Microeconomics Vs Macroeconomics
In this review we will be taking a look at the main differences between macroeconomics and microeconomics and the main impacts each have on the market.
Macroeconomics and microeconomics are important and broad fields of economics. Although they are both worthy to study in economic behaviours and trends, the two financial disciplines can bring confusion at first glance but easy once you learn to differentiate micro economic issues from macroeconomic ones.
They both cover development, policy politics, agriculture, development, and labour. However, the principles of these fields are frequently misunderstood or confused. While they share few similar concepts which are interrelated relevantly, there are fundamental differences between
these areas.
In this article, you will learn some microeconomics topics, the definitions, difference, similarities and their importance in the economy. If you are looking for a really good interactive online course you should check out the Fundamentals Of Finance on this site.
Definition of Macroeconomics
Macroeconomics is a branch of economics that deals with the behaviour and performance of standard variables and the issues that have a direct impact on the economy. It entails regional, national and international economies of scale and covers the majority fields like poverty, general price level, unemployment GDP (Gross Domestic Product), exports and imports, monetary
or fiscal policies, economic growth, globalization and general price levels.
Students studying macro economics will learn how about the factors that fuel the Central Bank to manipulate the money supply and the interest rate of an economy at a particular time.
In short, macroeconomics topics can be viewed as a top-down approach, where the whole economy is seen from a birds eye view. It aims at studying various aspects that will help to understand the state of an economy, thereby formulating favourable policies.
To illustrate this, the Central Bank in most countries majorly uses the macroeconomic nature of the country and the globe to make critical policies on interest rates. Although macro economics has a broader scope than microeconomics, most of the macroeconomic factors are essential in predicting a micro economic level.
For instance, as an example of microeconomics, understanding how the unemployment rate is at the national influence will enable the micro economics to predict the layoffs in a particular company. Common topics in macroeconomics include the effect of international trade, business cycle and theoretical issues that contribute to economic growth in the long-run.
What is microeconomics?
Microeconomics is a branch of economics that deals with the performance and behaviour of the individual units in an economy, like family, consumers, industries and firms. In this field, demand plays a significant role in determining the price of a product as well as the price of the quantity of a related product, i.e., complementary and substitute goods to make a shrewd decision regarding the provision of scarce resources while considering the alternatives. For an example of microeconomics, an economist studying micro level might be interested how the present consumer demand affects the level of oil industries and the prices as well.
In other words, microeconomics is a bottom up approach. The primary examples of microeconomics include the components that make up the economy such as capital, entrepreneurship, labour, and land.
Agriculture, manufacturing and tertiary sectors are the critical element that creates
a better understanding of microeconomics. Microeconomics is based on the idea of a market economy where the consumer demand is the driving force for the prices and product quality and quantity of goods and services.
The field of economy is interested in how particular parties choose and use limited resources that are available to them. The microeconomic study involves critical topics like demand supply equilibrium, consumer demand theory, cost of production, measurement of elasticity and economic market conditions.
How Macroeconomic Effect Microeconomics
Assuming that the country’s Central Bank cuts the interest rate policy (impact to the macroeconomics) by 1%, the result will be ideally lower borrowing cost by commercial banks leading to a lower deposit rate giving room to lower rates on loans they make to corporate and individuals. The move will result in rising in borrowing (credit growth) given the cheaper access to credit. Also, there will be greater investment aiding cooperates to invest in new assets, expansion plan, and projects which are developed on the microeconomics.
One other thing, the unemployment rates in an economy can help understand the number of jobs and industry can create amongst another factor. Other examples of how macro policies affect micro economy include;
- Changes in subsidies
- Changes in income tax
- And currency related policies (like China undervaluing the Yuan to the US Dollar)
How Micro Economies Effects Macro Economies
Among the multiple factors that affect macro policies is the condition of the micro economy. Looking at the previous assumptions, given the central bank have lowered their policy rates, they can observe the investment and borrowing patterns of individuals, corporate and households.
The behavioral patterns can aid the Central Bank to know whether they should cut rates if the outlook rate is weak or hold the rates if the prospect is shooting up. Other relevant examples include:
- Consumer Price Index (CPI) is calculated by taking surveys of retails and individuals based on their spending patterns, and the outcome result is an accurate percentage which can indicate the rate of inflation. The percentage figure is considered an important determinant that the Central Bank uses to set policy interest rates. Therefore the spending behaviour of individual’s microeconomics has an indirect impact on macroeconomics.
- Looking at the US economy, the major factors that affect policy decisions is the wages growth or the payroll numbers, which is an essential concept of micro economy.
- Opportunity cost, a fundamental concept of micro economy, where the cost is incurred by not choosing the second best options given that the choices are mutually exclusive. In other terms, there is a marginal benefit of choosing the second best comparable to achieve the same
purpose at a lower cost.
The Difference Between Macro and Micro Economics
The simplest way to differentiate macro economics and microeconomics is to reason about the names of these branches of economy. According to the name, microeconomics is the study of economics on more smaller and accurate scale. Similarly, the fundamental definition of macroeconomics is the study of economics on a broader scale.
Although the supply and demand patterns apply to both fields of economics, microeconomics is believed to be by premises of sellers and buyers achieving equilibrium in case the disequilibrium exists. The macro economy is keen on different cycles of the economy like short-term and long-term debt cycle, super-cycle and the business cycle.
