Major Difference Between Microeconomics and Macroeconomics

Introduction

Economics is the social science that 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.”

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.

Microeconomics and Macroeconomics

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.

Difference between Microeconomics and Macroeconomics
January 13, 2022
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Table of Contents

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 behaviour and decision making.

Microeconomics generally analyzes the market and determines the prices of goods and services. Forces like demand and supply are the primary source of influence for determining these prices.

To study human behaviour in the market, microeconomics analyses the producer and his choices and the consumer’s choices. Both of these entities will be rational and aim to never be at a loss. A business firm will maximise its production to sell its product at a lower rate than other producers. This will result in a greater demand for their item leading to greater profit margins. The company will try to achieve a heightened production with the same resource allocation (raw material, labour, machinery, etc.).

A rational consumer will also buy a product that gives them similar output as an expensive product at a cheaper rate.

What are the first few questions 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 fulfil 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 the firm 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, labourers, land, capital?
  • What will be the number of labourers they will hire?
  • How will the firm increase production?

Microeconomics answers all the above questions.

Principles of Microeconomics

  • Supply and Demand Equilibrium

Supply and Demand Equilibrium

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

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

The equilibrium price and 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, 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 equilibrium.

  • Production Theory

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

  • Cost of Production

Cost of Production

The cost of production refers to the total cost 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, giving them the highest satisfaction.

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

Macroeconomics

Macroeconomics is a study of the macro elements in economics, such as the behaviour 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 can 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.

Types of Macroeconomics 

There are two types of Macroeconomics—real and theoretical. In the real-world economy, prices and prices are a real phenomenon that affects the actions of individuals and businesses. The economics theory seeks to explain why some individuals and companies behave in ways that others do not. For example, a company that decides to pay workers more or hire more employees would do so only because of the theory of economics, not because of its immediate needs or a desire to avoid raising its prices. In economic theory, the process is called rational choice. To economists, the key to the success of a free-market economy is to find the most efficient rational exchange between sellers and buyers and between sellers and lenders. Because the process of free competition is so inefficient, the incentive for good firms to develop good products is also much less than in other markets. 

Significance of Macroeconomics 

The significance of Macroeconomics is that it explains the behaviour of economic actors in precise terms. The primary purpose of economics is to study and predict economic outcomes. Economics also has an important role as a descriptive science. This is not simply because economics is an “arts”, “medicine”, or “history” discipline. Economics is part of the “science of behaviour”. Economic behaviour is also part of the science of “relationships, exchanges, alliances, bonds, etc.  This is a necessary condition for political existence”. In addition, it is necessary to understand the role of these social relationships in the development of the political process. This is where the third criterion comes into play. 

 The economy cannot be adequately explained. If it is understood, one grasps its macroeconomic roots. The economy is in a state of revolution. Economic science has, however, been unable to explain these fundamentals while, at the same time, making a sharp turn towards the theoretical and the theoretical end of its discipline, that is, the foundations of economic activity. This is one reason why so many economists in the past have made their living from their position. One of the most important, or perhaps the most neglected, tasks in economics is the role of macroeconomics as a discipline of systematic analysis and interpretation. 

Importance of Macroeconomics 

The macroeconomic theory is the economic activity that is organized into independent units called units of account. One of the best-known applications of this concept is business cycles: As business activity plays out, capital and stock values increase; output and employment decrease; net income increases; and total firm value increases. However, one unit of the firm’s total economic activity (business cycle) changes into another at some point. It becomes increasingly valuable to understand the changes in the inputs used, the costs of activity-based management, and the behaviour of activity-based managers. A macroeconomics perspective can be of great assistance in designing and implementing policies that reflect our aspirations, even if some of these policies are a bit simplistic at the macro level. Macroeconomics has been the field of study for the last two decades, but there are several challenges in studying macroeconomics. 

