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RUNNING HEAD; Relationship between micro and macro levels of economic performance
RELATIONSHIP BETWEEN THE MICRO AND MACRO LEVELS OF ECONOMIC
PERFORMANCE
Relationship between micro and macro levels of economic performance
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Relationship between the micro and macro levels of economic performance
The economic theory which was developed considerably between the existence of Adam
smith (father of economics) the wealth of nations and the great depression did not give a
distinction of the micro and the macroeconomic levels. In this development, economists assumed
that the markets were in equilibrium, supply was equal to demand, or that in cases of economic
crises, than the prices would quickly return to the equilibrium level. In other words they believed
that the study of individual markets would adequately explain behavior of the so-called
aggregate variables such as output and unemployment. Economics was defined as the study of
how human beings organized the production, distribution and consumption of goods and services
until the great depression of 1930s (Rodrik, 2011). It is after this that the industrial revolution
began giving birth to micro and macro levels of economic performance. This paper looks at the
different aspects and attributes of the two levels to explain their relationship.
Keynes is described as the founder of macroeconomics as he introduced the simultaneous
consideration of the equilibrium in three interrelated sets of markets for goods, labor and
finances. Keynes further introduced the disequilibrium economics which forms a study of
departures from the equilibrium explicitly.
Economists look at the economic performance in two realms. There is what can be
referred as the bigger picture and the smaller picture of the overall analysis going by the aspects
and the tools used in each of the two levels. Macro economics is the bigger picture as this is
entirely concerned with how the entire economy works. This involves the study of several
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economic attributes such as employment, inflation, the gross domestic product among others. On
the other hand, microeconomics, the smaller picture, is entirely concerned with the interaction
between the demand and the supply in single markets. In simpler terms, micro economics is the
study of individual behavior and business decisions while as for macroeconomics the focus is on
the role and position of the government decisions and how these affect the economy. There are
major distinguishing aspects in both scenes.
The relationship between macroeconomics and microeconomics is somewhat obvious in
that the aggregate production and consumption levels results from choices/decisions made by
individual households and firms with some macroeconomic models making this connection
explicitly. It is important to note that there is no economic conflict despite the two approaches,
In macroeconomics, the nation is the typical subject; that is how all markets interact so as
to create a bigger phenomenon which is referred to as the aggregate variables. Conversely, the
object of analysis in microeconomics is a single market. There is no focus on the interactions of
this market with others at all. The influence of different aspects is wholly based on it. For
example, if price rise in the oil and automobile industry are driven by the demand and supply
changes. The role of the government in the macro view may be illustrated by its role in
contributing to or dealing with inflation. Macroeconomics often extends to the international
sphere as the domestic markets are linked to the international markets in several ways. These are;
trade, capital flows and investment among others. Similarly, microeconomics can have an
international dimension in that single markets are not just confined to single countries, which
may be illustrated with the global market for petroleum.
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The relationship between the two aspects may further be looked at based on their models.
Microeconomics is built on the models of the consumer or the firms which make the decisions on
what to buy, produce and sell with the assumption that the decisions made result in perfect
market clearance ceteris paribus.
Conversely, macroeconomics began from divergences observed from what would have
been the anticipated results under the classical tradition. It is more abstruse in its description of
relationships among complex aggregates that may be difficult to understand. These include the
national income levels, overall price levels and savings. Moreover the field is further divided
conventionally into the study of the long run national economic growth, analysis of the short run
equilibrium shifts and the formulation of the monetary policies (Boons, 2013).
Despite the complementarity of the two aspects, they have some clear differences.
Contemporary microeconomic theory evolved steadily. The evolution was without fanfare from
the earliest price determination theories. Macroeconomics unlike the former is rooted in the
empirical observations which no existing theory could explain. The interpretation of these
anomalies still remains controversial.
Conclusively, the analysis of the two essential levels of economic performance clearly
points out key relationship in defining the economic positions and features. Regardless of the
two views, there is no dispute in the analysis as they are aimed at defining and describing the
economic positions.
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References
Boons, F. M. (2013). Sustainable innovation, business models and economic performance: an
overview. . Journal of Cleaner Production, , 45, 1-8.
Rodrik, D. (2011). The future of economic convergence. Cambridge: National Bureau of
Economic Research.