Macroeconomics and Microeconomics Differences
Macroeconomics is a study that deals with the factors that are impacting the local, regional, national, or overall economy and it takes the averages and aggregates of the overall economy whereas Microeconomics is a narrower concept and it is concerned with the decision making of single economic variables and it only interprets the tiny components of the economy.
Microeconomics vs Macroeconomics are the two branches of economics deal with the study of the economy from a different perspective. Microeconomics is the study of decision making by individuals and organizations in day to day life, factors affecting those decisions and the effects of decisions. On the other hand, macroeconomics is the study of the economy as a whole, which includes price fluctuations, GDP, inflation, etc.
Microeconomics deals with the conduct of the individuals and firms on the use of limited resources and allocations of those resources among possible alternatives. The analysis of demand and supply, price equilibrium, labor expenses, production are in the limit of microeconomics. Macroeconomics is a broad term, deals with decisions making and behaviour of the whole economy. The main concerns are GDP, unemployment, growth rate, net export, etc. Macroeconomic analysis is used by the government for policy-making decisions.
What is Macroeconomics?
In short, Macroeconomics is a ‘top-down’ approach and is in a way, a helicopter view of the economy as a whole. It aims at studying various phenomena like the country’s GDP (Gross Domestic Product) growth; inflation and inflation expectations; the government’s spending, receipts, and borrowings (fiscal policies); unemployment rates; monetary policy, etc. to ultimately help understand the state of the economy, formulate policies at a higher level and conduct macro research for academic purposes.
For example, Central Banks of all the countries majorly look at the macroeconomic situation of the country and also the globe in order to make crucial decisions like setting the country’s policy interest rates. But it is worth mentioning that they look at micro aspects also.
Example
If you have been following recent global financial and economic events, the most talked about is the topic of the USA Federal Reserve’s course of interest rate hikes. In a year, the Federal Reserve holds eight scheduled meetings for two consecutive days to decide and convey their policy stance known as ‘FOMC meetings’ (Federal Open Market Committee meetings).
The meeting majorly focuses on macro policy and stability based on data analysis and research, the conclusion being whether they should hike their policy interest rate or not. This meeting is part of a macroeconomic policy given that it looks at the economy as a whole and an outcome is a macro event.
What is Microeconomics?
Microeconomics, in short, is a ‘bottom-up’ approach. Detailed, it comprises the basic components that make up the economy which include the factors of production (Land, Labour, Capital and Organization/Entrepreneurship). The three sectors of the economy – agriculture, manufacturing, and services/tertiary sectors and the components thereof understandably come up because of the factors of production. Microeconomics largely studies supply and demand behaviors in different markets that make up the economy, consumer behaviour and spending patterns, wage-price behavior, corporate policies, impact on companies due to regulations, etc.
Example
For those who have been following the Indian growth story, you would be aware of the fact that the monsoon could have an impact on inflation especially food inflation. A bad monsoon could increase inflation given that the supply of fodder, vegetables, etc. doesn’t match the demand and a good monsoon could decrease/stabilize inflation due to obvious reasons. This affects the spending behaviour of individual consumers, agrarian-based corporates and their like. (More on supply and demand coming up!)
Yes, you saw it coming – macro and microeconomics are two sides of the same coin i.e., they have several things in common despite looking like seemingly different topics. Though there’s no thin line of difference between the two, they are interrelated. So let’s see what they have in common.
Macroeconomics vs Microeconomics Infographics
Let’s see the top differences between macroeconomics vs microeconomics.
Commonalities
The following section will surely help you appreciate economics a lot more with many interesting concepts that one comes across than just know the commonalities between the two.
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Demand and Supply Relationship
The basic rationale is that ‘assuming all other factors remaining the same/equal,’ the quantity demanded decreases as price increases and the quantity demanded increases as price decreases (inverse relationship). All other factors remaining the same, the quantity supplied increases as price increases and the quantity supplied decreases as price decreases (direct relationship).
This relationship between demand and supply attains the ‘state of equilibrium’ or the optimal relationship when the quantity demanded and quantity supplied are equal. When they aren’t equal, what arises is either a shortage or excess which gets adjusted to achieve equilibrium again.
