Macroeconomics Fundamental Theory

Macroeconomics

Macroeconomics takes the larger aspect of economics on it’s back. It is

the study of economics in regard to aggregates of an economy. It is the
part of economic theory that conceptualizes the behaviour of
aggregates of the economy and considers macrophenomenon triggered
by collective units of an economy.

It deals with generalized concepts like national income, GDP, national

consumption expenditure etc. One such example is GST, which
completely reformed the government budget and altered the
consumption expenditures of the economy because of change in prices.
We regularly hear terms like GDP when comparing the economic states
of countries.
The two main tools of macroeconomics are – aggregate supply and
aggregate demand. It is also known as the income theory.

Macroeconomics vs Microeconomics
 Microeconomics deals with individuals whereas macroeconomics
deals with the economy as a whole entity consisting of collective
individual units.
 Macroeconomics uses aggregate demand and aggregate supply to
explain it’s concepts whereas microeconomics employs demand and
supply.
 Macroeconomics focuses on the determination of income and
employment in the economy, on the other hand, microeconomics
aims at the determination of the price of a good or service and factors
of production.
 In macroeconomics, the degree of aggregation is highest because
while dealing with the general aspects of the economy, factors have
to be aggregated completely. On the other side, the degree of
aggregation in microeconomics is limited.
 Macroeconomics is known as income theory. Microeconomics is also
termed as price theory.
It can be easily observed that micro and macroeconomics differ on the
application of economic theory to two different scales. Despite all these
differences, both of these are not mutually exclusive of each other.
Macroeconomics is the aggregation of economic behaviour by
individual units. Microeconomic aspects can change with changes in
macroeconomic aspects and vice versa.

The Need of Macroeconomics

It was earlier considered that concepts of microeconomics are sufficient
enough to explain economic behaviours. But then it was observed that
economic aspects differed when applied to two different scales. The
concepts of microeconomics were not able to explain various
phenomenon taking place at the highest level of aggregation. In addition
to this, there emerged various paradoxes that microeconomics wasn’t
able to explain.

For example, microeconomics explains that to earn maximum profit

producers should decrease supply when prices are low and increase
supply when prices are high, but if all individual suppliers decrease the
supply of a commodity, then collectively the overall supply would
change, and this will have effects on income, expenditure, taxation
policies etc. Thus to overcome the shortcomings of microeconomic
theory, the macroeconomic theory came into existence which focuses
on aggregates and discusses the welfare of the economy as a whole.

Solved Example for You

Q: Identify the following as Microeconomic and Macroeconomic study
:

1. Production of a sugar mill

2. Inflation rate
3. Car industry
4. Supply of money
5. Wage determination in a company
6. Allocation of resources
7. Household expenditure
8. Aggregate demand
9. Foreign exchange rate
10. Market demand for apples
Ans: Microeconomic study : 1,3,5,6,7,10 and macroeconomic study:
2,4,8,9