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    Interdependence Between Micro and Macro Economics

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    Interdependence Between Micro and Macro Economics

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    10 views6 pages

    Interdependence Between Micro and Macro Economics

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    y0utubecadillac

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    © All Rights Reserved
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    of 6

    NATIONAL INSTITUTE OF FASHION TECHNOLOGY, BENGALURU

    MASTER OF FASHION MANAGEMENT

    BATCH 2023-2025

    MANAGERIAL ECONOMICS

    ASSIGNMENT

    SUBMITTED TO:

    Dr. Gulnaz Banu P


    Professor, Fashion Management Studies

    SUBMITTED BY:

    Swapnil Shreshtha (MFM/23/91)


    Interdependence between Micro and Macro Economics

    Microeconomics and macroeconomics are two subdivisions of economics that are closely
    related and dependent on each other. While microeconomics deals with the behavior of
    individual economic agents, macroeconomics looks at the overall performance of the
    economy through aggregate variables such as gross domestic product (GDP), inflation rates,
    unemployment rates, and different economic policies.

    The relationship between microeconomics and macroeconomics is reciprocal in nature. On


    one hand, macroeconomics provides the building blocks for our aggregate theories, while
    microeconomic theory should also contribute to macroeconomic understanding. Theories
    regarding the behavior of some macroeconomic aggregates are derived from theories of
    individual behavior. For instance, the theory of investment, which is a part of microeconomic
    theory, is derived from the behavior of individual entrepreneurs.

    Moreover, we can derive the behavior of these aggregates only if either the composition of
    aggregates is constant or the composition changes in some regular way as the size of
    aggregates changes. It should be noted that not all macroeconomic relationships are in
    conformity with the behavior patterns of the individuals composing them. Although
    microeconomic theory contributes to macroeconomic theory in another way, the theory of
    relative prices of products and factors is essential in the explanation of the determination of
    general price level.

    Financial markets are the meeting point of macroeconomic and microeconomic factors. These
    markets make it easier for savers and borrowers to exchange funds. Individuals make
    investment decisions based on their risk tolerance, time horizon, and financial goals at the
    micro level. However, macroeconomic conditions have an impact on these decisions. For
    example, during times of economic uncertainty, investors may shift to safer assets such as
    government bonds, influencing interest rates. During periods of economic growth, on the
    other hand, investors may seek higher returns in riskier assets such as stocks. This dynamic
    relationship exemplifies how macroeconomic factors influence individual investment
    decisions.
    Individual and collective expectations have a significant impact on economic outcomes.
    Consumer confidence and business sentiment influence spending and investment decisions at
    the micro level. If consumers anticipate a recession, they may postpone major purchases,
    resulting in lower demand. Similarly, businesses may reduce investment and hiring if they are
    pessimistic about future economic conditions. Managing expectations becomes a critical
    component of macroeconomic policy. Central banks and governments that communicate
    clearly about their policy intentions can influence market behavior and consumer confidence,
    affecting economic outcomes.
    Monetary and fiscal policy are effective tools that governments use to manage the economy.
    Their influence is felt at both the macro and micro levels. Central banks use monetary policy
    to influence interest rates and the money supply in order to control inflation and stimulate
    economic activity. Lower interest rates, for example, encourage mortgages and business
    investments. This has an immediate impact on individual households and businesses,
    influencing their consumption and investment decisions. Fiscal policy, on the other hand,
    involves the spending and taxation of the government. Government spending increases or tax
    cuts can boost aggregate demand, influencing consumer behavior and business investment
    decisions. Furthermore, targeted fiscal policies such as infrastructure projects can generate
    job opportunities, influencing individual employment decisions.
    Individual decisions in a theoretical free market should ideally lead to optimal outcomes,
    guided by the invisible hand of self-interest. However, real-world markets are frequently
    disrupted by flaws and failures. Market imperfections include externalities, public goods, and
    information asymmetries, to name a few. Government intervention is required in such cases
    to correct these failures and ensure efficient outcomes. This is a great example of how
    microeconomic phenomena necessitate macroeconomic policies. Government intervention,
    whether through regulation, taxation, or subsidies, addresses market failures, which have a
    direct impact on individual economic decisions.