The graph above looks complex isn’t it? Honestly….it isn’t. The graph is a depiction of the concept of ‘Equilibrium’, the vertical axis (Y-axis) representing ‘Quantity’ both demanded and supplied whereas the horizontal axis (X-axis) represents the ‘Price’ of the product/service. The explanation below should make it simpler for you!
A higher price set by sellers would cause a surplus of stock (Surplus/Excess Quantity supplied) forcing them to lower prices (from Surplus Prices to the Equilibrium Price) to match the corresponding demand. A lower price set by sellers would cause a shortage of stock (Shortage of Quantity supplied) forcing prices to go up (from the Shortage Price to the Equilibrium Price) to keep pace with the corresponding demand.
This is a fundamental law that governs economics and daily life, be it macro or microeconomics. Whether equilibrium is attained always, the dynamics beyond demand and supply is a totally different topic!
Key Differences Between Macroeconomics vs Microeconomics
Both these branches of economics are interrelated, but their approach is different towards the economy. The following are the main differences.
- Microeconomics is the study of the actions of individuals, markets, firms, etc., and macroeconomics is the study of the economy as a whole.
- Microeconomics deals with demand and supply, factor pricing, product pricing, labor cost, etc. Macro deals with national income, unemployment, inflation, etc.
- The microeconomics is applicable to the resolution of internal issues while macroeconomic principles are applicable to the environment and eternal issues.
- Microeconomics is significant in the case of price determination, demand, and supply, labor cost, etc. Macro is significant in the formulation of fiscal and monetary policies.
- Demand and supply are the main tools used in Microeconomics and aggregate demand and aggregate supply are the tools used in Macroeconomics.
- Microeconomics is a bottom-up approach and macroeconomics is a top-down approach in analyzing the economy.
- Micro economy takes the economy as so many parts and analyzes each separately, while macroeconomy takes and the economy as a whole and analyze it.
- The result of government policies is the main variable used in macroeconomic analysis. Government policies do not affect the microeconomic variables directly.
- Microeconomics analyzes the economy in a narrow way taking the variables which affect demand and supply. Macroeconomics analyzes the economy in a broader way by taking the variables which affect the productivity of the economy.
- The microeconomic analysis helps in finding the solutions for improving the individual entities, the standard of living of the individuals within the economy. Macroeconomics analysis helps to determine the overall health of the economy and finding ways for the betterment of the economy through price regulations and solving issues like unemployment, inflation, deflation, poverty, etc.
- Microeconomics helps in determining the price levels, product pricing, and factor pricing, using the forces of demand and supply. Macroeconomics helps in regulating and maintaining the general price level in the economy.
- Even though both the economics are driven by the forces of demand and supply, the microeconomics focuses on the behaviour of the producers and consumers and macroeconomics focuses on the business cycles of the economy.
How Does Macro Affect Micro?
Let’s assume the nation’s Central Bank cuts the policy interest rate (a macro impact) by 100 basis points (100 bps = 1%). This should ideally lower the borrowing costs of commercial banks with the Central Bank, helping lower their deposit rate, thus giving room to lower the rate on the loans they make to individuals and corporate.
This is expected to cause a rise in borrowings aka ‘credit growth’ given cheaper access to credit and therefore greater investment helping corporate invest in new assets, projects, expansion plans, etc. which are developments on the micro front. This is just one of several examples where macro policies and decisions affect the micro economy. Additional examples can include:
- Income tax changes;
- Changes in subsidies;
- Currency related policies (ex: China de-pegging the Yuan/Renminbi to the US Dollar) amongst others;
- Unemployment rates in the economy could help understand how many jobs a company might create amongst other factors
How Does Micro Affect Macro?
One of the multiple factors that set macro policies is the condition of the micro economy. To continue with the earlier example of the Central Bank given that they have lowered their policy rates, they observe the borrowing and investment patterns of corporates, individuals and households.
These behavioural patterns can help determine whether the Central Bank should cut rates further if the outlook is weak, keep rates on hold or increase them if the outlook is picking up or shooting up. Additional examples include the following:
- The Consumer Price Index (CPI) is determined by taking surveys of individuals and retailers based on their spending patterns where the outcome results in a certain ‘percentage figure’ which is indicative of the rate of inflation. This figure is considered a key determinant for the Central Bank to set policy interest rates. The spending behaviour of individuals is a microeconomic variable.
