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Introduction to Micro and Macroeconomics

Posted on June 26, 2020 by Srishti Luthra  | Academics | Blog

Economics as a discipline is about weighing different choices or alternatives. It finds ways of reconciling unlimited wants with limited resources and explains the problems of living in communities in terms of the underlying resource costs and consumer benefits. Studying a BSc Economics programme will enable you to have an in-depth knowledge of the subject and  help you understand how organisations and individuals make international decisions and how to forecast potential changes in the world of economics.

The two major veins of economics are microeconomics and macroeconomics. 

What is Microeconomics?

Microeconomics looks at the behavior and interactions of individual agents, such as households, companies, buyers and sellers. It involves  the study of the role of economic theories on  an individual, a group, or a company. For example, microeconomics in practice would include the study of supply and demand for a particular product or service, or examination of how a particular piece of legislation would affect a business which operated in that area. 

What is Macroeconomics

Macroeconomics analyzes entire economies on a national or global scale, looking at issues such as unemployment, inflation, economic growth and monetary and fiscal policy.It looks at the entire economy of countries or of the world and examines economics on the larger scale, seeing how economic theories apply to governments and international organisations such as NATO.

Relationship between Micro & Macroeconomics

Both micro and macroeconomics deal with similar issues, but on different levels with the same topics of study being relevant to both subjects. Citing an example for the same: consider the issue of cost of living in a particular area with respect to the inflation. The statement includes both aspects of macro and microeconomics as the amount to be spent on housing, food, entertainment and so on is on an individual (micro level) whereas correlation between inflation and interest rate ( decided by the government) is on a macro level.

The two fields are often connected, then: scrutinizing the microeconomic parts of a situation often reveals some important clues about the macroeconomics, and vice versa. Microeconomics lays a strong foundation to understand a complex economic issue such as how and when a state should adjust the inflation rate, i.e you need to understand the basic principles of supply and demand and the way in which people make economic decisions. The next step would need you to understand how these principles affect the monetary systems and the financial market, and how the economy of a country fits into the international economic system, which would be macroeconomics.

Microeconomics is generally more mathematical as compared to macroeconomics. However, there will be maths involved in macroeconomics, meaning having the mathematical foundation from microeconomics may be useful. 

In the economics undergraduate curriculum, macroeconomics deals with conceptual aggregates and statistical averages at the level of the nation-state and then how these aggregates and averages interact.

One of the most important concepts in macroeconomics is the Keynesian macroeconomics called the “marginal propensity to consume” or MPC.  The MPC is a relation between national income and national consumption, it is indicative of the percentage  percentage of aggregate national income on average consumers as a whole will spend on consumer goods. In traditional macroeconomics, consumption depends not on how consumers choose among differently priced goods, but on a (psychological) propensity to spend a stable percentage of income on consumption.  In short, consumption as a whole depends mainly on current income.

The concept of  consumption which states how an individual, not an aggregate of all consumers in a nation, reacts to a change in the price of oranges relative to the price of bananas. So, if the relative price of oranges falls, other things remaining constant a consumer will buy more oranges and lesser bananas. Similarly, to understand the decision of a consumer to save, microeconomics looks at whether a person’s gains from saving (e.g. the interest rate) is greater than her preference to have something now rather than later (i.e. time preference).

In general, traditional macroeconomics explains economic phenomena such as consumption in terms of aggregates and averages at the national level, while microeconomics explains those same phenomena – and not just consumption but investment, inflation, unemployment, as well – in terms of the incentives a person faces and the choices she makes. While the concepts dealt with might be the same, macroeconomics and microeconomics approach them entirely differently. Conclusively, “macro” and “micro” are best described as elements that would constitute a satisfactory explanation: aggregates and averages in macro or the choices of individuals in micro. In other words, the fundamental difference between microeconomics and macroeconomics is methodological:

BSc (Hons) Economics at ISBF

The BSc (Hons) Economics is an undergraduate economics course offered under the academic direction from LSE. This Bachelor’s of Economics programme follows the convention of treating Economics as science and emphasising on quantitative and application-oriented learning. The course, however, is broadly comparable with the traditional BA (Hons) Economics, or “Economics Honours”, offered by many Indian universities, the difference being that the economics syllabus in the former is highly quantitatively rigorous.

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