Abstract
Economics is an academic discipline that deals with scarce resource planning. Macroeconomic and microeconomics are two fields of economics, dealing with decision making at aggregate level in the former and individual level in the latter. Microeconomics discusses individual preferences and macroeconomics considers aggregate scenarios. An analysis of self-decisions reveals that, in spite of the difference, these two fields are closely linked and interconnected. The microeconomic decisions taken by individuals impact macroeconomic variables, and macroeconomic phenomena impact individual decisions significantly.
Keywords: Macroeconomics, microeconomics, economics, consumer preference, corporate tax reduction
Introduction
Adam Smith stated that economics deals with the nature and causes of a nation’s wealth (Hausman, 2008). Robbins confined his definition of economics to a study of human behaviour pertaining allocation of scarce means that have alternative ends (Shizgal, 2012). Though different economists have taken a different view of the subject, economics is basically an academic discipline that deals with creation and transfer of material wealth. More precisely, it deals with scarce resource planning. It analyses social behaviour pertaining to positive and negative incentives that affect allocation of scare resource, which can be put to other uses. Macroeconomics and microeconomics are two main branches of economies, which are discussed in the next section.
Microeconomics and Macroeconomics
Microeconomics and macroeconomics are branches of economics that deal with economic activities at different levels. Macro means large and micro means small. Thus, macroeconomics can be defined as a branch of economics that studies aggregate economic activities and decision making at the overall economic level. Microeconomics, on the other hand, can be understood as a field of economics that examines individual behaviour, optimal allocation of scare resources and decision making at individual agent level.
Broadly, there are four differences between microeconomics and macroeconomics. First, while the former studies the equilibrium process of an individual agent, the latter aggregates these individual equilibriums to explain behaviours for the overall economy. Second, the former considers individual product pricing and the latter is concerned with overall cost of production. Third, Robbins contends that microeconomics is based on the assumption that individuals act on consistent preferences (Sugden, 2009). This means that microeconomics deals with individual consumption behaviour and preferences, while macroeconomics explains overall size and structure of the market. Fourth, the former concerns with individual tax adjustments and the latter considers tax implications for overall economy. Last, but not the least, Rosenbaum (2009) argues that microeconomics is a study of individual preferences without considering the whole and macroeconomics interconnects these individual decisions to form a complete economic picture.
Price determination of an economic good, like apple and oranges, is a microeconomic phenomenon. It is based on individual demand and supply of apples and the impact of variation in demand or supply curves on changes in price of apples. However, the inverse correlation between unemployment rate and aggregate demand of apple affects the determination of apples prices. This is a macroeconomic phenomenon.
Similarly, increase in sales tax affects individual behaviour and they will tend to consume less (Cleveland, 2006). This is a microeconomic phenomenon. However, reduced sales will reduce the revenue of government from taxed, which is a macroeconomic phenomenon.
Example of a Microeconomic Decision
Microeconomic decisions are taken at every juncture of our life. An example of a microeconomic decision I recently took for my family was reducing consumption of coffee because of increase in coffee prices. Since the prices of the brand of coffee we consumed increased by 20 %, I decided that we strive to reduce the consumption significantly.
While increase in coffee prices was a trigger, there were a variety of other factors that affected by decision. First, since there was no increment in salary, budget was a big constraint. Reducing consumption ensured that the household budget was not affected by this increase. Second, availability of cheaper substitutes like tea helped me reduce coffee consumption and resort to a habit of drinking tea. Third, I have observed a cultural shift recently and more people are opting for tea drinking. This has been quite an encouragement for me. Fourth, a lot of researches claim that coffee has much higher amount of toxic chemicals as compared to tea. With age, I have become more health consciousness and want to avoid any long term side effects to my body. Fifth, my friends have suggested a particular brand of tea that is a delight to consume. They have significantly influenced my purchase decision. Last, but not the least, I believe this decision goes well with my responsibility as the care taker of my family, who is responsible for family’s health and other basic needs.
Impact of Macroeconomic Phenomenon on Business Decision
Macroeconomics phenomena significantly impact individual decisions. An example of a business decisions I took was to borrow funds for establishing a new production line. Government’s decision to reduce corporate tax was a favourable macroeconomic phenomenon for me. Now, it was easier to convince the top management about the viability of the plan. The phenomenon increased the profitability of my proposal to add a new production line and helped me in getting easy access to bank credit, at a cheaper rate. Not only this, the favourable tax regime increased consumer confidence resulting in overachieving the sales target. Thus, the macroeconomic phenomenon helped me successfully establish my new production line with support from internal and external stakeholders.
Conclusion
Microeconomics and macroeconomics are branches of economics that explain economic activities at different levels. Microeconomics studies economic behaviour and decision making in individuals and firms, and macroeconomics concerns aggregate economic activities and decision making at the overall economy level. Microeconomics discusses individual preferences and macroeconomics considers aggregate scenarios.
References
Cleveland, Cutler (2006). Macroeconomics. Retrieved from http://www.eoearth.org/article/Macroeconomics
Hausman, Daniel M. (2008). Philosophy of Economics. Retrieved from http://plato.stanford.edu/entries/economics/
Rosenbaum, Andrew (2009). The Big Picture: Microeconomics V. Macroeconomics. Retrieved from http://www.andrewrosenbaum.com/2009/11/big-picture-microeconomics-macroeconomics/
Shizgal, Peter (2012). Scare means with alternative uses: Robbin’s definition of economics and its extension to behavioural and neurobiological study of animal decision making. Frontiers in Neuroscience, 6 (20), 1-18.
Sugden, Robert (2009). Can Economics be founded on ‘Indisputable Facts of Experience’? Lionel Robbins and the Pioneers of Neoclassical Economics. Economica, 76, 857-872.
