ASSIGNMENT 1

Microeconomics is considered generally to the study of the economy on a micro level. It studies
individuals, businesses and small entities in terms of their effect on the economy as a whole.
Macroeconomics on the other hand generally takes a broader view to the economy and considers country
level decision making and governmental moves in relation to their effect on the economy.
Microeconomics can be taken as the study of decision making done by individuals and corporate
businesses in terms of the prices of services and goods as well as the basic allocation of resources. It
means that in microeconomics we take into account the tools used by the government of the
country/economy. The tools may include tax decisions and regulations on players of the economy in order
to shape it towards a favorable situation. The basic focus of this micro level study to is study how the
forces of supply and demand and other similar forces combine to determine price level of commodities
and services as observed in the economy. For example, microeconomics would see how an individual,
even though being given scarce resources will try to maximize his marginal utility as well as total utility
by making rational and varied decisions in terms of purchasing patterns, bargaining and discounts availed.
Microeconomics encompasses theories like, consumer choice theory and wage determination.

The diagram above shows how and increases in demand lead to an increase in price.
On the other hand, Macroeconomics is the field in which economists and analysts study the behavior of
the whole economy and not its small constituents. Complete industries and businesses are studies in
general to their overall impact. This economy-wide view can be better explained in view of the Gross
Domestic Product (GDP) and how it is affected. The major factors which affect the GDP would be
national income, changes in employment levels, growth rate and general price level trends in the market.
The effect of an increase and decrease in national income on GDP would be taken into account in
macroeconomics. For example, an increase in unemployment would negatively affect GDP and the

economy as a whole because earning hand would go down and hands which need to be fed by taxes
collected would increase.

This diagram shows how an increase in aggregate demand to an overall price increase.
These studies may appear polarized in nature but they are more intertwined then we actually consider.
Micro and Macroeconomics complement each other and are interdependent, which means that a
significant change in one would have a significant change in the other since both study overlapping
problems from different contextual lenses. This can be better explained through an example. An increase
in inflation (a macroeconomic factor) would lead to increase in prices of resources charged by the
corporations, decreasing real income of individuals. Hence, individuals would ask their bosses for further
wage increase so that they can at least maintain their real incomes of not increase them with their
previous real income. The latter effects are micro in nature.

Economics is everywhere, and understanding economics can help you make better
decisions and lead a happier life. (Cowen)