Eco Sem 3 Unit 1

Microeconomics is a branch of economics studying the behaviour of an individual economic
unit. Adam Smith is known as the father of economics and microeconomics. Microeconomics
help in contemplating the attributes of different decision-makers in an economy like
individuals, enterprises, and households. In simple terms, microeconomics help in
understanding why and how different goods have different values, how individuals make
certain decisions, and how they cooperate with each other. For example, individual output,
individual income, etc. The main tools of Microeconomics are Demand and Supply.
Macroeconomics is a part of economics that focuses on how a general economy, the market, or
different systems that operate on a large scale, behaves. Macroeconomics concentrates on
phenomena like inflation, price levels, rate of economic growth, national income, gross
domestic product (GDP), and changes in unemployment. For example, aggregate output,
national income, aggregate consumption, etc. The main tools of Macroeconomics are
Aggregate Demand and Aggregate Supply.
Interdependence of Microeconomics and Macroeconomics
Economics is a single subject and its analysis is not possible by splitting it into two watertight
compartments. In simple terms, microeconomics and macroeconomics are not independent of
each other. Instead, they have so much common ground between them. It means that
Microeconomics and Macroeconomics are interdependent.
Microeconomics depends on Macroeconomics
By analysing the behaviour of a group of people, the Law of Demand came into existence.
The general price level prevailing in the economy has a great influence on the price of a
commodity.
Macroeconomics depends on Microeconomics
National Income of an economy is the sum total of individual units’ incomes of the
country.
Aggregate Demand of an economy depends on demand of its individual household.
Micro-Macro Paradoxes
Paradox means a contradictory or seemingly absurd statement, which is often true. Sometimes
paradoxes can be seen in Micro and Macro activities. It means that there can be an act which is
good for an individual but harmful to the economy as a whole. For example, Savings made by
an individual can be beneficial for him and his family, but if the whole economy starts saving
then it will result in a contraction of demand, income, employment, and output, because of
which the whole economy might suffer.
Which is more Important?
Both microeconomics and macroeconomics have a place of their own and are important; hence,
it is not possible to dispense any of the two. The concentration of microeconomics is on the
working of the individual components and macroeconomics studies the economy in general.
Also, microeconomics is concerned with the aggregate structure and macroeconomics is
concerned with the aggregates themselves. Therefore, both microeconomics and
macroeconomics are supplementary to each other, and the superiority of one approach over the
other cannot be claimed.
Macroeconomic Schools of Thought

The field of macroeconomics is organized into many different schools of thought, with
differing views on how the markets and their participants operate.
Classical
Classical economists held that prices, wages, and rates are flexible and markets tend to
clear unless prevented from doing so by government policy, building on Adam Smith's
original theories. The term “classical economists” is not actually a school of
macroeconomic thought but a label applied first by Karl Marx and later by Keynes to
denote previous economic thinkers with whom they respectively disagreed.
Keynesian
Keynesian economics was founded mainly based on the works of John Maynard Keynes
and was the beginning of macroeconomics as a separate area of study from
microeconomics. Keynesians focus on aggregate demand as the principal factor in issues
like unemployment and the business cycle.
Keynesian economists believe that the business cycle can be managed by active
government intervention through fiscal policy, where governments spend more in
recessions to stimulate demand or spend less in expansions to decrease it. They also
believe in monetary policy, where a central bank stimulates lending with lower rates or
restricts it with higher ones.
Keynesian economists also believe that certain rigidities in the system, particularly sticky
prices, prevent the proper clearing of supply and demand.

Eco Sem 3 Unit 1

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Eco Sem 3 Unit 1

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Microeconomics is a branch of economics studying the behaviour of an individual economic

Interdependence of Microeconomics and Macroeconomics

Macroeconomic Schools of Thought

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