Economics is divided into two separate parts by the modern economists, Micro and Macroeconomics. These two terms were first coined and used by Ranger Frisco in 1933. The distinction between Microeconomics and Macroeconomics are actually two different approaches adopted to simplify the study of Economics.
Micro Economics
The word Micro is a Greek word which means little or small. Micro economics is the study of individual part or some small part of the whole economy. Micro economics concerned with the study of the behavior of individual units, particular firms, particular households, industries, particular individual prices, wages, income, individual commodities. In micro economics we study the demand of an individual consumer for a good and from there we go to derive the market demand for a good. Similarly, in micro economic theory we study the behavior of individual firms in the fixation of prices and output. Micro economic theory or price theory deals with the economic behavior of individual decision making units such as consumers, resource owners, business firms as well as individuals who are too small to have an impact on the national economy.
The micro economic theory seeks to explain whether the problems of scarcity and allocation of resources are determined efficient. The economic efficiency involves in efficiency of consumption, efficiency in production, efficiency in distribution and overall economic efficiency. The micro economic concept takes the entire quantity of resources as given. It seeks to explain how they are allocated to the production of goods. The allocation of resources to the production of commodities depends upon the prices of different commodities and the prices of factors of production. Micro economics examines how the comparative prices of commodities and factors are determined. Thus the theory of product pricing and the theory of factor pricing such as rent wages, interest and profit are fall within the domain of micro economics.
Importance of Microeconomics
Micro economics involves the study of welfare, thus micro economics helps us to understand the working of free market economy. It apprise us as to how the prices of the goods and the factors of production are determined. Micro economics helps in describing the conditions of effectiveness in consumption, production and in distribution of the rewards of factors of production. The micro economics tells how a free enterprise economy works without any central control.
Macro Economics
The word Macro is derived from Greek word which means large. Macro economics is the analysis of the behavior of the entire economy. In other words, macro economics deals with total or big aggregates such as aggregate saving and aggregate investment in a country, national income of a country, output and employment rate in the country, total consumption in the country, and the general level of prices. Macro economics not deals with individual incomes but with the national Income of a country, not with individual prices but with the price level in the country, not with the Individual outputs but with the national output of a country. It also studies the problems of recession, unemployment, inflation, the balance of international payments, the determination of national output and its growth and the policies adopted by the governments to deal with these problems.
Importance of Macro Economics
Macro economics helps in understanding the determination of income and employment, determination of general level of prices and growth, International trade, Investment in the national income, Unemployment, Fiscal and Monetary policy, global economic system, exchange rate, balance of payment and controlling business cycle in the economy.
Interdependence of Micro Economics and Macro Economics
The micro and macro economics are interdependent. Both these approaches assistance us in inspecting the operating of the economy. If we analyze one approach and forsake the other, we are not considered to be full educated. We should combine the two approaches for the complete inspection of the working of economic structure. The macro approach should be applied where entire entities are involved and micro approach when sole cases are to be analyzed. If we ignore one and lay emphasis on the other, it will lead to wrong conclusions. The division between these two approaches is to better understand the economic problems of an economics system. We cannot say one approach is preferable to another, both approaches have their limitations. Both approaches are complementary rather than competitive. They can never be completely separated they are interconnected to each other’s.
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