Understanding Microeconomics and Macroeconomics Like Never Before
The most popular definition of begins with an exhaustive study of micro-economics, i.e., a study of an individual's demand and supply, and an analysis of separate markets, firms, and industries. The allocation of goods and services is then examined by reference to the mechanism of the price system. This description is an oversimplification, but can be justified if one accepts the general principle expounded by classical economists that all productive resources will be used to the maximum, because if resources were left unused, there would be a fall in their prices and it would then become profitable to employ them. All resources would then be fully employed and the invisible hand which guided the resources into their most effective place would work for the general good of mankind
Few people today believe in the complete effectiveness of the free interplay of market forces to bring about a society compatible with modern ideas of social justice. The belief that if economic forces are allowed to work themselves out unimpeded, a Utopian affluent society would naturally result has been cast into doubt by the great slump of the 1930s and the deep economic depression faced by the western world in the 1980s. A broader concept of the economic system is necessary than is provided by micro-economic analysis.
This broader concept is known as macroeconomics, from the Greek word "macro," meaning "large." Whether it is better to consider macroeconomics before studying microeconomics is debatable. J. Harvey has argued, in Modern Economics (Macmillan), that: the only reason why microeconomics is taken before macroeconomics is that it is felt it is easier for beginners to understand. An allied reason for considering micro-economics first is that it is an approach that is occasionally more relevant to the life of an individual student. Naturally, one is more interested in one's own income than in the tonal income .One is more concerned about one's own unemployment than about national unemployment statistics
The theme of this book is the problem of scarcity and how it can, to some extent, be overcome. Scarcity is a relative term. Scarcity can be attacked, but it can never be abolished. It is not so much that nature is niggardly, as Professor Robbins has suggested, but rather that human wants are insatiable. Have you ever thought about what you would do if you had £1 million? You might plan to buy a yacht, have your own private swimming pool or golf course, or go on a world cruise. You might spend it on paintings, but there would still be some things that you could not buy.
In a so-called affluent society, scarcity is always with us. But scarcity can be fought against: unemployed resources can be put to work, whether they are in the form of labour. land, or capital. Economic systems can be evolved that use scarce resources economically and thus bolster economic growth. We will study throughout this book the economic problems which face mankind, but we shall find at the end that world problems are the problems of the individuals who make up the whole. So we shall move naturally from the economic problems of the world, to the economic problems of our own country, and to the economic problems of the individual
What is macro-economics?
The term "macroeconomics" was probably first used by Ragner Frisch in 1933, Macro-economics is the economy of aggregates. It may be assumed that if large quantities are carefully selected, then the men and women who make up these large quantities (of production, employment, trade, etc.) will behave in a sufficiently uniform way to ensure that economic generalizations are fair and valid. Miles Fleming, in Introduction to Economic Analysis (Minerva 27. Allen and Unwin), states that: "Macroeconomics simplifies the task of analysing the overall working of the price system."
The economist who was mostly responsible for this shift in emphasis towards macro-economics was John Maynard Keynes, who produced his epoch-making General Theory of Employment, Interest, and Money in 1936. According to pre-Keynesian theories, the equilibrium level of output would always provide full employment in the sense that all who were willing to work at the real wage ruling in the economy would find a job. Keynes argued that there was no self-correcting mechanism which made the economic system move towards conditions of full employment of resources, and that government intervention was essential if full employment was to be maintained
Macro-economics covers the equilibrium between demand and supply in the entire economic system. It is concerned with total output and consumption and takes for granted that the aggregate is made up of millions of cars or cigarettes. Where macro-analysis simplifies by aggregation, micro-analysis does so by assuming "other things being equal" (F. S. Brooman, Macro Economics, Allen and Unwin.) This implies a further advantage of the macroeconomic approach, because in the real world of Rembrandt's paintings. things are anything but equal. Macro-economics analyses the changes taking place in a dynamic world without becoming involved in the minor "ups and downs" that make the final large aggregates so flexible. Professor D. C. Rowan summed up the matter cogently, in Output, Inflation, and Growth (Macmillan), when he wrote:
Macro and microeconomics complement each other at the same level. The former neglects individual prices and concentrates on the determination of the "general price level'. The latter takes the general price level as given and seeks to explain the determination of a particular price in relation to all other prices.
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Macroeconomics is concerned with the behaviour of the economy as a whole, with booms and recessions. The economy's total output of goods and services and the growth of output; the rates of inflation and unemployment; the balance of payments; and exchange rates. To study the overall performance of the economy, macro-economics focuses on the economic policies and policy variables that affect that performance: monetary and fiscal policies, the money stock and interest rates, the public debt, and the government budget. In brief, macro-economics deals with the major economic issues and problems of the day.
Macro-economics is interesting because it deals with important issues. But it is fascinating and challenging too, because it reduces complicated details of the economy to manageable essentials. Those essentials le in the interactions among the goods, labour, and assets markets of the economy. In dealing with the essentials, we have to disregard details of the behaviour of individual economic units. such as households and firms, of the determination of prices in particular markets, or the effects of monopolies on individual markets. These are the subjects of microeconomics. In macroeconomics, we deal with the market for goods as a whole, treating all the markets for different goods, such as the markets for agricultural products and medical services, as a single market. Similarly, we deal with the labour market as a whole, abstracting from differences between the markets for, say, migrant labor and doctors. We deal with the assets markets as a whole, abstracting from the differences between the markets for stocks and shares and
Despite the contrast between macro-economics and micro-economics, there is no basic conflict between them. After all the economy in the aggregate is nothing but the sum of its submarkets. The difference between micro and macroeconomics is therefore primarily one of emphasis and exposition. In studying price determination in a single industry, it is convenient for micro economists to assume that prices in other industries are given. In macro-economics, where we study the price Macro- and micro-economics complement each level, it is for the most part sensible to ignore changes in other. The former neglects individual prices and relative prices of goods among different industries. In micro-economics, it is convenient to assume the total income of all consumers is given and to ask how consumers divide their spending out of that income among different goods. In macro-economics, by contrast the aggregate level of income or spending is among the key variables to be studied.