    Let’s look at the example of GST to see how the interdependence between macroeconomics
    and microeconomics affects decision-making:

    Macro Level Impact

    ● Macroeconomic Factor: The GST system was put in place to improve tax compliance
    and raise revenue for both the central and state governments. It sought to establish a
    more stable and predictable revenue stream.

    Influence on Micro Decision-Making: This meant a significant change in tax


    reporting and compliance procedures for businesses. They had to modify their
    accounting systems to comply with the new tax regime, which had an impact on their
    operational decisions.

    ● Macroeconomic Factor: The GST was expected to improve economic efficiency by


    reducing tax cascading (the tax on tax effect) and removing trade barriers between
    states.

    Influence on Micro Decision-Making: This meant potential cost savings and increased
    market opportunities for businesses, particularly those involved in interstate trade.
    They could now base their decisions on a more streamlined and unified tax structure.

    ● Macroeconomic Factor: Because GST aimed to reduce the overall tax burden on
    goods and services, it was expected to have an impact on inflation.

    Influence on Micro Decision Making: For consumers, this meant that prices for
    various goods and services could change. They may alter their consumption habits in
    response to price changes.

    Micro Level Impact

    ● Microeconomic Factor: Organizations needed to rethink their supply chain structures


    in order to maximize tax efficiency. They might decide to consolidate warehouses,
    switch distribution channels, or restructure their business models.

    Influence on Macro Decision Making: Businesses' collective decisions to restructure


    supply chains may result in changes in demand patterns for transportation and
    logistics services, affecting the overall economy.

    ● Microeconomic Factor: Individual businesses had to rethink their pricing strategies to


    account for changes in input costs and tax rates. Under the new tax regime, they may
    also need to consider consumer price sensitivity.

    The Influence on Macro Decision-Making: Price changes in various industries may


    have an impact on inflation and overall consumer behavior, influencing
    macroeconomic outcomes.
    ● Microeconomic Factor: To comply with the new tax regime, businesses had to invest
    in technology and employee training. This included the costs of implementing new
    accounting systems and software.

    Influence on Macro Decision Making: The collective investment in technology and


    training had a broader impact on the IT sector and on the economy.

    In conclusion, the interdependence of macroeconomic and microeconomic factors is the


    foundation of economic decision-making. Individual choices are influenced by
    macroeconomic policies, while individual decisions aggregate to shape macroeconomic
    trends. Market dynamics, financial markets, expectations, and policy implications highlight
    the complex relationship between macroeconomic and microeconomic factors. Recognizing
    this interaction is critical not only for understanding economic phenomena but also for
    developing effective policies that promote economic growth and stability.
    References

    1. A. R. (n.d.). 15.1 The Role of Government in a Market Economy – Principles of


    Economics. 15.1 the Role Of Government In a Market Economy – Principles Of
    Economics.
    https://open.lib.umn.edu/principleseconomics/chapter/15-1-the-role-of-government-in
    -a-market-economy/
    2. Financial Markets and Economic Growth, by Anne O. Krueger, Special Advisor to the
    Managing Director. (2006, September 29). IMF.
    https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp092806
    3. Rational Expectations Theory Definition and How It Works. (2023, September 19).
    Investopedia. https://www.investopedia.com/terms/r/rationaltheoryofexpectations.asp
    4. Monetary and Fiscal Policy. (n.d.). CFA Institute.
    https://www.cfainstitute.org/en/membership/professional-development/refresher-readi
    ngs/monetary-fiscal-policy
    5. Bank, E. C. (2001, May 31). The role of financial markets for economic growth.
    European Central Bank.
    https://www.ecb.europa.eu/press/key/date/2001/html/sp010531.en.html
    6. Rational Choice Theory: What It Is in Economics, With Examples. (2023, May 27).
    Investopedia. https://www.investopedia.com/terms/r/rational-choice-theory.asp
    7. Interdependence between Micro and Macro Economics. (2014, April 30). Your Article
    Library.
    https://www.yourarticlelibrary.com/economics/interdependence-between-micro-and-
    macro-economics/39133
    8. S. (2021, April 27). Microeconomics And Macroeconomics (Difference And
    Interdependence). Tyonote.
    https://tyonote.com/microeconomics-and-macroeconomics/
    9. Interdependence Between Microeconomics and Macroeconomics. (2023, April 9).
    Market Renovate.
    https://marketrenovate.com/interdependence-between-microeconomics-and-macroeco
    nomics/

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