-economics may be true for an  individual industry. The reason is that at a lower wage, more workers will be employed, given the demand curve for labour. However, for the economy as a whole, this is highly  misleading. Any attempt to cut wages in the entire economy will bring down the aggregate  demand for goods and services in almost all the industries, as the wages are incomes of the workers. Moreover, the demand for labour is a derived demand, derived from the demand of goods. The fall in aggregate demand for  goods and services will result in decline in demand for labour, which will create more unemployment rather than reducing it.

(vii).      Micro-economics may assume a full employment economy, whereas, the macro-economics does not assume full employment. In the words of Keynes: “To assume a full employment  economy is to assume our difficulties away”.

(viii).    In case of full employment situation, an individual firm or industry may increase its output and employment by bidding way the workers from the other firms of industries. But, what applies to an individual firm or industry, does not do so in case of the economic system as a whole.

(ix).      The aggregative conclusions show an average tendency and do not influence all the sectors
alike. Steady general price level rarely implies equal distribution of income among various sections, viz. agriculturists, industrialists, workers, consumers, etc. The high price in one sector  might have neutralised by low price in other sector(s). It is, therefore, important to keep in mind nature, composition and structure of different sectors or groups (which is a subject matter of micro-economics), when we make a statement regarding the system or aggregates on the assumption that it is homogenous.To elaborate, the general price level is an aggregate including all types of prices like wholesale and retail prices of different goods, prices of productive agents, viz. wages, rent, interest and profits. Some prices move very fast, e.g., prices of securities, while others are extremely rigid like house rent. Further, different prices level in the country, one gets nothing, but a hotch potch picture lacking precise meaning. Similarly, a rise in the per capita income may not reflect the increase in the economic welfare, if the whole of the increased  income is absorbed by elite groups.

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