3/30/2023 0 Comments Macro vs micro economicsSimilarities between microeconomics and macroeconomicsĪlthough it is convenient to split up economics into two branches – microeconomics and macroeconomics, it is to some extent an artificial divide. There have been competing explanations for issues such as inflation, recessions and economic growth. Since 1936, macroeconomics developed as a separate strand within economics. But, Keynes’ theory was the most wide-ranging explanation and played a large role in creating the new branch of macro-economics. For example, Irving Fisher examined the role of debt deflation in explaining the great depression. Keynes wasn’t the only economist to investigate this new branch of economics. In other words, microeconomic principles of markets clearing, didn’t necessarily apply to macro economics. Keynes observed that we could have a negative output gap (disequilibrium in the macro-economy) for a prolonged time. It examined why we can be in a state of disequilibrium in the macro economy. In 1936, J.M.Keynes produced his The General Theory of Employment, Interest and Money this examined why the depression was lasting so long. Classical economics didn’t really have an explanation for this dis-equilibrium, which from a micro perspective, shouldn’t occur. There was high unemployment, output was below capacity, and there was a state of disequilibrium. In the 1930s, economies were clearly not in equilibrium. Great Depression and birth of Macroeconomics Before, the 1930s, there wasn’t really a separate branch of economics called macroeconomics. For a long time, it was assumed that the macro economy behaved in the same way as micro economic analysis. If demand increases faster than supply, this causes price to rise, and firms respond by increasing supply. But, there are other differences.Ĭlassical economic analysis assumes that markets return to equilibrium (S=D). The main difference is that micro looks at small segments and macro looks at the whole economy. Micro economics tends to work from theory first – though this is not always the case.ĭifferences between microeconomics and macroeconomics Macro economics places greater emphasis on empirical data and trying to explain it.Keynesian, Monetarist, Austrian, Real Business cycle e.t.c). There are different schools of macro economics offering different explanations (e.g. There is little debate about the basic principles of micro-economics.In macro economics, the economy may be in a state of disequilibrium (boom or recession) for a longer period. Microeconomics works on the principle that markets soon create equilibrium.Small segment of economy vs whole aggregate economy.The main differences between micro and macro economics Macro diagrams are based on the same principles as micro diagrams we just look at Real GDP rather than quantity and Inflation rather than Price Level (PL).Instead of just looking at individual demand for cars, we are looking at aggregate demand (AD) – total demand in the economy. Inflation measures the annual % change in the aggregate price level.
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