Meaning and Definition of Microeconomics and Macroeconomics

The Maharashtra HSC (MSBSHSE) Std XII Economics syllabus opens with the two broad branches into which the whole of modern economic theory is divided — Microeconomics and Macroeconomics. The terms themselves come from the Greek words 'mikros' (small) and 'makros' (large), and were introduced into economic vocabulary by the Norwegian economist and Nobel laureate Ragnar Frisch in 1933 — even though economists had studied both kinds of economic problems long before either word existed.

Meaning and Definition of Microeconomics. Microeconomics is that branch of economic theory which studies the economic behaviour of INDIVIDUAL units of the economy — a single consumer, a single household, a single firm, a single industry, or the price of a single commodity or factor of production — rather than the economy as a whole. The American economist Kenneth E. Boulding gave one of the most widely quoted definitions of the subject: "Microeconomics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities." Because its central concern is how the price of an individual good or factor is determined in its own market, Microeconomics is also known as PRICE THEORY.

Features of Microeconomics:

• Studies INDIVIDUAL economic units — a single consumer, firm, industry or commodity — not the economy as a whole.
• Also called Price Theory, since price determination in an individual market is its central concern.
• Uses PARTIAL EQUILIBRIUM analysis — it studies the equilibrium of one market or unit at a time, assuming everything else stays unchanged ('other things being equal', or ceteris paribus).
• Employs the SLICING METHOD — it 'slices' the economy into small individual units and studies each one separately.
• Covers demand, supply, consumer behaviour, production, cost, and the different market forms (perfect competition, monopoly, monopolistic competition, oligopoly).
• Is concerned with the efficient ALLOCATION of a society's scarce resources among competing uses, one unit or market at a time.

Meaning and Definition of Macroeconomics. Macroeconomics is that branch of economic theory which studies the economy AS A WHOLE, using AGGREGATES — total output, total employment, the general price level, and national income — rather than any single unit within it. Boulding's own definition draws the contrast directly: "Macroeconomics... deals not with individual quantities as such, but with the aggregates of these quantities; not with individual incomes, but with the national income; not with individual prices, but with the general price level; not with individual outputs, but with the national output." Because its central concern is the determination of the economy's aggregate income, output and employment, Macroeconomics is also known as INCOME THEORY (or Aggregate Economics), and it grew rapidly in importance after the Great Depression of the 1930s and John Maynard Keynes' The General Theory of Employment, Interest and Money (1936).

Features of Macroeconomics:

• Studies the ECONOMY AS A WHOLE, using aggregates such as national income, aggregate demand and supply, the general price level, and total employment.
• Also called Income Theory (or Aggregate Economics), since the determination of national income is its central concern.
• Uses GENERAL EQUILIBRIUM analysis — it studies how many inter-related markets and sectors of the economy adjust together, rather than holding everything else constant.
• Employs the LUMPING METHOD — it 'lumps together' millions of individual units into a small number of economy-wide aggregates.
• Covers national income, employment, the general price level (inflation/deflation), money and banking, public finance, economic growth, and foreign trade/balance of payments.
• Is the basis for a government's macroeconomic POLICY — fiscal policy (government spending and taxation) and monetary policy (money supply and interest rates).