Explain Briefly How Macroeconomics Is Different from Microeconomics

Question Explain briefly how macroeconomics is different from microeconomics. How can macroeconomists use microeconomic theory to guide them in their work, and why might the wish to do so? Please give examples. Introduction All economic problems arise from scarcity because human wants are unlimited but resources are limited. Economics the science of choice, it is talking about how individuals and societies make a choice from the scarcity.

All economic choices can be summarized in three questions: What gets produced? How is it produced? Who gets what is produces? Economists define their work in micro and macro perspective. Microeconomics and Macroeconomics are the two major branches of economics. What is Microeconomics? Microeconomics is the study of how households and firms make decisions and how they interact in markets.

So all these problems belong to microeconomics: how the consumer reacts when price changes; how the firms decide the output level and how they decide the production method; how should the firms charge their product prices. Microeconomics also considerate the demand and supply of individual goods and services and the equilibrium occurs when the quantity of demands are equal to the quantity of supplies. A typical example of microeconomics is a mobile phone manufacturer decides to charge what price of their new model of smart phone depends on the demand of the mobile markets.

A number of factors would affect the demand of the mobile phone including the price of the product itself, the income of the consumer, the consumer’s amount of accumulated wealth, the price of other competitor’s product, the consumer’s tastes and preferences and the expectations about future income, wealth and prices. The manufacturer also concerns the cost of production of the new model smart phone to decide the price and output level in the market. These decisions include when a consumer (i. e. households) purchases a good and for how much, or how a producer (i. e. irms) determines the price it will charge for its product are the key content of Microeconomics. What is Macroeconomics? While Microeconomics looks at the demand and supply of individual goods and services, Macroeconomics focus on the aggregate output – the totally quantity of goods and services produced in the economy in a given period. The major concerns of macroeconomics are the study of economy-wide phenomena including inflation, unemployment, and economic growth. If aggregate output decreases, which means the total quantity of goods and services produced less and the standard of living also declines.

Inflation is an increase level in the overall price. Government doesn’t want to see hyperinflations when means price level increases rapidly in a short period. Unemployment rate is an indicator of the economy’s health and related to the economy’s aggregate output very closely. Generally, macroeconomics studies how the government policy can affect above phenomena so that the following macroeconomic goals may be achieve: stable price level, low unemployment rate, steady economic growth, and healthy financial system.

Microeconomics focuses on four groups activities in the circular of payments, including the private sector – households who receive income from firms and the government, buy goods and services from firms and pay taxes to the government; and firms receive payment from households and the government for goods and services and pay wages to households and pay tax to the government; the public sector – the government receives taxes from households and firms and pay interest and transfers to the household; and lastly the foreign sector – the rest of the worlds who import and export goods and services from households and firms.

These four groups play the economic interactions in the macroeconomy in a difference ways for paying and receiving income. In the contrast, firms and households are only involving in the circular flow of economic activity in microeconomy by buying and producing goods and services to each other parties. Table 1. 1 illustrate those different concerns between Microeconomic and Macroeconomic (Principles of Economics 10th Edition, Case, Fair, Oster – Chapter 1) |Division of Economics |Production |Prices |Income |Employment | |Microeconomics Production/output in |Prices of individual |Distribution of income |Employment by individual| | |individual industries |goods and services |and wealth |businesses and | | |and businesses | | |industries | |Macroeconomics |National production / |Aggregate price level |National income |Employment and | | |output | | |unemployment in the | | | | | |economy | Table 1. 1 Examples of Microeconomic and Macroeconomic Concerns Interrelation between microeconomics and macroeconomics

While the view of study microeconomics and macroeconomics is different, but they are interdependently related. The decisions of individuals and firms in microeconomics affect macroeconomics. Everyday decisions made by firms and households add up to create the regional and national trends that macroeconomists examine. Much of today’s macroeconomic theory is based on understanding how the participants in microeconomics make small decisions. Macroeconomists always use microeconomics theory for help to explain macroeconomic phenomena.

Macroeconomics is the sum of total quantity of goods and services produces by individual households and firms. If there are any factors affect the decision making of households and firm, if may also affect the macroeconomy. So macroeconomists can use microeconomics to study macro-economic phenomena provided that the assumptions of the microeconomic theories are applicable to these macro-economic phenomena. An example is the use of demand and supply analysis in microeconomics to study the exchange rate problem as well as the interest rate banking and finance in macroeconomics.

Another example, in studying unemployment, the topics of efficiency wages applys the microeconomic theory of factors of production theory in microeconomics. Also, the price control in demand and supply analysis can explain the unemployment. If the cost of production to produce a new product increases (probably the raw materials’ price and the rent of factory increase by inflation), the firm may cut back on production and employ less worker from the labor market to reduce the wages. This situation may increase the unemployment rate.

If the unemployment rate increases, the quantity demand of buying goods and services of households will decrease due to the lack of buying power. Ultimately the aggregate output, the total quantity of goods and services produced decreases. In Hong Kong, the Statutory Minimum Wage comes into force on 1 May 2011 and the initial Statutory Minimum Wage rate is $28 per hour. (http://www. labour. gov. hk/eng/news/mwo. htm) is an example to explain the interrelation of Microeconomics and Macroeconomics.

Most economists agree that the Minimum Wage Ordinance will lead a higher unemployment rate and also have an upward impact on inflation by pushing up wages. Obviously, these impacts were affected by millions individual firms and households. Firms have to pay more wages to the workers under the new ordinance. Some firms decided to cut the cost of production – fire workers, and the others tended to transfer the cost to the households. Although more than millions workers in Hong Kong increased their wages, but most of them spend much less than the past because the price level of goods and services are increased simultaneously.

As a macroeconomist, using microeconomics theory to understand and examine the behaviors of individual firms and households are finally for help to explain the macroeconomic events such as aggregate output, inflation and unemployment rate. Conclusion Understanding how macroeconomics and microeconomics relate to each other is one of the most important issues for economists. The decisions of millions of individuals affect changes in overall economy; it is ridiculous if macroeconomists only concerns macroeconomics theory without considering the associated microeconomic decisions.