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







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