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Difference Between Microeconomics

and Macroeconomics
by Tejvan Pettinger on February 4, 2013 in A-Level, economics

Readers Question: Could you differentiate between micro economics and
macro economics?
Microeconomics is the study of particular markets, and segments of the economy.
It looks at issues such as consumer behaviour, individual labour markets, and the
theory of firms.
Macro economics is the study of the whole economy. It looks at ‘aggregate’
variables, such as aggregate demand, national output and inflation.

Micro economics is concerned with:









Supply and demand in individual markets
Individual consumer behaviour. e.g. Consumer choice theory
Individual labour markets – e.g. demand for labour, wage determination
Externalities arising from production and consumption.
Macro economics is concerned with
Monetary / fiscal policy. e.g. what effect does interest rates have on whole
economy?
Reasons for inflation, and unemployment
Economic Growth
International trade and globalisation
Reasons for differences in living standards and economic growth between
countries.
Government borrowing

Moving from Micro to Macro
If we look at a simple supply and demand diagram for motor cars.
Microeconomics is concerned with issues such as the impact of an
increase in demand for cars.

This micro economic analysis shows that the increased demand leads to higher price. . Macro economic analysis This looks at all goods and services produced in the economy. and higher quantity.

The macro diagram is looking at Real GDP (which is the total amount of output produced in the economy) instead of quantity.t. Before. Monetarist. Micro economics tends to work from theory first. and macro looks at the whole economy.g. 2.c). Keynesian. But. it was assumed that the macro economy behaved in the same way as micro economic analysis. There are different schools of macro economics offering different explanations (e. Microeconomics works on principle that markets soon create equilibrium. there are other differences. 4. If demand increases faster than supply. Austrian. For a long time. There is little debate about the basic principles of micro-economics. we are looking at the overall price level (PL) for the economy. Real Business cycle e. Equilibrium – Disequilibrium Classical economic analysis assumes that markets return to equilibrium (S=D). Macro economics places greater emphasis on empirical data and trying to explain it. Instead of the price of a good. Macro economics is more contentious. we just look at Real GDP rather than Quantity and Inflation rather than Price Level (PL) We can also consider differences between micro and macro economics. Small segment of economy vs whole aggregate economy. I will summarise the main differences here: 1. In macro economics. there wasn’t really a separate branch of economics called macroeconomics. Great Depression and Birth of Macroeconomics . Differences Between Microeconomics and Macroeconomics The main difference is that micro looks at small segments. Inflation measures the annual % change in the aggregate price level. this causes price to rise and firms respond by increasing supply. Macro diagrams are based on the same principles as micro diagrams. the economy may be in a state of disequilibrium (boom or recession) for a longer period 3. the 1930s.

. output was below capacity. It examined why we can be in a state of disequilibrium in the macro economy. and there was a state of disequilbrium. J. In 1936. Micro effects macro economics and vice versa. Iriving Fisher examined the role of debt deflation in explaining the great depression. microeconomic principles of markets clearing. Keynes’ theory was the most wide ranging explanation. But. If you study impact of devaluation. didn’t necessarily apply to macro economics. this examined why the depression was lasting so long. this enables faster economic growth. For example. If we see a rise in oil prices. Micro principles used in macro economics. and will influence monetary policy. Keynes observed that we can have a negative output gap (disequilibrium in the macroeconomy) for a prolonged time. There was high unemployment.M. There have been efforts to use computer models of household behaviour to predict impact on macro economy. Classical economics didn’t really have an explanation for this dis-equilibrium. 4. housing market is so influential that it could also be considered a macro-economic variable. Keynes wasn’t the only economist to investigate this new branch of economics.Keynes produced his The General Theory of Employment. it is to some extent an artificial divide. Blurring of distinction. you are likely to use same economic principles. 1. 3.In the 1930s. this is a micro economic effect for housing market. and played a large role in creating the new branch of macro-economics. such as the elasticity of demand to changes in price. Similarities between Microeconomics and Macroeconomics Although it is convenient to split up economics into two branches – microeconomics and macroeconomics. If technology reduces costs. In other words. Interest and Money. If house prices rise. macroeconomics developed as a separate strand within economics. which from a micro perspective. 2. There have been competing explanations for issues such as inflation. Since 1936. economies were clearly not in equilibrium. But. shouldn’t occur. this will have a significant impact on cost-push inflation. recessions and economic growth.

both micro. For example. how an entire economy is managed and sustained. and price levels. macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. (To keep reading on this subject. is the field of economics that studies the behavior of the economy as a whole and not just on specific companies.) 10. What's the difference between macroeconomics and microeconomics? 6. The field of study is vast. While these two studies of economics appear to be different. but entire industries and economies. and their wide array of underlying concepts. here is a brief summary of what each covers: Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. For example. By Investopedia Staff A A A 8. macroeconomics looks at higher up country and government decisions. national income.and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus.Economics. microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry. seeMacroeconomic Analysis. This means also taking into account taxes and regulations created by governments. Regardless. have been the subject of a great deal of writings. such as Gross National Product (GDP) and how it is affected by changes in unemployment. increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public. Macroeconomics and microeconomics. (Find out more about microeconomics in Understanding Microeconomics.5. rate of growth. The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. Principles of Macroeconomics. For example.) Macroeconomics. This looks at economy-wide phenomena. on the other hand. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. 7. they are actually interdependent and complement one another since there are many overlapping issues between the two fields. Macroeconomics Basics. Basic Macroeconomics Terms 9. . Microeconomics is generally the study of individuals and business decisions. Related Searches: Macroeconomics Concepts.