What is the difference between macroeconomics and microeconomics?

Answer 1

Macroeconomics is the branch of economics that deals with aggregate economic decision or behavior of an economy as a whole; for example, the problem of inflation, level of unemployment, and payment of a deficit. To put it simply, it studies the economy as a whole.

In contrast, Microeconomics is the branch of economics that studies the behavior of an individual decision-making unit such as an individual firm, their relationship with the market, at what price to set a commodity, how much of a commodity should be produced, how an individual uses their income to maximize satisfaction, and how the price of each commodity in the market is affected by the forces of supply and demand.

For example, macroeconomics deals with GDP, inflation, interest rates, and unemployment. Microeconomics deals with the economics of health care or agriculture or labor. For instance, a macroeconomist would study GDP numbers, Fed moves, the Dow Jones Industrial Average, or the Producer Price Index. A microeconomist, on the other hand, might attempt to study the economics of labor (ie: unions, labor shifts, etc).

Although "micro" means small and "macro" means large, the two shouldn't be separated by the size of an economy or firm. For example, Wal-Mart may be many times the size of the economy of a small nation; however, Wal-Mart's costs and supply/demand curves will be governed by microeconomic decisions while the GDP of the small economy is an aspect of macroeconomics.

More Information:Microeconomics is generally the study of individuals and business decisions; macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast; 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. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, 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.

Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, 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.

While these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, 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.

The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. Regardless, both micro- 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, how an entire economy is managed and sustained.