It gives us a better understanding that the economy could stay in a state of disequilibrium for a period before adjusting to equilibrium. Other key differences between macro and micro include;
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Microeconomics studies the particular market part of the economy while macro economy studies the whole economy that is within the market segment.
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Microeconomics focuses on the individual and cooperate factors of the economy whereas the macro economics concentrates on the aggregate economic variables.
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While microeconomics applies on the operation and internal factors, macro economics stresses on the external and environmental factors that affect the state of the economy.
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Microeconomics topics deals with issues like how to price a specific good or service will change its quantity demanded and the supplied and vice versa. On the other hand, macroeconomics covers major factors that influence the current economy like poverty, unemployment, fiscal policies, international trade and monetary policies.
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Microeconomics includes an individual product, household, wages, prices, firm, wages, and industry, while the macroeconomics is interested with the aggregates like national output, national income, and the price levels.
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When analyzing the state of an economy, the micro economies take the bottom up approach, whereas the macroeconomic take the top-down approach.
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Microeconomics determines the price of a particular commodity considering the price of substitute and complementary goods while the macroeconomics is necessary for balancing the general price level.
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The microeconomics study objective is to analyze how the increase in demand can help the economy to maximize the supply. In contrast, the goal of macroeconomics is to optimize the income at the national levels by the provision of full employment, the balance of payment and
economic growth.
The Effect of Macroeconomics vs Microeconomics In Decision Making
If you want to open a business, you may overlook the larger economic forces that may influence the existence of your investment. However, you can’t afford only to look at the micro-economic effects of the local economy, prices of competitors, salaries, and policies on bank loans.
Macroeconomic factors like government regulations, modern trends, and inflation also deserve consideration when making critical decisions for your enterprise.
Below are some effects of macro and micro economics in decision making;
Contract With Vendors
Having a micro economic ground can enable you to get the favourable terms and condition especially on discounts when entering long term contracts with suppliers. However, in case you macro economic indicator shows the possibility of a recession, then it will be wise to
settle on a short term contract.
Hiring Permanent Employees
If your business is growing at a faster rate, you might be tempted to add more employees on your payroll. However, your commitment to permanent employment is not wise especially when the larger economy suggests that employees are cutting back. Stick to the temporary work until the macroeconomic and micro-economic trends are both positive.
Expansion
A growing company can be exciting. In case the next market justifies the expansion of your investment, you can go ahead. However, look at the macroeconomic factors like business leaders who might be aware of the future financial forces. Also remember that expansion
requires more employees, facilities, and equipment.
Similarities of Macro and Microeconomics
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Although it is comfortable to split into two branches of economy, macroeconomics and microeconomics to some extent share some similarities.
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Macroeconomics utilizes the micro principles. When studying the impact of inflation (reduction in value of a product), you will have to use some principles of change in price and elasticity of demand (decrease or increase of demand)
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Macro and micro economics have a significant effect to one another. For example, if there is a rise in oil prices, there will be a great crash on cost pull inflation (increase in the price of commodities due to the increase in the cost of raw materials). In case of technology has a positive impact and reduces its cost, will enable a faster economic growth.
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Blurring of distinction; In case there is a rise in rental prices (a micro effect on the
housing market) however, the housing market can also be considered as a macroeconomic variable that influences the monetary policies.
Advantages Of Micro Economics
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It can aid in the determination of the prices of particular products in the economy. The identification of the various prices of the factors of production like; labour, land, capital, entrepreneurship, and organization which are important concepts to consider before investing.
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It is commonly known for free enterprise economy’ therefore the enterprise is free to make flexible and independent decision concerning the investment.
Its Drawbacks
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The assumption of full employment during the calculation of GDP is entirely unrealistic. The assumption that there is always a situation of full employment is often misleading. The levels of employment are ever changing. Therefore, it is expected to grow due to the increase in demand.
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Microeconomics focuses only a small population of the economy while the bigger party is not analyzed.
Advantages of Macroeconomics
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Macroeconomics can be useful in the identification of the overall health or living standard of the economy and therefore improve the economy by ensuring there is stability in the general prices of commodities, solving economic issues like deflation, inflation, unemployment, and
poverty.
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It is also helpful in determining the balance of payment considering the causes of the surplus
deficit. As a result, the Central Bank can make critical decisions on the economic and fiscal policies to solve the public finance.
Its Drawbacks
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When studying macroeconomics, one may sometimes involve the �fallacy of composition.’ In other words, what’s true for the whole portion is also true for one portion. The generalization could often result in some errors.
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According to macroeconomics, the aggregates, referred to as homogeneous, but this is not true since they can sometimes be heterogeneous.
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Macroeconomics covers only the aggregate variables which eliminate the welfare of individuals.
Bottom Line
Macroeconomics vs microeconomics are two interlocking discipline of the economy where one phenomenon often bleeds over the other. When looking at the economy as a whole, it’s important to utilize both the macro and micro economics. The two branches are relevant studies within the economics that are essential to provide knowledge for an overall sustainable growth of the economy.
A micro economist can’t possibly consider business investment policies without referring to the impact macroeconomic trends like taxes and economic growth. Similarly, a macro-economist can’t fully research the components of output in a country’s economy without considering
the effect of individuals, households, and firms.
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