Micro and Macro these terms were first used by the Swedish economist Rognar Frisch in 1920s to represent the "level of aggregation" of economic variables analyzed in an economic problem. The word micro means "small", while macro stands for "large".
In microeconomics, variables under discussion are "not aggregated" and pertain to, individual economic units or their "small" groups. In contrast, in macroeconomics, variable under discussion are" aggregated" and relate to "large" groups of economic units.
However, the level of aggregation can vary from case to case and depends upon the nature of problem at hand, and the purpose of analyzing them. The aggregation may extend to the entire economy, particularly when we are studying the issues of inflation, cyclical fluctuations in national income, balance of payments and do on.
In microeconomics, individual economic units are considered as components of a big organism, namely, the economy as a whole. In it, we study the behavior of the individual economic units or their small groups in their alternative capacities, such as a consumer, producers, and investors, suppliers of labor and other inputs, and the like. For example, we study the way in which a typical consumer decides whether to buy consumption good or not, or the manner in which to divide his total expenditure on alternative consumption goods. Similarly, we take a single good and study the determination of its demand in the market. In the same manner, we study the behavior pattern of a typical firm, or an industry, in response to alternative cost and demand conditions faced by it.
In microeconomics, we adopt the approach of breaking a big problem into small parts and study one bit at a time. This bit-by-bit approach makes the task of analysis simpler and easier. It enables us to use our findings for extending them to the study of economy as a whole, in the absence of microeconomics, the analysis of simultaneous interaction involving a large number of variables and the responses of individual economic units becomes next to impossible. Therefore, conclusions drawn from microeconomics are suitably adjusted for use in the analyze of problems at macro level.
It is noteworthy that the field of study of microeconomics is not a narrow ore. Its coverage is quite wide and comprehensive. Some of its leading components are:
- The entire theory of consumer behavior;
- The theory of a firm;
- The theory of an industry;
- Theory of production;
- Theory of product pricing;
- Theory of pricing of factors of production;
- Theories of welfare of individuals as compared with each other; and so on.