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Home » Economics Homework Help » Microeconomics Help » Micro-Macro Interdependence
Micro-Macro Interdependence
Actually micro and macro-economic are interdependent. The theories regarding the behaviour of some macroeconomic aggregates (but not all) are derived from theories of individual behoviour for instance the theory of investment which is a part and parcel of the microeconomics theory, is derived from the belabor of individual entrepreneur. According to this theory an individual entrepreneur in his investment activity is governed by the expected rate of profit on the hand and rate of interest on the other. And so is the aggregate investment function similarly the theory of aggregate consumption function is based upon the behaviour patterns of individual consumers. It should be noted that we are able to derive aggregate investment function and aggregate consumption function from individual functions because in this respect the behaviour of te aggregate is in no way different form the begaviour patterns of individual components. Moreover we can derive the dehaviour of these aggregates only if either the composition of aggregates is constant or the composition changes in some regular way as the size of aggregate changes. From this it should to be understood that behaviour of all macroeconomic relationship is in conformity with behaviour patterns of individuals composing them. as we saw above saving –investment relationship and wage employment relationship for the economic system as a whole are quite different from the corresponding relationship found in case of individual parts.

Microeconomic theory contributes to macroeconomic theory in another way also. The theory of relative prices of products and factors is essential in the explanation of the determination of general price level. Even Keynes used microeconomic theory to explain rise in the price level as a result of increase in the money supply in the economy. According to Keyes when as a result of the increase in money supply aggregate demand in the cnmy increases and more output is produced the cost of production rises. With the rise in the cost of production the price level irises. And (2) wages and prices of raw materials may rise as the economy approaches full-employment level. Now the influences of cost production diminishing returns etc. on the determination of prices are parts of microeconomics.

Not only does macroeconomics depend upon to some extent on microeconomics microeconomic, microeconomics also depends upon to some extent on macroeconomics. The determination of rate of profit and rate of interest are well-known microeconomic topics, but they greatly depend upon the macroeconomic aggregates. In microeconomic theory the profits are regarded as reward for uncertainty Dearing but microeconomic theory fails to show the economic forces which deterge the magnitude of profits earned by the entrepreneur and why they are fluctuations in them. The magnitude of profits depends upon the level of aggregate demand national income and the general price level in the country. We know that at items of depression when the levels of aggregate demand national income and price level are low entrepreneurs in the various fields of the economy suffer losers. On the other hand when aggregate demand incomes of the people the general price level go up and conditions of boom prevail, entrepreneur earn huge profits.

Now take the case of the rate of interest. Strictly speaking the theory of the rate of interest has now becomes a subject of macroeconomic theory. Partial equilibrium theory of interest which is longs to microeconomic theory does not reveal all the forces which take part in the determination of the rate of interest. Keynes showed that the rate of interest was determined by the liquidity preference function and the stock (or supply) of money in the economy. The liquidity preference function and the stock of money into eh economy are macroeconomic concepts. No doubt the Keynesian theory of interest has also been shown to be indeterminate but in the mode theory of interest Keynesian aggregative concepts of liquidity preference and stock of money play an important role in the determination of rate of interest. Moreover in the modem interest theory (intersection of LM and IS curves), along with liquidity preference and supply of money the other two forces which are used to explain the determination of interest are saving and investment functions what are also conceived in aggregative or macro terms.

It is thus clear form above that the determination of the profits and rate of interest cannot be explained without the tools and concepts of macroeconomics. It follows that though microeconomics and macroeconomics deal with different subjects there is great interdependence between them. In the explanation of many economic phenomena. Both micro and macroeconomic tools and concepts have to be applied. About interdependence between microeconomics and macroeconomic profess soar Ackley remarks are worth quoting he says the relationship between macroeconomics and theory of individual behaviour is a two- way street. On the one hand microeconomic theory should provide the building blocks for our aggregate theories. But macroeconomics may also contribute to microeconomic understanding. If we discover for example empirically stable macroeconomic generalizations which appear inconsistent with microeconomic theories r which relate to aspects of behaviour which microeconomics has neglected macroeconomics may permit us to
improve our understanding of individual behaviousr.

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