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What Is The Difference Between Microeconomics and Macroeconomics?

 

Economics is the social science which deals with the production, consumption, and distribution of goods and services.Microeconomics and Macroeconomics are the two main categories of economics. It explains how economies work; ranging from the economy of just an individual to the economy of an entire country.

The greatest economists of the previous century have defined economics in the following terms:

Adam Smith (1776) defined economics as “an inquiry into the nature and causes of the wealth of nations”

Alfred Marshall provided a definition in his textbook Principles of Economics (1890), “Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man.

According to Samuelson’s  Modern Definition of Economics, ‘Economics is a social science concerned chiefly with the way society chooses to employ its resources, which have alternative uses, to produce goods and services for present and future consumption’.

Microeconomics and Macroeconomics are the two main categories of economics. The basic difference between microeconomics and macroeconomics is that Micro is the study of individuals and business decisions while macroeconomics while macro studies the decisions of the governments and countries.

Microeconomics

Microeconomics is the study of the microelements of the economy. These microelements can be a single individual, a household, or a business firm. The way these elements maintain their economy, that is, allocate their resources is studied. It deals with human behavior and decision making.

Microeconomics generally analyzes the market and determines the prices of goods and services in it. Forces like demand and supply are the major source of influences for determining these prices

To study human behavior in the market, microeconomics analyses the producer and his choices as well as the consumer’s choices. Now, both of these entities are going to be rational and will aim to never be in a loss. A business firm will focus on maximizing its production so that they can sell their product at a lower rate as compared to other producers. This will result in a greater demand for their item leading to greater margins of profit. The company will try to achieve a heightened production with the same amount of resource allocation (raw material, labor, machinery, etc).

A rational consumer will also buy a product that is giving him/her similar output as that of an expensive product at a cheaper rate.

What are the first few questions that pop up in your head when you need to understand the market? Let’s make a list

  • How do households and individuals spend their budgets?
  • How do people decide how much to save for the future?
  • What combination of goods and services will best fulfill their needs and wants according to their budget?
  • On what basis will the consumer choose the brand of product they wish to take?
  • What determines the products and how many will firms produce and sell?
  • How is the firm going to produce these products?
  • What determines the prices of these products?
  • How will the firm finance its resources- raw material, laborers, land, capital?
  • What will be the number of laborers they will hire?
  • How will the firm increase production?

Microeconomics just answers all the above questions.

Principles of Microeconomics:

  • Supply and Demand Equilibrium

Supply and Demand Equilibrium

Since microeconomics is a study of markets, the interaction between supply and demand of goods and their scarcity is the main principle.

A supply curve shows the relationship between quantity supplied and price on a graph.

The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level.

  • Production Theory

Production means the transformation of inputs such as raw material, capital, equipment, labor, and land into final goods and services. For example, bread is good while all the materials required to make it (flour, sugar, milk, ovens, laborers, etc) are all inputs. The goal of the producer is to maximize the efficiency of the input in order to create more goods. By implementing various strategies the former can be achieved. For example- by employing more labor, increasing their hours, investing in more machinery, etc.

  • Cost of Production

Cost of Production

The cost of production refers to the total cost incurred by a business to produce a specific quantity of a product or offer a service.

  • Utility Satisfaction

Utility maximization refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions. They choose a combination of goods and services within their budget which will give them the highest satisfaction.

Other than the above, microeconomics covers a variety of specialized areas of study including industrial organization, labor economics, financial economics, public economics, political economy, health economics, urban economics, law and economics, and economic history.

 

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Macroeconomics

Macroeconomics is a study of the macro elements in the world of economics, such as, the behavior of a country and its policies that decide its economy as a whole. It analyzes industries and economies rather than a single company. That is why macroeconomics is able to answer some of the most crucial questions. John Maynard Keynes initiated the use of monetary aggregates to study broad phenomena. Hence, he is credited as the founder of macroeconomics.

Basic understanding of Macroeconomics
  • How is the level of economic activity in a society determined?
  • What is the rate of unemployment?
  • How should economic growth be stimulated?
  • What should be the rate of inflation?
  • How is the standard of living of the people of the nation determined?
  • What should be the country’s monetary and fiscal policies?

The study of macro tries to answer the questions above.

Macroeconomics examines gross domestic product (GDP) and gross national product (GNP). Moreover, it also inspects how they are affected by changes in unemployment, national income, rate of growth, and price levels.

The import and export policies of the country are also studied and explained by macroeconomics. Any increase or decrease in the net export/import affects the nation’s capital income. Therefore, macroeconomics also analyses the nation’s capital income.

Macroeconomics concerns itself with very significant issues. Variables such as GDP, inflation, unemployment rate are studied and how they are related to each other is explained. The monetary and fiscal policies created by the government authorities are constructed, evaluated and forecasted using these variables. Businesses set their strategies accordingly in the world market; investors predict and plan their movements and so on. We can very well say that macroeconomics encompasses an enormous scale of government budgets and decides the impact of economic policies on consumers.

Although Macro is a vast area, two specific areas of macroeconomic research are economic growth and business cycles.

Economic Growth

Economic growth refers to the increase in the production of goods and services as compared to another period of time. Macroeconomists analyze the policies to understand which factors are promoting growth and which are retarding it. To achieve the development and rising living standards, these policies are tweaked accordingly. In conclusion, functioning of factors such as physical capital, human capital, labor force, and technology model the economic growth.

The increase in production/ national output results in the increase of national income. The two main factors that cause economic growth are:

  • An increase in aggregate demand (AD)

AD= C + I + G + X- M

  1. C= Consumer spending
  2. I = Investment
  3. G = Government spending
  4. X = Exports
  5. M = Imports
  • Increase in Aggregate supply/ Long-run aggregate supply

LRAS can increase due to the following reasons:

  1. Increase in the capital: investment in new factories or investment in infrastructures, such as roads and telephones.
  2. Increase in the working population: through immigration, higher birth rate, employment opportunities, skill induction
  3. Increase in labor productivity: through better education, training, and skill induction
  4. Channeling new raw material: finding reserves/means to procure much more efficient raw material
  5. Improvement in Technology: As technology advances, such as microcomputers, AI, machines there will be a great boom in the aggregate supply.

Other factors that influence economic growth are the stability of the nation, inflation, etc.

Business Cycles

Business Cycles
Business cycles are identified as having four distinct phases: peak, trough, contraction, and expansion. These are basically the ups and downs of the economy. Each phase has its own level of GDP, unemployment, and inflation. Business cycle fluctuations occur around a long-term growth trend. The growth rate of real gross domestic product usually measures it.

The alternating phases of the business cycle are expansions and contractions (also called recessions). Recessions start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle when the next expansion begins. After excluding the effects of inflation, during expansion, growth in indicators like jobs, production, and sales in real terms measures the economy. Recessions are periods when the economy is shrinking or contracting.

Key Difference between Microeconomics and Macroeconomics

A basic understanding of microeconomics is essential to the study of macroeconomics. This is because the foundation of “macro” is provided by “micro.” Microeconomics focuses on individual markets, while macroeconomics focuses on whole economies. The main difference between the two is the scale.

Microeconomics studies the behavior of individual households and firms in making decisions on the allocation of limited resources. Another way to phrase this is to say that microeconomics is the study of markets.

Macroeconomics is generally focused on countrywide or global economics. It studies involves the sum total of economic activity, dealing with issues such as growth, inflation, and unemployment.

The basic comparison between Micro vs Macro has been done above. As you go on to read the subjects in greater depth, there will be a lot more to analyze.

 

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