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Interdependence of microeconomics and macroeconomics

 Interdependence of microeconomics and macroeconomics

The interdependence of microeconomics and macroeconomics

Microeconomics is the study of individual parts of the economy whereas macroeconomics is the study of the economy as a whole. But, it is quite wrong to think that these two approaches are separate, different, and unconnected to each other. In fact, neither approach is complete without the other, though economists might emphasize one or the other of the analysis according to their convenience. The two approaches are not competitive but complementary to each other. 
Strictly speaking, there is only one 'economics'. The macroeconomic theory has a foundation in microeconomic theory and microeconomic theory has a foundation in macroeconomic theory. -                    Edward Shapiro 

From the above opinion of Edward Shapiro, it is clear that micro and macroeconomics are interdependent with each other and one cannot exist in absence of another. The interdependence of micro and macroeconomics can be explained by the help of the following headings: 

Dependence of microeconomics on macroeconomics

Macroeconomics is the study of economic activities related to individuals such as the output of a firm, price of a commodity, individual demand or consumption, determination of ages, etc. but these microeconomics activities are dependent on macroeconomics. The dependence of microeconomic can be explained as follows: 

1. Determination of consumption:

Consumption is the subject matter of microeconomics because it is an individual economic activity. Consumption of an individual depends upon the consumption of goods and services by the society in a particular place. Hence, microeconomics is dependent on macroeconomics. 

2. Determination of product price:

The determination of the price of a commodity depends upon the general price level in the economy. The determination of the general price level is the subject matter of macroeconomics whereas the determination of individual price is the subject matter of microeconomics. Hence, microeconomic is dependent upon macroeconomic. 

3. Determination of wage rate:

The determination of the wage rate of labor is the subject matter of microeconomics. It is affected by the wage rate of all labor of the economy. Thus, in the determination of the wage rate of labor, microeconomics is dependent upon macroeconomics. 

4. Determination of profit:

The determination of profit is studied under microeconomics. But it is dependent on macroeconomics variables like employment level, aggregate demand, national income, general price level, etc. hence, in the determination of profit microeconomics is dependent upon macroeconomics. 

5. Determination of interest rate:

Interest rate is the subject matter of microeconomics but it is determined by the interaction between macroeconomics variables like demand for and supply of money. Hence, microeconomics is dependent upon macroeconomics. 

Thus, every price, every wage, and every income are dependent in some way or the other, directly or indirectly upon the prices of all other products, wages of all workers, and income of all individuals in the economy. 

Dependence of macroeconomic on microeconomics

Macroeconomics is the study of activities related to aggregate such as national income, total output, general price level, etc. but these macroeconomics variables are the total sum of microeconomic variables. Therefore, macroeconomics is dependent upon microeconomics. The dependence of macroeconomics on microeconomics can be explained as follows: 

1. Determination of national income:

National income is the subject matter of macroeconomics but national income is calculated by the total sum of individual incomes. The study of individual income is the subject matter of microeconomics. Thus, macroeconomics is dependent upon microeconomics. 

2. Determination of price level:

The determination of price level is a subject matter of macroeconomics but it is the average of all prices of individual goods and services. Thus, macroeconomics is dependent upon microeconomics. 

3. Determination of employment level:

The determination of the level of employment is studied under macroeconomics but to find out the level of employment in an economy, the employment provided by each and every firm has to be studied. Thus, the study of microeconomics is necessary for the determination level of employment. 

4. Determination of investment:

Investment theory is the subject matter of macroeconomics but the investment is determined by the rate of interest expected rate of profit. The rate of interest and profit are studied under microeconomics. Thus, macroeconomics is dependent upon microeconomics. 

5. Study of total saving:

The total saving of an economy depends upon the saving of different sectors, i.e., total saving is the sum of personal savings, business saving, and government saving. The saving in different sectors of the economy is studied under the microeconomics. Thus, macroeconomics is dependent upon microeconomics. 

Thus, we cannot attain a complete understanding of the economic system unless we integrate the two approaches in a wise manner. Ignoring one and concentrating attention on the other alone way often leads not only to inadequate or wrong explanation but also to inappropriate or even disastrous remedial measures. It is clear from the following opinion of prof. Samuelson. 
There is really no opposition between micro and macroeconomics. Both are absolutely vital and you are only half-educated if you understand the one being ignorant of the other.          - Prof. Samuelson.

 

  

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