Microeconomic and Macroeconomic
What are the differences between microeconomic and macroeconomics ?
Microeconomics focuses on the observation and analysis of small-scale interactions (supply and demand, price determination, etc.), macroeconomics studies the economy at the national or international level.
The object of microeconomics in the current sense is the study of economic agents: the consumer, the company, etc.
Macroeconomics is the overall study of the economy based on major aggregates (sum of economic quantities of the same nature in value or volume) such as consumption, production, employment, income, investment, inflation, unemployment rate, etc. or indices that allow a comparison in time or space such as the consumer price index or the standard of living index.
Microeconomic and macroeconomic theories
Theoretical microeconomics is at the origin of concepts and models describing the behavior of economic agents and their interactions, in particular on the markets. She uses mathematical tools and statistical methods to model the functioning of the fields she studies. In the 19th century, this was the first form of mathematization of the economy.
At that time, a new economic trend appeared whose ambition was to describe the overall functioning of the economy based on the behavior of the individual. The economists of this current consider that the individual – represented in the form of a theoretical model the homo-oeconomicus – seeks to maximize his utility in an environment, where he must nevertheless take into account the means at his disposal and the other agents. economic.
Macroeconomic theory makes it possible, through the analysis of the relationships between the major aggregates of the economy, to understand their functioning and to predict their evolution when the environment changes following economic shocks (economic crises, conflicts, etc.) or a new orientation of economic policy. It is an essential tool for understanding economic policy choices. It informs the public authorities (government, central bank, etc.) on the actions to be taken in order to guide the course of the economy. The British economist, J.-M. Keynes, is considered the founding father of theoretical macroeconomics.
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Examples from Microeconomics
Some examples of the application of microeconomics can be:
- A company that manufactures shoes must analyze the impact that a rise in the price of one of its inputs, leather, has on its activity.
- In country B, a group of analysts wondered about the banking market, since only four large banks are in competition there, considered as an oligopoly. However, other experts warn that it should be taken into account that microfinance companies (fifteen in number) also offer savings and credit products.
- Faced with climatic problems, farmers are seeing their potato production reduced. This results in a decrease in the quantity supplied to the market and, therefore, upward pressure on the price.
Examples from Macroeconomics
Here are some examples of the application of macroeconomics:
- When a country goes through a period of recession, economic policy makers offer stimulus measures, like the one applied by the United States in the face of the 2008 subprime mortgage crisis.
- All governments generally set a legal minimum wage. This is calculated on the basis of the cost of the basic family basket, among other factors, and will normally be adjusted according to macroeconomic indicators such as inflation.
- Faced with an acceleration of inflation, the monetary authority decides to raise the mandatory reserve rate, which is the percentage of bank deposits that cannot be lent to their customers, but must remain in reserve.
- The executive branch prepares the public budget for the coming year, allocating resources to different portfolios or ministries. You can decide, for example, to increase the budget for social programs in order to fight against monetary poverty.
Conduct market research to save time
A macro-economic study is an analysis of all of a given activity at the national level. We may consider all the actors in order to understand their state of health, the particularities of this sector and thus establish what type of strategy to adopt in broad outline. It helps to understand how the activity works and which actors to take into account. It is already having an impact on the project. We see if it can fit into the existing logic, under what conditions.
Read also: Why do you need a Market Research? Key Points: Goals, Process, Classification
The micro-economic study aims to validate the designer’s project in his area. To identify specific targets, establish a precise strategy, adapt its offer in order to optimize start-up and profitability. Understanding the macro study allows you to carry out the micro study in better conditions. When you know your market well, you understand what the stakes of your micro study are and you set precise and clear objectives (which is the first condition for a successful study).
Key points to remember between Microeconomic and Macroeconomic
- Microeconomics and macroeconomics are 2 fields of study that involve examining the behavior in certain sectors of the economy over a certain period of time.
- Microeconomics is specific and smaller in scale, studying consumer behavior, the supply and demand equation in individual markets, and firms’ hiring and wage-setting practices.
- Macroeconomics has a broader scope, such as the impact of fiscal policy, the overall causes of unemployment or inflation, and how government actions influence national economic growth.
Read also: Parallel Economy Model (Black Economy) and Their Examples
Comparison chart
Basis of comparison |
Microeconomics |
Macroeconomics |
|---|---|---|
Meaning |
The branch of economics that studies the behavior of an individual consumer, firm, or family is called microeconomics. | Macroeconomics is the branch of economics that studies the behavior of the entire economy (domestic and international). |
It deals with |
Individual economic variables | Aggregate economic variables |
Application in business |
Applied to operational or internal issues | Environment and external issues |
Scope |
Covers various issues such as:
|
Covers various issues such as:
|
Importance |
Useful for determining the prices of a product as well as the prices of the factors of production (land, labor, capital, contractor, etc.) in the economy. | Maintains the stability of the general level of prices and solves the main problems of the economy such as: inflation, deflation, reflation, unemployment and poverty as a whole. |
Limits |
It is based on unrealistic assumptions, i.e. in microeconomics it is assumed that there is full employment in society, which is not possible at all. | It has been analyzed that “compositional error” implies, which sometimes does not prove the truth, because it is possible that what is true for the aggregate is not also true for the individuals. |
Special Considerations
Although there are many differences between microeconomics and macroeconomics; they are largely interrelated. Inflation is a prime example of this interdependence. Inflation and its impact on the cost of living is a common research topic in the study of macroeconomics.
However, as inflation raises the prices of services and commodities, it can also have acute implications for individual households and businesses. Businesses may be forced to raise prices to meet the increased amounts they have to pay for materials and the inflated wages they have to pay their employees.
Sources: CleverlySmart, PinterPandai, International Monetary Fund (IMF), Maryville University
Photo credit: geralt via Pixabay
