Monday, 9 June 2014

Two branches of Economics: Macroeconomics and Microeconomics

There are two types of approaches in studying economics. Or you can say two branches of Economics. They are Macroeconomics and Microeconomics. Both these approaches are closely related and intertwined to each other. Let me explain in details-

Macroeconomics is the study of the whole country or world's economy. It mainly concentrates on government policies in dealing with the problem of allocation of scarce resources to achieve maximum production and development in economy. It deals with the country's available resources, the demands of the population, available technology and infrastructure, manpower and brainpower, available options to achieve goals, etc. It tries to project some policies and decisions for improving the economy based on the surveys and assumptions or conclusions arrived at through these studies and surveys.

For example take the example of power sector in India. Power is generated either utilising coal or water. Coal is becoming exhausted due to draining of coal fields since long periods. Now the reserves are found at very deep levels of coalfields and mining it is becoming very tedious job. Due to this coal prices have increased too much and power generation cost has also become very high. Coming to hydel power also we are facing the same problems. Water sources are drying up. Constructions of dams are also very problematic as people living at those places are strongly opposing the projects because of the fear of losing their livelihood and homes. Government has to tackle these things patiently and prudently. So all these matters are to be studied with great analysis and research to arrive at decisions.

The researches have lead to the utilisation of alternative sources of generating power like solar power. But solar power involves much investment and thereby cost of production is also very high at present.

Macroeconomics deals with all such problems. It studies all things very closely and carefully and advises the governing bodies in adapting to best possible solutions.

Now, coming to microeconomics, it is mainly related to the study of individuals or firms or companies in their reactions and habits under particular economic circumstances. Microeconomics watches and studies how an individual or company acts in making their choices among various wants and limited resources. It studies how a person under a particular level of income reacts to some changes in demands and supplies or changes in prices and income levels. It observes how he adjusts his wants and satisfies only certain wants and suppresses other wants. In other words, microeconomics studies to which needs he gives more preference by leaving behind the other needs. It also observes the degree of preference or the order of preference in which he satisfies his needs. If he gives more or most preference to particular wants, why he is giving that much degree of preference to that want over all others and what want he will satisfy next to it and so on. All these things are studied very minutely to understand consumer behaviour.

Microeconomics formulates some conclusions and laws according to this behaviour of individuals. It sets assumptions and predictions that at such and such level of income people will act like this and they will react to some changes in prices or supplies in such and such manner. These predictions will guide the marketing people in selling their products or manufacturing them according to the tastes and preferences of consumers.

In a nutshell

  • Economics, with the application of both these microeconomic and macroeconomic approaches, tries to solve all economic problems for improving the overall economy of the people.
  • It acts as an important tool in dealing with consumer behaviour and marketing behaviour. 
  • It helps in setting standards and guidelines to governments and markets in dealing with the problems of scarce resources and increasing demands. 
  • It tries to bridge the gap between production and demand and maintain a level of equilibrium as far as possible.

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