Macroeconomics vs Microeconomics

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 exportNet ExportNet exports of any country are measured by calculating the value of goods or services exported by the home country minus the value of the goods or services imported by the home country. It includes various goods and services exported and imported by the government, like machinery, cars, consumer goods.read more, etc. Macroeconomic analysis is used by the government for policy-making decisions.

Microeconomics vs Macroeconomics

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. MicroeconomicsMicroeconomicsMicroeconomics is a study in economics that involves everyday life, including what we see and experience. It studies individual behavioural patterns, households and corporates and their policies. It deals with supply and demand behaviours in different markets, consumer behaviour, spending patterns, wage-price behaviour, corporate policies.read more 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.

Macroeconomics-vs-Microeconomics-info

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.

Demand and Supply Relationship

The basic rationale is that ‘assuming all other factors remaining the same/equal,’ the quantity demandedQuantity DemandedQuantity demanded is the quantity of a particular commodity at a particular price. It changes with change in price and does not rely on market equilibrium.read more 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.

Demand and Supply Relation

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.

[Note: By ‘higher’ and ‘lower’ prices, we mean the price relative to the ‘Equilibrium Price’ – that which a buyer should ideally bid/buy for (OR) the price relative to that which a seller should ideally ask/offer.]

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.

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 banksCommercial BanksA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. It facilitates bank deposits, locker service, loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of deposits.read more 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:

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:

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.

Example of micro affecting macro

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

 

 The variables used for the study are

 

  • Price
  • Individual expenditure
  • Factors of production
  • Wages
  • Consumptions
  • Investments

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 EconomicsKeynesian EconomicsKeynesian Economics is a theory that relates the total spending with inflation and output in an economy. It suggests that increasing government expenditure and reducing taxes will result in increased market demand and pull up the economy out of depression.read more.

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.

Recommended Articles

This has been a guide to Macroeconomics vs Microeconomics. Here we discuss the top differences between Macroeconomics and Microeconomics and how they differ from each other. You may also have a look at the following articles –

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Comments

  1. Mitchell Mecca says

    Many thanks to you for sharing this wonderful blog which has really helped me to understand the two main subject’s i.e Macro and Micro economics. Thank you once again. Well actually I was little confused and wanted to ask you the question. And the question is do micro economics and macroeconomics interact with each other?

    • Dheeraj Vaidya says

      thanks for your note. Well if you have gone through this article properly. I have mentioned the differences it appears these two studies of economics I,e micro and macroeconomics are different but in reality they are inter related and complement each other. They both explore the same things but from different viewpoints.

  2. Dustin Obey says

    Great post with lots of useful fundamentals. Can also tell me when does the Macroeconomic problem arises and what are the problems that arise mostly?

    • Dheeraj Vaidya says

      Thanks for your kind words. Well macroeconomic problem commonly arises when the economy does not adequately achieve the goals of full employment, stability and economic growth. Mostly there are 3 problems that are commonly raised and they are Inflation, Unemployment and Business cycle.

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