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Microeconomics and Macroeconomics: Understanding the Difference
Learn the difference between microeconomics and macroeconomics and the effect they have on each other.
Microeconomics and Macroeconomics: Understanding the Difference
Most people understand how physics is classified as a science, however, there might be some confusion when including economics in the same category. In fact, economics is a social science, as it shares the same qualitative and quantitative elements common to all social sciences.1 Economics focuses on the manufacturing, distribution, and consumption of goods and services, and how people, organisations, governments, and nations choose to allocate resources in order to gain these goods and services.2 As with the studies of all sciences, establishing different sections makes it easier to understand. Economics can be broken into two sections: microeconomics and macroeconomics.3 Here we delve into these sections; their differences, how they affect each other, and their impact on business.
What is microeconomics?
Microeconomics can be defined as the study of decision-making behaviour of individuals, companies, and households with regards to the allocation of their resources.4
Microeconomics strives to discover what factors contribute to peoples’ decisions, and what impact these choices have on the general market as far as price, demand, and supply of goods and services is concerned. It’s a ‘bottom-up’ approach with a focus on the basic elements that make up the economy’s three sectors (agriculture, manufacturing, and services/tertiary), such as land, entrepreneurship, and capital.5 It aims to understand the pattern of wages, employment, and income,6 as well as consumer behaviour, spending trends, wage-price behaviour, corporate policies, and how regulations impact on companies.7 Microeconomics tries to determine decisions and resource allocation at an individual level, as well as explain what happens when certain conditions change.
To summarise, microeconomics determines to understand the following:8
How people and households spend their budgets
What combination of products and services are the best fit for their needs and wants, in the context of their available budget
How individuals decide whether or not to work, and if they choose to work, whether or not it will be full time or part time
How people decide to save for the future, how much they choose to save, or whether they decide to go into debt
How a business decides to produce and sell certain products, how it will produce it, how many of each it will sell, and for how much
What causes them to decide how many workers it will hire
How a firm will finance its business
At what time a business will decide to expand, downsize, or even close
For example, microeconomics could use information from a company’s financial reports in order to determine how an organisation could maximise its production and output capacity, in order to lower prices and become more competitive.
What is macroeconomics?
Macroeconomics is the holistic study of the structure, performance, behaviour, and decision-making processes of an economy, at a national level.9 Essentially, macroeconomics is a ‘top-down’ approach.10 It seeks to understand changes in the nation’s Gross Domestic Product (GPD), inflation and inflation expectations, spending, receipts and borrowings at a governmental level (fiscal policies), unemployment, and monetary policy. This is done to interpret and know the state of the economy, so that policies can be formulated at a higher level, and macro research can be carried out for academic purposes.
Macroeconomics analyses entire industries and economies, rather than singular companies or individuals.11 It seeks to answer questions such as, “What should the inflation rate be?” and, “What stimulates economic growth?”.
To summarise, macroeconomics strives to answer the following:12
Which factors determine how many goods and services a country can produce
What determines the number of jobs available in an economy
What determines a country’s standard of living
What factors cause the economy to speed up or slow down
What causes organisations to hire or fire more labour on a national scale
What causes the economy to grow over the long term
What the state of the nation’s economic health is, based on improvement in the standard of living, low unemployment, and low inflation
Macroeconomics vs microeconomics: the key differences
Microeconomics and macroeconomics both explore the same elements, but from different points of view.13 The main differences between them are:
Macroeconomics seeks to find a general perspective, at a national level, while microeconomics focuses on the individual’s perspective, at a consumer level.14
Even though supply and demand applies to both fields of economics, microeconomics is based on the trends of buyers and sellers, where macroeconomics focuses on the various cycles of an economy, such as short and long term debt cycle, and business cycles.15
Macroeconomics vs microeconomics: the overlap
It is clear that macroeconomics does not exist in isolation, but rather is entwined with microeconomics, and works in tandem in order to be efficient.15 Choices based on microeconomic factors, whether from individuals or businesses, can impact macroeconomics in the long run. Similarly, a national policy that involves microeconomics could affect how households and enterprises interact with their economy. For example, if the government raises the tax on a certain product (macroeconomics), an individual shop owner will have to increase the price, which will impact on the consumer and their decision for or against the product at that price (microeconomics).
