Microeconomics and macroeconomics are two diverse viewpoints on an economy. Microeconomics focuses on the individuals, firms, and industries of the economy. In microeconomics, we focus on how individuals’ choices are determined, what those choices determine and for whom do we produce goods and services. Macroeconomics looks into the economy as a whole, focusing on areas like unemployment, inflation, and growth in the standard of living. It has two types of strategies for these areas: monetary policy and fiscal policy. Microeconomics and macroeconomics are not distinct topics, but rather corresponding perspectives on the complete subject of the economy.
A Good Look Into Microeconomics
Microeconomics is the study of economic inclinations, or what is prone to happen when certain choices are made by individuals and how those choices affect the factors of production. Given it is essentially a completely advanced and a normatively settled science, microeconomics does not necessarily try to demonstrate what should happen in a market, rather, it only explains what expectations should be kept if certain conditions are altered. At its basic, microeconomics describes what is to be anticipated if valid situations change. Hence, if a manufacturer increases the prices of smartphones, microeconomics addresses that consumers will tend to buy fewer smartphones than they have before. In case of a major collapse of a copper mine in South America, the price of copper will tend to rise, as the supply will most likely be restricted. Microeconomics is based on a free business economy, which depicts the business is independent to take decisions. The key concepts of this study include:
(1) Demand, supply and, equilibrium – which deals with price determination in a competitive market at its basic; if depicted that the price demanded by the consumers is equal to supplies produced by the producers, then we conclude that the economy has reached equilibrium.
(2) Labor economics – the necessity of comprehending the dynamics of the wage labor market, looking into employers, suppliers and, attempts to understand the pattern of income, wages, and employment.
(3) Cost of production – which talks about how the price of goods and services is determined by the cost of resources utilized for making it.
(4) Production theory – dealing with conversions of inputs into outputs and vice versa.
Macroeconomics is the study of economics which greatly looks into the behavior and performance of aggregate variables and the issues which impact the whole economy. It comprises regional, national and international economies. Moreover, macroeconomics covers unemployment, poverty, general price level, GDP (Gross Domestic Product), imports and exports, economic growth, globalization, monetary/ fiscal policy, all of which are the key factors of an economy. It aids in determining the numerous problems of the economy. Thereby, it enables efficient functioning.
Numerous goals can explain an economy’s macroeconomic conditions: development in the standard of living, reduced unemployment and inflation, most importantly. We might as well wonder how a macroeconomic policy can be utilized to pursue such goals.
- Monetary policy: This approach involves policies that affect interest rates, bank loans, and financial capital markets. It is conducted by a nation’s central bank. For example, in the United States, this is the Federal Reserve.
- Fiscal policy: This process includes taxes and government spending, which are determined by a nation’s parliamentary body. For instance, in the United States, this is the Congress and the executive branch, which instigates the federal budget. These are the core tools the government has to work with.
It is important to acknowledge the necessity of both microeconomic and macroeconomic perspectives. As an illustration, let’s consider a tricky study of a biological ecosystem like a lake. An individual, who is out to study the lake, keeps in mind to focus on specific topics such as certain types of plant life; the features of particular fishes; or just the trees neighboring the lake.
Another individual, who is also out for the same motive, might just straightly take an overall view instead, and reflect the entire ecosystem of the lake; what feeds on what, how the system controls and balances itself, and what environmental pressures affect this balance. The reason for this illustration is to prove the fact that both of these methods are useful.
Both approaches are examining the same lake, but the viewpoints are unlike. Similarly, microeconomics and macroeconomics study the same economy, but each has a different perspective. Whether you are considering lakes or economics, it is quite important that the observations of the micro and the macro blend well with each other.
In economics, the micro-decisions of discrete businesses are inclined by whether the macroeconomic economy is healthy. For instance, if the overall economy is emerging, firms will be more likely to employ workers. Consecutively, the performance of the macroeconomic economy will stay dependent on the microeconomic decisions made by individual businesses and households.
Key Differences Between Micro and Macro Economics
- Microeconomics examines the particular market segment of an economy, whereas Macroeconomics examines the entire economy, which covers quite a few market segments.
- Microeconomics emphasizes on individual economic units. On the other hand, the emphasis of macroeconomics is on aggregate economic variables.
- Although microeconomics is enforced into operational or internal issues, macroeconomics deals with environmental and external issues.
- Microeconomics works with individual firms, products, industries, households, wages, prices, and so on, while macroeconomics deals with aggregate factors like national income, national output, price level, etc.
- Microeconomics covers concerns of particular prices of commodities and how those commodities affect its quantity demanded and quantity supplied and vice versa. However, macroeconomics majorly covers concerns of unemployment, monetary/ fiscal policies, poverty, and international trade, of an economy.
- Microeconomics determines both, the price of a particular commodity, as well as the prices of complementary and the substitute goods, whereas macroeconomics is useful in maintaining the overall price level.
- While studying any economy, microeconomics takes a bottom-up approach, whereas the macroeconomics takes a top-down approach into attention.
- In microeconomics, unrealistic assumptions are put up as a basis such as, there will be full employment in the society. That is very unlikely. However, in macroeconomics, it is assumed that the economy may be in a state of disequilibrium (boom or recession) for a longer period. In addition, with high possibility, what is true for aggregate may not be true for individuals.
- Microeconomics tends to work from a theory first. Nevertheless, macroeconomics places greater importance on empirical data and attempts to explain it.
- Investors can use microeconomics in their investment decisions, whereas macroeconomics is utilized as an analytical tool mainly to craft economy and fiscal policy.
As microeconomics focuses on the distributions of scarce resources among the individuals, macroeconomics analyzes how these distributions of scarce resources are to be done amid several people, so that it makes the optimum use of the limited resources. Microeconomics studies about the independent variables more. At the same time, macroeconomics studies the aggregate factors. With these observations, we can depict that microeconomics and macroeconomics are interdependent. In other words, microeconomics and macroeconomics both concentrate on the allocation of limited resources. Both disciplines study how the demand, for assured resources, interacts with the ability to supply that good, so that it ends up determining how to optimally distribute and allocate that resource amid various consumers.
To sum up, microeconomics and macroeconomics are not contradictory by nature. Instead, they are complementary. As every coin has two sides, microeconomics and macroeconomics are also the two sides of the same coin, where one’s drawback is the other’s advantage. Hence, in this way, they run the entire economy.
The area of application is one of the most significant things, which makes microeconomics and macroeconomics different. In microeconomics, an economist might focus on how the supply gets shifted by the tax in a specific market, or how a firm’s decision making gets influenced.
At the End
In contrast, a macroeconomist will simply consider whether the standard of living for all of the economy’s participants will be improved by tax translation. Another way to phrase the differences is to state that microeconomics is the study of markets, while macroeconomics includes the total economic activity. This key difference modifies how the two approach economic circumstances. Microeconomics does reflect on macroeconomics – which forces impacts on the world- but it focuses more on how those forces impact individual firms and industries.