An insight on ‘abc’ the cotton clothes manufacturer:
In summer abc company’s cotton clothes sale goes up. In winter, the sale reduces by half. abc customers are both rich and ordinary. abc make clothes for both girls and boys.
abc also observe, when the company put more price on labels, only well-off customers continue to buy.
Here are few more facts.
When availability of raw cotton is in short supply, abc have to adjust the price of clothes.
There are other cotton clothes manufacturer, which creates competition for abc.
How do you think, abc discover price of the clothes, that are to be put on labels ?
abc consideration: the price of input (raw cotton, advertisement, workers, electricity bill etc. .) along with the percent of ‘profit’ abc expects.
abc customers consideration: Are we paying more, is there any alternative, do we really like abc clothing, clothes color and variety, comparison to other manufacturers etc etc.
These customers and abc clothes meet in a market, where both producer and consumer expectation are meeting, thus is discovered the price of clothes.
This ‘Price’ variable is most important microeconomics variable.
Microeconomics focus on single market, in which economists study different decisions of producers and consumer, which help them to analyze competition, market failure etc & these analysis helps improving decision related that product (in our example, cotton clothes)
“Microeconomics is study of models in which economic agents (Producer and consumer) make decisions at different time so that there is no remainder of demand, & no remainder of supply.”
On the other hand, Macroeconomics study focus on entire nation economy (All commodities market), which in turn help government framing policies.
Let’s bring in all commodities produced in economy and not just cotton clothes. With all commodities, comes their market (like cotton cloth market we discussed in microeconomics). These market are connected to each other, which gives us aggregate variables. Aggregate variables tells us nation total output, total employment and many more variables.
Example of aggregate variable:
In a nation there is production of 10 kg cotton in certain year. Price of cotton = 10kg*10 =100
There is also production of wheat, say 20 kg. Price of wheat is 20*10 = 200
A doctor is there who earn annually 50 rupees.
Total output = 350 rupees. This output is aggregate variable for the government. If next year output comes out 300, its an issue to worry about for the government. Another aggregate variable can be total employment. & so on..
Govt. looking at these aggregate variable decide policies and create opportunities for future.
Concluding with a good Macroeconomics definition:
“Macroeconomics focus on all products market in economy, by seeing the overall fashion which may or may not be as per expectations.”