Difference Between Microeconomics & Macroeconomics
Microeconomics and Macroeconomics are two branches of Economics which deal with study of individuals and that of a nation respectively. Read the difference between microeconomics and macroeconomics here.
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Difference between Microeconomics and Macroeconomics
“Economics is the science which studies human behaviour as a relationship
between given ends and scarce means which have alternative uses.”Top 7 Difference Between Microeconomics And Macroeconomics
Economic is a study about how individuals, businesses and governments make choices on allocating resources to satisfy their needs. These groups determine how the resources are organised and coordinated to achieve maximum output. They are mostly concerned with the production, distribution and consumption of goods and services.
Economics is divided into two important sections, which are: Macroeconomics & Microeconomics
Macroeconomics deals with the behaviour of the aggregate economy and Microeconomics focuses on individual consumers and businesses.
What is Microeconomics?
Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources and prices of goods and services. The government decides the regulation for taxes. Microeconomics focuses on the supply that determines the price level of the economy.
It uses the bottom-up strategy to analyse the economy. In other words, microeconomics tries to understand human’s choices and allocation of resources. It does not decide what are the changes taking place in the market, instead, it explains why there are changes happening in the market.
The key role of microeconomics is to examine how a company could maximise its production and capacity, so that it could lower the prices and compete in its industry. A lot of microeconomics information can be obtained from the financial statements.
The key factors of microeconomics are as follows:
Demand, supply, and equilibrium
Production theory Costs of production Labour economicsExamples: Individual demand, and price of a product.
What is Macroeconomics?
Macroeconomics is a branch of economics that depicts a substantial picture. It scrutinises itself with the economy at a massive scale, and several issues of an economy are considered. The issues confronted by an economy and the headway that it makes are measured and apprehended as a part and parcel of macroeconomics.
Macroeconomics studies the association between various countries regarding how the policies of one nation have an upshot on the other. It circumscribes within its scope, analysing the success and failure of the government strategies.
In macroeconomics, we normally survey the association of the nation’s total manufacture and the degree of employment with certain features like cost prices, wage rates, rates of interest, profits, etc., by concentrating on a single imaginary good and what happens to it.
The important concepts covered under macroeconomics are as follows:
RevenueExamples: Aggregate demand, and national income.
Top 7 Differences Between Microeconomics And Macroeconomics
Let us look at some of the points of difference between Microeconomics and MacroeconomicsMicroeconomicsMacroeconomicsMeaning
Microeconomics is the branch of Economics that is related to the study of individual, household and firm’s behaviour in decision making and allocation of the resources. It comprises markets of goods and services and deals with economic issues. Macroeconomics is the branch of Economics that deals with the study of the behaviour and performance of the economy in total. The most important factors studied in macroeconomics involve gross domestic product (GDP), unemployment, inflation and growth rate etc.Area of study
Microeconomics studies the particular market segment of the economy Macroeconomics studies the whole economy, that covers several market segmentsDeals with
Microeconomics deals with various issues like demand, supply, factor pricing, product pricing, economic welfare, production, consumption, and more.
Macroeconomics deals with various issues like national income, distribution, employment, general price level, money, and more.Business Application
It is applied to internal issues.
It is applied to environmental and external issues.Scope
It covers several issues like demand, supply, factor pricing, product pricing, economic welfare, production, consumption, and more. It covers several issues like distribution, national income, employment, money, general price level, and more.Significance
It is useful in regulating the prices of a product alongside the prices of factors of production (labour, land, entrepreneur, capital, and more) within the economy.