Macroeconomics theory is still at a very early stage, and there are many challenges to overcome. The challenges require constant monitoring as the system is continuously upgraded to keep the system’s performance increasing. Macroeconomics is not a science; rather, it is the study of how economic agents interact, in their interactions, with each other and the environment. Macroeconomics and internal strategies are the most widely used theories. Furthermore, we will now try to present some of our theories so far. One of the reasons for doing so is that we are entering an era of unprecedented technological change and innovation. This is especially true of the automobile industry. The automobile has dramatically changed its relationship with society and the environment in the past few decades.  

SWOT analysis 

Strengths 

A systematic method for analysing economic trends Harmful effects. Changes in business conditions are challenging to predict Disadvantages. There is not a good test of the model Lack of empirical support. The size of the sample is insufficient to detect significant economic statistics. No evidence of causality Lacks consistent methods for evaluating the validity of model output. This theory assumes that the behaviour of economic systems has a predictable pattern that corresponds to economic laws. Economic fundamentals include new technologies and knowledge (e.g., Internet); globalization and international trade; and changing regulatory standards. However, these and many other factors were likely to have contributed to the crisis. 

Weakness 

Macroeconomics needs some level of scientific analysis. It is estimated that an industry in the United States alone worth billions of dollars annually, despite the U.S. GDP being in the red, generates revenues in the billions of dollars annually. The nature of these relationships, however, is not exactly straightforward. A particular group may have a close personal relationship with an individual, yet it may not feel that it has a duty to support that individual’s work. This is the case for employees who are related as friends, relatives, spouses, or business associates. Many employees feel they have no real obligation to support their friends. Some believe they should be expected to support the work of friends to feel worthwhile. 

For the present, we use the concept of a microeconomic system to evaluate the performance of the macroeconomics of the European Union, and we will not go into details about the theory under examination here. The main points are the interrelatedness of macro and microeconomic systems. The macroeconomic system is composed of many interrelated variables, and the interrelationships between the factors are difficult to understand. Nevertheless, there is a great deal of interdependence among them, and it isn’t easy to find a common cause for them. Because of this, a single theory or model is not possible to explain the variation across countries and economic sectors. The same applies to explaining how different countries can maintain their current economic structures over the long term. 

Opportunities 

Macroeconomics of the price level, and macroeconomics is the distribution of wealth. The macroeconomic variables are viewed as a large basket of monetary policy variables with their potentials and influences. Monetary policy is regarded as a decision-making tool to meet macroeconomic risks such as changing variables or unstable input or demand. Some of these risks are hedged by using oracles or other protection against the risk factors. Another important aspect of the tool is that its effectiveness depends largely on the attitude of the top leaders and the subordinates. The tool should be flexible to ensure that it is used in appropriate situations to bring about the desired results. 

Threats 

Macroeconomics challenges researchers who try to integrate both theory and experimental data. Defensive macroeconomic threats include Regulatory threats, Uncertainty threats, Transition threats, Market threats, Technological threats, Economic threats, etc. This new method refers to association analysis for simplicity of representation and subsequent interpretation. The analysis of the association between the two variables, a model with a large number of classes is possible. A statistical inference method, such as chi-square, means testing the hypothesis without the use of a test statistic. Economic threats require the use of several additional tools. First, a threat analysis tool is necessary to determine the reasons the threat is coming and how those threats may affect the business. Threats can be economical in nature, social in nature, political in nature, or psychological. Understanding them and how to deal with them can significantly impact a company’s competitive position and the value they provide. 

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.

You can also read our blog on Scope of Macroeconomics.

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, and unemployment rate are studied, and they are related to each other are 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 compared to another period. Macroeconomists analyze the policies to understand which factors promote growth and which are retarding it. These policies are tweaked accordingly to achieve the development and rising living standards. In conclusion, the functioning of physical capital, human capital, labour force, and technology model economic growth.

The increase in production/ national output results in an increase in 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 labour productivity: through better education, training, and skill induction
  4. Channelling 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 the ups and downs of the economy. Each phase has its 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 behaviour of individual households and firms in making decisions on the allocation of limited resources. Another way to phrase this is to say that microeconomics studies markets.

Macroeconomics is generally focused on countrywide or global economics. Its studies involve the total economic activity, dealing with growth, inflation, and unemployment.

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

You can also read our article on Career Options after B.A. Economics.

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