- Taking a deep dive into the US Federal Reserve and in particular the US economy, the news would tell us that a major factor influencing their policy decisions is the payroll numbers or the wage growth which is part of the micro economy.
- A key concept in microeconomics is that of ‘Opportunity Cost’ i.e., the cost incurred by not choosing the second-best alternative given the choices are mutually exclusive (one choice eliminates the others). In other words, it is the marginal benefit one could derive by choosing the second-best comparable alternative to achieve the same purpose given that the choices are mutually exclusive. On a more philosophical note, this has some roots in the concept of ‘’
Example
You are a 5-year-old kid and have $5 with you to choose between an ice-cream and Swiss chocolate which costs $5 and $4 respectively (would a 5-year-old kid really care if it were Swiss chocolate? I doubt he’d know its speciality. Who knows?). Let’s say that the kid chooses the chocolate over the ice-cream just to spoil our clichéd assumption that a kid would always choose the ice-cream! He relishes the chocolate until he sees his friend relishing the ice-cream. The kid then tries to weigh the costs of his decision to go for the chocolate.
Macroeconomics vs Microeconomics Comparative Table
| Points of Comparison | Macroeconomics | Microeconomics | ||
| Meaning | It deals with the study of the behaviour of the economy as a whole like the performance, structure, etc. of a country’s economy. | It deals with study individual entities like market, firms, individual households, and their behaviour | ||
| Objective | It analyses the economy as a whole and determines the income and unemployment level of the economy. | It analyses the behaviour of the individuals, households, and firms in a different environment and determines the product pricing, labour cost, and factors of production | ||
| Approach | It is a top-down approach toward the economy. | It is a bottom-up approach towards the economy | ||
| Scope | The scope is wide and it consists of the study of the factors affect the overall economy like income and employment, foreign exchange, public finance, banking, etc. | The scope is wide and helps to determine product pricing and factor pricing. | ||
| Beneficiaries | The government uses the study of macroeconomics for the formulation of different economic policies | The individual consumers, producers, investors small households, etc. are the stakeholders of this branch of study. | ||
| Focus | Focus on the maximization of the welfare of the economy as a whole. That is focus on income analysis. | The main focus is the maximization of individual’s/firms’ gain. That is focus on price analysis. | ||
| Assumptions | It assumes that the variable in the economy is interdependent. It shows the effect of the mutual interdependence of different variables like total income and total employment. | It assumes that only one variant is volatile and others are constant. That means it shows the effect of change in one variable by keeping other variables constant. | ||
| Method | The study is called general equilibrium as it analyses the interdependence of different economic variables | The study is called partial equilibrium as the study is based on the movement of one variable by assuming others are constant. | ||
| Variables | The macroeconomic variable is
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The variables used for the study are
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A Tinge of Important History
There’s more history apart from the fact that Adam Smith and J.M. Keynes were the so-called ‘fathers’ of micro and macro-economics. It is believed that Macroeconomics majorly evolved from an economic crisis, the infamous ‘Great Depression’ from 1929 to the late 1930s where J.M. Keynes and Milton Friedman played a major role in explaining and understanding the event. J.M. Keynes wrote a book titled ‘The General Theory of Employment, Interest, and Money’ where he sought to explain the Great Depression through aggregate expenditures, income levels, employment levels and government spending – Keynesian Economics.
Milton Friedman, a highly regarded economist explained the Great Depression by a banking crisis, deflation, higher interest rates and restrictive Monetary Policy – School of Monetary Economics.
If you understood the above paragraph and its various inter-linkages, you are on the verge of becoming an upcoming economist and a good economic thinker. If you didn’t totally understand it, you are going to start thinking more about economics and the more you think about it, the more you would appreciate it.
Conclusion
Microeconomics is the study of individual factors and macroeconomics is the study of aggregate factors, but both focus on the allocation of limited resources. Macroeconomics is the basis of microeconomics, it analyses how the macroeconomic conditions or factors affect the behavior of the market and the results of those.
It is evident that both are mutually interdependent and correlated. The understanding of both branches is very important for every economy. For solving economic problems and improving the health of an economy an accurate analysis of micro and macroeconomic factors are important.
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