It perpetuates firmness in the broad price level, and solves the major issues of the economy like deflation, inflation, rising prices (reflation), unemployment, and poverty as a whole.
Microeconomics vs. Macroeconomics: A Simple Guide
Microeconomics is the study of individuals’ and businesses’ decisions, while macroeconomics looks higher up, at national and government decisions.
Microeconomics vs. Macroeconomics: An Overview
Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
Though these two branches of economics appear different, they are actually interdependent and complement one another. Many overlapping issues exist between the two fields.
Microeconomics studies individuals and business decisions, while macroeconomics analyzes the decisions made by countries and governments.
Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature.
Investors can use microeconomics in their investment decisions, while macroeconomics is an analytical tool mainly used to craft economic and fiscal policy.
Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services. It considers taxes, regulations, and government legislation.
Microeconomics focuses on supply and demand and other forces that determine price levels in the economy. It takes a bottom-up approach to analyzing the economy. In other words, microeconomics tries to understand human choices, decisions, and the allocation of resources.
Having said that, microeconomics does not try to answer or explain what forces should take place in a market. Rather, it tries to explain what happens when there are changes in certain conditions.
For example, microeconomics examines how a company could maximize its production and capacity so that it could lower prices and better compete. A lot of microeconomic information can be gleaned from company financial statements.
Microeconomics involves several key principles, including (but not limited to):Demand, Supply and Equilibrium: Prices are determined by the law of supply and demand. In a perfectly competitive market, suppliers offer the same price demanded by consumers. This creates economic equilibrium.Production Theory: This principle is the study of how goods and services are created or manufactured.Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during production.Labor Economics: This principle looks at workers and employers, and tries to understand patterns of wages, employment, and income.
The rules in microeconomics flow from a set of compatible laws and theorems, rather than beginning with empirical study.
Macroeconomics, on the other hand, studies the behavior of a country and how its policies impact the economy as a whole. It analyzes entire industries and economies, rather than individuals or specific companies, which is why it’s a top-down approach. It tries to answer questions such as “What should the rate of inflation be?” or “What stimulates economic growth?”
Macroeconomics examines economy-wide phenomena such as gross domestic product (GDP) and how it is affected by changes in unemployment, national income, rates of growth, and price levels.
Macroeconomics analyzes how an increase or decrease in net exports impacts a nation’s capital account, or how gross domestic product (GDP) is impacted by the unemployment rate.
Macroeconomics focuses on aggregates and econometric correlations, which is why governments and their agencies rely on macroeconomics to formulate economic and fiscal policy. Investors who buy interest-rate-sensitive securities should keep a close eye on monetary and fiscal policy.
John Maynard Keynes is often credited as the founder of macroeconomics, as he initiated the use of monetary aggregates to study broad phenomena. Some economists dispute his theories, while many Keynesians disagree on how to interpret his work.
Investors and Microeconomics vs. Macroeconomics
Individual investors may be better off focusing on microeconomics, but macroeconomics cannot be ignored altogether. Fundamental and value investors may disagree with technical investors about the proper role of economic analysis. While it is more likely that microeconomics will impact individual investments, macroeconomic factors can affect entire portfolios.
Warren Buffett famously stated that macroeconomic forecasts didn’t influence his investing decisions. When asked how he and partner Charlie Munger choose investments, Buffett said, “Charlie and I don’t pay attention to macro forecasts. We have worked together now for 54 years, and I can’t think of a time we made a decision on a stock, or on a company ... where we’ve talked about macro.”1 Buffett also has referred to macroeconomic literature as “the funny papers.”2
John Templeton, another famously successful value investor, shared a similar sentiment. “I never ask if the market is going to go up or down because I don’t know, and besides, it doesn’t matter,” Templeton told Forbes in 1978. “I search nation after nation for stocks, asking: ‘Where is the one that is lowest priced in relation to what I believe it’s worth?’”