Macroeconomics vs Microeconomics

Macroeconomics & Microeconomics: Meaning

Economics is a social science. And it is the study of how the people within the country or of an economy relate to the value. And how they produce, consume and distribute the goods and services within an economy. It studies how people allocate the scarce resources available to achieve maximum possible efficiency, thereby creating value in the process. We can divide economics into two categories: Macroeconomics and Microeconomics. As the name suggests, macroeconomics has a much broader view and scope. It looks into the matters that concern countries, the economy, and the world economy. Microeconomics has a micro or narrower view. It looks into individuals and corporations and the matters that concern them.

Macroeconomics

As we discussed above macroeconomics deals with the policies and regulations related to the country or its economy. Hence, the focal point and the main objective of it remains on improving and maximizing the national income and growth. And one can achieve these by uninterrupted and efficient economic activities, minimizing unemployment, stabilizing prices, and maintaining a fair distribution of income and wealth in the society. Further, it studies the cause and effects of business cycles, their effect on the national income, imports and exports, and the Balance of Payments. So, the approach and direction of macroeconomics relate to achieving optimum and maximum long-term sustainable economic growth of the countries.

Microeconomics

Microeconomics focuses on maximizing the welfare of individuals and companies. It assumes that business entities act rationally and have limited constraints with regard to decision-making. Because they have not to ask anyone outside nor they have to look at the broad picture and take care of the various segments of the economy or industry and so on. Hence, they are expected to work without any outside influence. And thereby they will make the most efficient and rational use of the available scarce resources at their disposal. Thus, the study of microeconomics focuses on demand and supply of goods and services, price equilibrium, production and distribution, government rules and regulations that affect a business, etc. In short, microeconomics revolves around the study of the factors of production- namely labor, capital, land, and enterprise.

Macroeconomics vs Microeconomics: Differences

As the focus of these two approaches are different, let us try to understand and absorb the key differences between these two categories of economics:

Meaning and Scope

Macroeconomics focuses on elements that affect nations and economies as a whole. Its scope is much wider than microeconomics. It makes use of a top-down approach in addressing the matters of the economy. It looks into broader issues like the gross domestic product or GDP, inflation and interest rates, unemployment, the growth rate of the economy, exploitation of available natural resources, etc. Therefore, Macroeconomics helps the government of that country to design and implement the fiscal and monetary policies of the country. It studies the economy as a whole and accordingly makes the regulations and policies that have a far-reaching positive impact on the social and economic status of various strata of society and business.

On the other hand, microeconomics studies individuals, markets, and businesses. Obviously, the scope of microeconomic remains quite narrow and limited, in terms of objective and resources. It covers demand and supply, price and quantity that can be bought and sold at that price, labor costs, government taxes, and their effects, etc. Microeconomics uses the bottom-up approach in dealing with the matters of the individuals or the organizations. It breaks it into small fragments and looks at them individually.

Demand/Supply and Aggregate Demand/Aggregate Supply

Since macroeconomics deals with the country’s economy it tries and directs to achieve equilibrium at a total demand and supply level in the economy. This model is known as the AD-AS model. It gives us the price level as well as the real output levels at which aggregate demand and aggregate supply are in equilibrium. And this model helps us to understand the various macroeconomic factors, like inflation and deflation. Furthermore, there is the IS-LM model that helps to find the interest levels and output levels or the supply side that can create equilibrium in the following two markets: equilibrium between investments and private savings, and equilibrium between investments and the preference for keeping liquid money. So the model takes into account the effect of interest rates as well as the macroeconomic factors like savings and investments.

Microeconomics explains the demand and supply equilibrium at an individual or business level and not the economy as a whole. It explains how a rational consumer will maximize the utility that he derives from the consumption of a product, keeping in mind his resource constraints or limitations. The model helps to find equilibrium between his preferences and the amount he is willing to spend for them. This is the basis of equilibrium levels of demand and supply.

Economic Growth & Individual Growth

Macroeconomics focuses on the betterment and economic growth of the entire economy as a whole. It helps to identify the factors that affect the aggregate demand and supply or production, namely interest rates, inflation, government’s fiscal and monetary policy, etc. Macroeconomics aims to improve national output and income while trying to minimize the unemployment situation in the economy.

Macroeconomics vs Microeconomics

Microeconomics focuses on the growth and development of individuals- be it persons or businesses. It helps to focus on maximizing individual welfare at the best possible price while taking care of their resource limitations. It takes into account the concept of opportunity cost to maximize socio-economic welfare. Opportunity cost is the cost or value of the next best possible option that a person forgoes to choose a particular item of consumption. Hence, an individual has to give up on things that are lesser important to him in order to make a particular choice. The policy helps to maximize the benefit by taking into account opportunity cost for a particular choice as well as the scarcity or limitations of options available.        

Savings & Investments: The Paradox of Thrift

Macroeconomics aims to promote aggregate demand and investments in an economy that will result in higher economic growth. This means that it assumes people will be better off with limited savings so that they spend more of their income to boost demand and consumption in the economy. This will lead to an increase in the national output or gross domestic product. Hence, it assumes that lower savings are the key to higher growth.

Microeconomics pushes for the exact opposite. According to it, individuals can maximize their welfare by saving more and spending less. By doing so, they will have more disposable income in their hands. Therefore, it assumes that an increase in savings is good for individuals and businesses.

Final Words

Though macroeconomics and microeconomics are two different categories of economics, they are very much interdependent also upon each other. They share common principles, and many macroeconomics phenomena impact microeconomics or the choices of individuals and businesses. Similarly, microeconomic phenomena have a big impact on macroeconomic factors.

Let us take an example of the rise in prices of an essential commodity such as fuel. The price rise initially hits individuals and businesses with an increase in direct consumption cost, as well as an increase in indirect costs such as power and energy, transportation of essentials and business goods, etc. This leads to an increase in inflation in the economy which is a macroeconomic factor. Prolonged inflation will push the government to alter its fiscal and monetary policies, and this may have an impact on aggregate demand and supply, as well as the national output.

Similarly, a macroeconomic policy such as a cut in interest rates brings down the cost of credit. This will encourage individuals and businesses at the micro level to borrow more and hence spend more. This will result in an increase in individual demand and consumption in the economy.

Therefore, both the categories of economics are related to each other. Theories and policies of both macroeconomics and microeconomics are important in their own way while having an impact over the other at the same time. Finally, at a broader level, both are interlinked and are not completely decoupled. The macroeconomic policies are driven to make changes in the behaviour at the microeconomics level, without which the success of macroeconomic policies are doubtful.

Frequently Asked Questions (FAQs)

Which one of the following is an example of macroeconomics?
a. Individual demand
b. National income
c. Price of a product

b. National income is an example of macroeconomics

Which one of the following is an example of microeconomics?
a. Aggregate demand
b. Aggregate supply
c. Individual supply

c. Individual supply is an example of microeconomics

Explain the scope of macroeconomics.

Macroeconomics looks into broader issues like the gross domestic product or GDP, inflation and interest rates, unemployment, the growth rate of the economy, etc. It studies the economy as a whole.

What is microeconomics?

Microeconomics studies individuals, markets, and businesses. It covers demand and supply, price and quantity that can be bought and sold at that price, labor costs, government taxes, and their effects, etc. It uses the bottom-up approach in dealing with the matters of the economy.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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