Interdependence of macroeconomics and microeconomics , Macroeconomics

 

INTERDEPENDENCE OF MACROECONOMICS AND MICROECONOMICS

In microeconomics, the underlying assumption is that the total output, total employment and total spending are given. It then goes on to examine how the given volume of output and employment can be best allocated between various individual industries and firms within industries, and how prices of individual products are determined. What microeconomics takes as given - total output, total employment, etc. - is what macroeconomics seeks to explain. What macroeconomics take as given - the distribution of output, employment, and total spending - is what microeconomics seeks to explain. Also, microeconomics takes the general price level as given, whereas it is a variable which has to be explained in macroeconomics; the relative prices are assumed to be given in macroeconomics but is a variable in microeconomics. Thus, macroeconomic theory has a foundation in microeconomic theory and microeconomic theory has a foundation in macroeconomic theory. In other words, there is an interdependence between the two. In practice, analysis of the economy is not done separately in two watertight compartments. When macroeconomic variables are analyzed, one must allow for changes in microeconomic variables that influence the macroeconomic variables and vice versa.

Shift of Emphasis from Microeconomics to Macroeconomics
       

Before the 1930s, economists emphasized microeconomics because it seemed there was not much to say about macroeconomics. The accepted macroeconomic theory then was that total output, in the short run, was more in the nature of a constant than a variable. All the resources in the economy would be fully employed. The output would be the full employment level of output.

If this were indeed the case, the only relevant question is whether or not the fully employed resources are being used in the best possible manner; in other words, whether or not the resources are optimally allocated among competing lines of production.

It is to be noted that the question of optimal allocation of resources assumes importance only when the resources are fully employed. In such a scenario, there is a scarcity of resources and thus there is an opportunity cost of using resources in certain lines of production and not in others. The resources have to be so allocated such that the opportunity cost is minimized and thus the benefit to the economy is maximized. This is the domain of microeconomics. However, when the resources in the economy are not fully employed, the question of optimal allocation of resources is not of much importance.

This is because, in such a scenario, resources are not actually scarce. To produce an additional output of any kind does not require the diversion of resources from being employed in other kinds of output because of the availability of idle resources. The opportunity cost of producing additional output of any kind is almost zero. Thus, whenever the economy departs from full utilization of resources, macroeconomics assumes greater importance than microeconomics This was precisely the case in the 1930s when there was large-scale persistent unemployment in Europe and America and thus macroeconomics shot into prominence. Full employment was no more taken for grante

Posted Date: 9/11/2012 2:24:10 AM | Location : United States







Related Discussions:- Interdependence of macroeconomics and microeconomics , Assignment Help, Ask Question on Interdependence of macroeconomics and microeconomics , Get Answer, Expert's Help, Interdependence of macroeconomics and microeconomics Discussions

Write discussion on Interdependence of macroeconomics and microeconomics
Your posts are moderated
Related Questions
how useful is national income statistics for indicating living standards

Determination of L in the cross model As firms will produce less than Y OPT , they require less labor than L OPT . We can determine exactly how much L they need in order to pro

Overnight interest rate of Central banks When the central bank buys government securities, it purchases from many individuals, companies and institutions. Deposits and reserves

how to work out National Income?

Critically examine the statement that privatization can always decentralize economic power.

What is money has nothing to do with token We also consider that what is money has nothing to do with token or commodity itself: USD is money in United States but not in

ISSUES RELATED TO BALANCE OF PAYMENTS: It  is to be remembered that the Indian economy witnessed varying intensities of BOP problem during 1956-9  1.  However over the 1990s,

explain with illustration the meaning of credit creation in commercial banks

Q. Equilibrium in the labor market? Equilibrium in the labor market  Real wage W/P will be equal to the equilibrium real wage in the classical model

Price Mechanism Price mechanism is the point, which equilibrates supply and demand within a market. It is a mechanism of pricing. The price mechanism is one, which permits the p