Macroeconomics and Microeconomics Differences

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 expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more, 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 Net 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. The government uses macroeconomic analysis 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 expectationsInflation ExpectationsInflation expectations refer to the opinion on the future inflation rate from different sections of the society, such as investors, bankers, central banks, workers, and business owners. As a result, they take this rate into account when making decisions about various economic activities they want to engage in in the future.read more; 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 productionFactors Of ProductionFactors of production define resources used to produce or create finished goods and services, the sale and purchase of which keeps the market economy afloat.read more (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. MicroeconomicsMicroeconomicsMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and supply.read more 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.

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.

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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 Quantity 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). 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 costLabor CostCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more, etc. Macro deals with investmentsInvestmentsInvestments are typically assets bought at present with the expectation of higher returns in the future. Its consumption is foregone now for benefits that investors can reap from it later.read more made within the country and its net exports.” url=”https://www.wallstreetmojo.com/national-income-formula/”]national income[/wsm-tooltip], 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 demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices.read more and supply are used in MacroeconomicsMacroeconomicsMacroeconomics aims at studying aspects and phenomena important to the national economy and world economy at large like GDP, inflation, fiscal policies, monetary policies, unemployment rates.read more.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, deflationDeflationDeflation is defined as an economic condition whereby the prices of goods and services go down constantly with the inflation rate turning negative. The situation generally emerges from the contraction of the money supply in the economy.read more, 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 Business CyclesThe business cycle refers to the alternating phases of economic growth and decline.read more.

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 loansLoansA loan is a vehicle for credit in which a lender will give a sum of money to a borrower or borrowing entity in exchange for future repayment.read more, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of deposits.” url=”https://www.wallstreetmojo.com/commercial-bank/”]commercial banks[/wsm-tooltip] 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 changesChanges in subsidiesSubsidiesA subsidy in economics refers to direct or indirect financial assistance from the government to an individual, household, business, or institution to promote social and economic policies.read moreCurrency related policies (ex: China de-pegging the Yuan/Renminbi to the US Dollar) amongst othersUnemployment 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 payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits.read more numbers or the wage growth part of the micro economy.A key concept in microeconomics is ‘opportunity cost,’ i.e., the cost incurredThe Cost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more by not choosing the second-best alternative given the choices are mutually exclusiveMutually ExclusiveMutually exclusive refers to those statistical events which cannot take place at the same time. Thus, these events are entirely independent of one another, i.e., one event’s outcome has no impact on the other event’s result.read more (one option eliminates the others). In other words, it is the marginal benefitMarginal BenefitMarginal benefits refer to the highest amount the consumer can and are willing to pay for acquiring the additional unit of goods or service. It denotes the utility or satisfaction a consumer gets from purchasing the extra unit of the goods or service.read more 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.

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

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 Keynesian 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.

 

  • Gross Domestic Product Unemployment rate Inflation Interest rate Balance of payments

  • Price Individual expenditure Factors of production Wages Consumptions Investments

A highly regarded economist, Milton Friedman, explained the Great Depression as a banking crisis, deflation, higher interest rates, and restrictive Monetary Policy Monetary PolicyMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more – 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.

This article has been a Guide to the Difference Between Macroeconomics and Microeconomics. Here, we discuss the key differences and how they differ? with examples. You may also have a look at the following articles: –

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