Macroeconomics vs Microeconomics

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13 Jul, 2016

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Table Of Contents

Macroeconomics and Microeconomics Differences

Macroeconomics is a study that deals with the factors impacting the local, regional, national, or overall economy. It takes the averages and aggregates of the overall economy. Whereas microeconomics is a narrower concept concerned with the decision-making of single economic variables and only interprets the tiny components of the economy.

Microeconomics and macroeconomics are the two branches of economics that study the economy differently. 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 studies the economy, including 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, and production limits microeconomics. Macroeconomics is a broad term that deals with decisions making and behavior of the whole economy. The main concerns are GDP, unemployment, growth rate, net export, etc. The government uses macroeconomic analysis for policy-making decisions.

Macroeconomics and Microeconomics Differences

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, the Central Banks of all the countries majorly look at the country's macroeconomic situation and the globe 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 discussed 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 entire economy and an outcome is a macro event.

What is Microeconomics?

Microeconomics, in short, is a 'bottom-up' approach. So detailed, it comprises the basic components that make up the economy, including the factors of production (land, labor, 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 behavior, spending patterns, wage-price behavior, corporate policies, impact on companies due to regulations, etc.

Example

Those following the Indian growth story would know that the monsoon could impact inflation, especially food inflation. A bad monsoon could increase inflation given that the supply of fodder, vegetables, etc., does not match the demand. On the other hand, a good monsoon could decrease/stabilize inflation. It affects the spending behavior of individual consumers, agrarian-based corporations, and they are 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. Moreover, though there is no difference between them, they are interrelated. So let us see what they have in common.

Macroeconomics vs Microeconomics Infographics

Let us see the top differences between macroeconomics vs. microeconomics.

Commonalities

The following section will surely help you appreciate economics more with many interesting concepts that one comes across than just knowing the commonalities between the two.

Demand and Supply Relationship

The basic rationale is that 'assuming all other factors remain the same/equal,' the quantity demanded decreases as price increases, and the quantity demanded increases as price decreases (inverse relationship). Therefore, all other factors remain the same, the quantity supplied increases as the price increases, and the quantity supplied decreases (direct connection).

This relationship between demand and supply attained the 'state of equilibrium' or the optimal relationship when the quantity demanded and quantity supplied are equal. However, when they are not the same, what arises is either a shortage or excess, which gets adjusted to achieve equilibrium again.

The graph above looks complex. But, it is not. The diagram depicts the concept of 'equilibrium,' the vertical axis (Y-axis) representing 'quantity' both demanded and supplied. 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 costs (from surplus prices to the equilibrium price) to match the corresponding demand. Conversely, a lower price set by sellers would cause a shortage of stock (lack of quantity supplied), forcing prices to go up (from the shortage price to the equilibrium price) to keep pace with the corresponding demand.

This fundamental law governs economics and daily life, macro or microeconomics. But whether equilibrium is always attained, the dynamics beyond demand and supply are different!

Key Differences Between Macroeconomics vs Microeconomics

These branches of economics are interrelated, but their approach is different from the economy. The following are the main differences: -

Microeconomics is the study of individuals, markets, firms, etc., and macroeconomics is the study of the whole economy.
Microeconomics deals with demand and supply, factor pricing, product pricing, labor cost, etc. Macro deals with investments made within the country and its net exports." url="https://www.wallstreetmojo.com/national-income-formula/"]national income, unemployment, inflation, etc.
Microeconomics resolves internal issues, while macroeconomic principles apply to the environment and eternal matters.
Microeconomics is significant in the case of price determination, demand, supply, labor cost, etc. Macro is substantial in the formulation of fiscal and monetary policies.
Demand and supply are the main tools used in microeconomics, and aggregate demand and supply are used in Macroeconomics.
Microeconomics is a bottom-up approach. Macroeconomics is a top-down approach to analyzing the economy.
Microeconomics takes the economy into so many parts and examines each separately. In comparison, macroeconomics takes the economy and analyzes it.
The result of government policies is the main variable used in macroeconomic analysis. However, the 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 more broadly by taking the variables that affect the economy's productivity.
The microeconomic analysis helps find solutions for improving the individual entities and the standard of living of the individuals within the economy. Macroeconomics analysis helps determine the economy's overall health and find ways to better the economy through price regulations and solving issues like unemployment, inflation, deflation, poverty, etc.
Microeconomics helps determine 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 the forces of demand and supply drive both economics, microeconomics focuses on the behavior of the producers and consumers, and macroeconomics focuses on the economy’s business cycles.

