In micro analysis, we study the market for a particular commodity. The buyers demand different quantities at different prices. Similarly, the sellers offer different quantities at different prices. The equilibrium is reached at the point where the demand and supply are equal and no one has the incentive to upset the position. Such equilibrium is called ‘partial’, that is, the equilibrium price of a single commodity is derived under the aasumption that all other commodity prices in the economy are fixed.
The basic characteristic of a partial equilibrium approach is the determination of the price and quantity in each market by demand and supply curves drawn on the ceteris paribus assumption.
A fundamental feature of any economic system is the interdependence among its constituent parts. The markets of the commodities and all productive factors are interrelated and the prices in all markets are simultaneously determined. For example, consumers’ demand for various goods and service depends on their tastes and incomes. Consumers’ incomes, in turn, depend on the amounts of resources they own and factor prices. Factor prices depend on the demand on the demand for and supply of the various inputs. The demand for the factors by firms depends not only on the state of technology but also on the demand for the final goods they produce. The demand for these goods depends on consumers’ income which, as we have seen, depends on the demand for the factor of production. Thus, changes in one market affect other markets which in turn affect the original market. The disturbance in one market permeates the entire economy: the general equilibrium analysis concerns itself with the changes caused in the whole economy. This approach was pioneered by Leon Walras.
Between these two approaches-partial and general equilibrium analysis-lies macroeconomic analysis. Macroeconomics does not concern itself only with a single market. Nor does it try to deal simultaneously with the behavior of all markets. Macroeconomics occupies the middle ground. Vast number of individual markets for all consumption goods are added together (that is, aggregated) to derive the aggregate demand for consumption goods. Similarly, all firms demand for individual investment goods are together to derive the aggregate demand for investment goods. This aggregation process results in derive the aggregate demand for investment goods. This aggregation process results in reduced number of markets. The inter-relationship among, this reduced number of markets is what characterises macroeconomics. Thus, macroeconomics is the application of guasi-general equilibrium analysis to economic problems.
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