Micro vs. Macro Economics: Differences and Similarities

By Indeed Editorial Team

Published 16 May 2022

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Economics is a broad social science that is divided into microeconomics and macroeconomics. Whether you want to be a researcher or economist, it's important to be knowledgeable about these two branches of economics to understand concepts like demand and supply, international trade and monetary policy. While they share similarities, these two economics branches have key differences that can have a significant impact on research and policy. In this article, we define what microeconomics vs. macroeconomics is, discuss their differences and similarities and define their key concepts.

Micro vs. macro economics

Here's a comparison of the definitions and principles of micro vs. macro economics:

What is microeconomics?

Microeconomics is the branch of economics that studies how individuals, households and businesses make decisions about the allocation of scarce resources. The key concept of microeconomics is the law of demand and supply, which is the determinant factor for the price of goods and services in a free market. It also aims to understand how taxes, market controls, regulations and laws influence human buying habits.

Understanding the principles of microeconomics can help individuals prioritise what to buy based on their budget. It can also provide insights into the factors companies consider when allocating productive resources, setting prices and competing in a perfect market. To understand microeconomics, it's important to know its core principles, which include:

Supply and demand

The principle of demand and supply states that the lower the supply of a product or service desired by the buying public, the higher the price. When demand outstrips supply, price rises and it falls when supply exceeds demand. Companies and consumers try to achieve equilibrium, a state where there's adequate supply at the price customers want to buy goods or services.

This principle is important for individuals as it influences their scale of preference, which is a list of wants they want to satisfy based on an order of importance. It also influences companies' motivation to produce as it can determine the profitability of their operations.

Related: How Does Supply and Demand Work? (With Definitions)

Production theory

This microeconomic principle studies the methods of producing goods and creating services. It investigates the production strategies businesses use to achieve economies of scale, including product selection, marketing strategy and cost optimisation. Understanding production theory can help companies allocate resources effectively to achieve optimal revenue generation and profitability.

Labour economics

Labour economics is an integral part of productive activities, as the human element is critical for the optimal use of capital, land, machinery and other factors of production. This principle investigates how employers can leverage their personnel for improved productivity and efficiency and the accomplishment of revenue targets. It also examines labour contracts, compensation and other important factors that can help companies get maximum value from their workforce.

Related: Contract vs. Permanent Employees (Explaining the Difference)

Costs of production

This theory postulates that producers determine the price of goods or services based on the cost of the productive resources. It's an important concept for understanding the cause-and-effect relationship between changes in production costs and the market price. Besides the cost of raw materials, production costs also include the interest businesses pay on capital, salary of employees, machinery, supply chain expenses and the budget for marketing and sales campaigns. This principle can help manufacturers create an effective pricing strategy that considers depreciation, fixed cost, variables cost, marginal cost and other factors that make the production process possible.

Related: What Is Fixed Cost and What Is Its Business Application?

Financial satisfaction

This concept, also called utility, is the satisfaction an individual derives from spending a specific amount of money on a product or service. It assumes that the primary motivation for making financial decisions is to achieve satisfaction. By assigning values to the utility consumers can get from purchases, the researcher can estimate their readiness to invest in such items or more desirable alternatives. This principle isn't only important for understanding customer behaviour, but it can also help manufacturers identify the specific features, functions and pricing that are most likely going to deliver the best experience for certain market segments.

What is macroeconomics?

Macroeconomics is the study of a country's economic policies and their impact on industries, employment, balance of trade, growth, development, national income and the citizens' living standards. It aims to understand the role of manufacturing and other productive activities on a nation's wealth and how economies grow over time. This branch of economics investigates national financial and economic activities and how they influence the global economy. It studies complex subjects like the impact of a country's tax regime on the inflow of foreign direct investment and the rate of inflation that's healthy for preserving the population's real wages.

Macroeconomics helps economists to understand how changes in Central Banks' interest rates affect mortgages, student loans and the cost of production. It's the primary economic policy formulating tool in most large countries. It informs import-export guidelines, monetary and fiscal policy, debt servicing and allocation of investment in critical sectors of the economy. If you want to understand how large economies trade with each other and other parts of the world, it's vital to understand the theories of macroeconomics, such as:

National Income

This aspect of macroeconomics studies the ability of a country to generate wealth. Economists use a wide range of parameters to measure national prosperity, including Gross Domestic Product (GDP), Gross National Product (GNP) and Net National Income (NNI). GDP represents the monetary value of all the finished products and services a country produced within a specific period, usually a year, making it an internationally accepted estimate of the size of a country's economy and its growth rate.

GNP is derived by adding a country's GDP with the overseas income of its residents minus the local earnings of foreign residents in the country. NNI is the GNI minus the depreciation of fixed capital assets. These calculations are vital for estimating the growth potential of a country, which is important for attracting new investments and growing national wealth.

Inflation

Inflation studies the rise of the cost of goods and services over time. One of the primary functions of central banks is to control inflation, particularly limiting it to zero or the low single-digits, as it has serious implications for the purchasing power of money. If a country has a high inflation rate while wages don't increase, the rising cost of items means residents may be unable to save and buy more things. This can reduce economic activity and cause such a country to slide into a recession.

Inflation is a complex phenomenon, but it often arises when the amount of money in circulation is greater than the actual value of the economy. This is why it's one of the primary targets of a country's monetary policy.

International trade

International trade concerns the import and export policy of a country. It studies a country's trade balance and how this affects local industries, especially those that have a comparative advantage in certain sectors. International trade policies also aim to achieve an optimal balance of payment, including maintaining adequate foreign exchange reserves to pay for imported goods local providers can't supply profitably. How a country's economic management team manages its international trade can have a significant impact on its GDP, employment and other important growth indices.

Related: What Is Elastic Demand? Definition and Uses in Economics

Monetary and fiscal policy

Fiscal policy is the combination of the government's decisions regarding public spending and taxation. Monetary policy concerns central bank operations related to the interest rate, credit, liquidity and other activities designed to regulate the flow of money in an economy. Adept management of the fiscal and monetary policy is vital for growing the economy, encouraging production activities and controlling inflation and other complex economic problems.

Differences between micro vs. macro economics

Here are some differences between micro vs. macro economics:

  • Businesses vs. government: Microeconomics focuses on the economic decisions of individuals, households and businesses. Macroeconomics studies national economies and their role in global trade.

  • Markets vs. larger economy: Microeconomics focuses on the dynamics of specific markets within a larger economy. Macroeconomics concerns itself with the role of national economies within international markets.

  • Consumer vs. national interests: Microeconomics helps researchers and policymakers understand what motivates individuals and groups to take specific economic decisions. Macroeconomics focuses on how nations protect their national interests while participating in a larger global economy.

  • Price vs. income: The primary concern of microeconomics is to understand the forces that determine the price of goods and services from the perspective of the buyer and supplier. Macroeconomics focuses on how countries increase their national income and achieve a trade balance with their international partners.

  • Equilibrium vs. imbalance: Microeconomic principles help individuals and businesses achieve an equilibrium of price and supply. Macroeconomics aims to eliminate imbalances that can cause unemployment, reduce national economic growth and disrupt the laws of supply and demand.

Similarities between microeconomics and macroeconomics

The fundamental similarity between the two branches of economics is that both study the forces that influence how to make economic decisions about scarce resources. While microeconomics studies these phenomena at the individual and business level, macroeconomics focuses on the strategic scale. Both aim to improve the deployment of productive resources efficiently to achieve satisfaction, but focus on different levels of the economy.

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