How Does Macro Affect Micro?

Let us assume the nation's Central Bank cuts the policy interest rate (a macro impact) by 100 basis points (100 bps = 1%). That should ideally lower the borrowing costs of loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of deposits." url="https://www.wallstreetmojo.com/commercial-bank/"]commercial banks with the Central Bank, helping lower their deposit rate, thus giving room to reduce the rate on the loans they make to individuals and corporate.

It is expected to cause a rise in borrowings, a.k.a. 'Credit growth' gives cheaper access to credit. Therefore, greater investment helps corporations invest in new assets, projects, expansion plans, etc., which are developments on the micro front. It is just one of several examples where macro policies and decisions affect the micro economy. The 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. Therefore, 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 behavioral 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 they are picking up or shooting up. The additional examples include the following: -

The Consumer Price Index (CPI) is determined by surveys of individuals and retailers based on their spending patterns. The outcome results in a certain 'percentage figure,' indicating the inflation rate. This figure is considered a key determinant for the Central Bank to set policy interest rates. The spending behavior of individuals is a microeconomic variable.
Taking a deep dive into the US Federal Reserve and the US economy, the news would tell us that a major factor influencing their policy decisions is the payroll numbers or the wage growth part of the micro economy.
A key concept in microeconomics is 'opportunity cost,' i.e., the cost incurred by not choosing the second-best alternative given the choices are mutually exclusive (one option 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.

Example

You are a 5-year-old kid and have $5 with you to choose between ice cream and Swiss chocolate, which cost $5 and $4, respectively (would 5-year-old kid care if it were Swiss chocolate? I doubt he would know it's a specialty. Who knows?). Let us say that the kid chooses the chocolate over the ice cream to spoil our clichéd assumption that a kid would always select the ice cream! He relishes the chocolate until he sees his friend enjoying 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 studying the economy's behavior, like the performance, structure, etc., of a country's economy.	It examines individual entities like markets, firms, particular households, and their behavior.
Objective	It analyses the economy as a whole and determines the income and unemployment level of the economy.	It analyses the behavior of individuals, households, and firms in a different environment and determines the product pricing, labor cost, and factors of production.
Approach	It is a top-down approach to the economy.	It is a bottom-up approach to the economy.
Scope	The scope is wide. It studies the overall economy's factors 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 to formulate 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 economy's welfare as a whole. It focuses on income analysis.	The main focus is the maximization of individual's/firm's 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 believes 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 consistent.
Method	The study is called general equilibrium. It is because 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 variables are: - Gross Domestic Product Unemployment rate Inflation Interest rate Balance of payments	The microeconomic variables are: - Price Individual expenditure Factors of production Wages Consumptions Investments

A Tinge of Important History

More history apart from Adam Smith and J.M. Keynes was the purported 'fathers' of micro and macroeconomics. 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.' He sought to explain the Great Depression through aggregate expenditures, income levels, employment levels, and government spending – Keynesian Economics.

A highly regarded economist, Milton Friedman, explained the Great Depression as a banking crisis, deflation, higher interest rates, and restrictive Monetary Policy – school of monetary economics.

If you understand the above paragraph and its various inter-linkages, you are on the verge of becoming an upcoming economist and a good economic thinker. On the other hand, if you do not understand it, you will start thinking more about economics, and the more you think about it, the more you will appreciate it.

Conclusion

Microeconomics studies individual factors, and macroeconomics studies aggregate factors, but both focus on allocating 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.

Both are mutually interdependent and correlated. Therefore, the understanding of both branches is very important for every economy. Moreover, to solve economic problems and improve the health of an economy, accurate analysis of micro and macroeconomic factors is important.