essay on microeconomics and macroeconomics

Difference between microeconomics and macroeconomics

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 involves

• 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. e.g. Externalities

Macro economics involves

• Monetary / fiscal policy. e.g. what effect does interest rates have on the 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 and higher quantity.

Macro economic analysis

This looks at all goods and services produced in the economy.

• The macro diagram is looking at real GDP (which is the total amount of output produced in the economy) instead of quantity.
• Instead of the price of a good, we are looking at the overall price level (PL) for the economy. Inflation measures the annual % change in the aggregate price level.
• Instead of just looking at individual demand for cars, we are looking at aggregate demand (AD) – total demand in the economy.
• Macro diagrams are based on the same principles as micro diagrams; we just look at Real GDP rather than quantity and Inflation rather than Price Level (PL)

The main differences between micro and macro economics

• Small segment of economy vs whole aggregate economy.
• Microeconomics works on the principle that markets soon create equilibrium. In macro economics, the economy may be in a state of disequilibrium (boom or recession) for a longer period.
• There is little debate about the basic principles of micro-economics. Macro economics is more contentious. There are different schools of macro economics offering different explanations (e.g. Keynesian, Monetarist, Austrian, Real Business cycle e.t.c).
• Macro economics places greater emphasis on empirical data and trying to explain it. Micro economics tends to work from theory first – though this is not always the case.

Differences between microeconomics and macroeconomics

The main difference is that micro looks at small segments and macro looks at the whole economy. But, there are other differences.

Equilibrium – Disequilibrium

Classical economic analysis assumes that markets return to equilibrium (S=D). If demand increases faster than supply, this causes price to rise, and firms respond by increasing supply. For a long time, it was assumed that the macro economy behaved in the same way as micro economic analysis. Before, the 1930s, there wasn’t really a separate branch of economics called macroeconomics.

Great Depression and birth of Macroeconomics

In the 1930s, economies were clearly not in equilibrium. There was high unemployment, output was below capacity, and there was a state of disequilibrium. Classical economics didn’t really have an explanation for this dis-equilibrium, which from a micro perspective, shouldn’t occur.

In 1936, J.M.Keynes produced his The General Theory of Employment, Interest and Money; this examined why the depression was lasting so long. It examined why we can be in a state of disequilibrium in the macro economy. Keynes observed that we could have a negative output gap (disequilibrium in the macro-economy) for a prolonged time. In other words, microeconomic principles of markets clearing, didn’t necessarily apply to macro economics. Keynes wasn’t the only economist to investigate this new branch of economics. For example, Irving Fisher examined the role of debt deflation in explaining the great depression. But, Keynes’ theory was the most wide-ranging explanation and played a large role in creating the new branch of macro-economics.

Since 1936, macroeconomics developed as a separate strand within economics. There have been competing explanations for issues such as inflation, recessions and economic growth.

Similarities between microeconomics and macroeconomics

Although it is convenient to split up economics into two branches – microeconomics and macroeconomics, it is to some extent an artificial divide.

• Micro principles are used in macroeconomics. If you study the impact of devaluation, you are likely to use same economic principles, such as the elasticity of demand to changes in price.
• Micro effects macroeconomics and vice versa. If we see a rise in oil prices, this will have a significant impact on cost-push inflation. If technology reduces costs, this enables faster economic growth.
• Blurring of distinction. If house prices rise, this is a micro economic effect for the housing market. But, the housing market is so influential that it could also be considered a macro-economic variable, and will influence monetary policy.
• There have been efforts to use computer models of household behaviour to predict the impact on the macro economy.
• Summary of economics

External Links

• Micro and macro economics at IMF

Last updated 1 July, 2019.

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Macroeconomics vs. Microeconomics

Macroeconomics is the branch of economics that looks at economy in a broad sense and deals with factors affecting the national, regional, or global economy as a whole. Microeconomics looks at the economy on a smaller scale and deals with specific entities like businesses, households and individuals.

This comparison takes a closer look at what constitutes macro- and microeconomics, their applications in real life, and the options if one were to pursue it as a career choice.

Comparison chart

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, as opposed to individual markets. This includes national, regional, and global economies. Macroeconomics involves the study of aggregated indicators such as GDP , unemployment rates, and price indices for the purpose of understanding how the whole economy functions, as well as the relationships between such factors as national income , output, consumption, unemployment, inflation, savings , investment , international trade and international finance .

Microeconomics, on the other hand, is the branch of economics that is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets. One of the goals of microeconomics is to analyze market mechanisms that establish relative prices among goods and services and the allocation of limited resources among many alternative uses. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty, and economic applications of game theory.

Real-world Application

Macroeconomics is typically used to determine the health of a nation's economy by comparing the GDP of a country and its total output or expenses. GDP is the total value of all final goods and services legally produced in an economy in a given time period. So, a region is considered in better health when the ratio of GDP to expenses is higher, meaning in lay terms that a nation is bringing in more than it puts out. Another measure used is GDP per capita, which is a measurement of the value of all goods and services divided by the number of participants in an economy. This is used to determine the standard of living and extent of economic development in a country, where a higher standard of living and greater economic development come as more people have greater overall production value. For example, the U.S. and China have a similar overall GDP, but the U.S. has a far better GDP per capita due to its far fewer economic participants, reflecting the higher standard of living in the U.S. Macroeconomics is also used to develop strategies for economic improvement at the nationwide and global levels.

Microeconomics is used to determine the best sort of choices an entity can make for maximum profit, regardless of the type of market or arena it is involved in. Microeconomics can also be considered a tool for economic health if used to measure the income versus output ratio of companies and households. Simply put, gaining more than is lost equals a better individual economy, much like on the macro-level. Microeconomics is applied through various specialized subdivisions of study, including industrial organization, labor economics, financial economics, public economics, political economics, health economics, urban economics, law and economics, and economic history .

Basic Macroeconomics Concepts

Macroeconomics encompasses a variety of concepts and variables related to the economy at large, but there are three central topics for macroeconomic research. Macroeconomic theories usually relate the phenomena of output, unemployment, and inflation.

Output and Income

National output is the total value of everything a country produces in a given time period. Everything that is produced and sold generates income. Therefore, output and income are usually considered equivalent and the two terms are often used interchangeably. Output can be measured as total income, or, it can be viewed from the production side and measured as the total value of final goods and services or the sum of all value added in the economy. Macroeconomic output is usually measured by Gross Domestic Product (GDP) or one of the other national accounts. Economists interested in long-run increases in output study economic growth . Advances in technology, accumulation of machinery and other capital, and better education and human capital all lead to increased economic output over time. However, output does not always increase consistently. Business cycles can cause short-term drops in output called recessions. Economists look for macroeconomic policies that prevent economies from slipping into recessions and lead to faster, long-term growth.

Unemployment

The unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labor force. The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force. Unemployment can be generally broken down into several types relating to different causes. Classical unemployment occurs when wages are too high for employers to be willing to hire more workers. Frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment. Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates.

Inflation and Deflation

Economists measure changes in prices with price indexes. Inflation (general price increase across the entire economy) occurs when an economy becomes overheated and grows too quickly. Inflation can lead to increased uncertainty and other negative consequences. Similarly, a declining economy can lead to deflation, or a rapid decrease in prices. Deflation can lower economic output. Central bankers try to stabilize prices to protect economies from the negative consequences of price changes. Raising interest rates or reducing the supply of money in an economy will reduce inflation.

Basic Microeconomic Concepts

Microeconomics also encompasses a variety of concepts and variables related to the individual, household or business. We will focus on the three central topics for microeconomic research: preference relations, supply and demand, and opportunity cost.

Preference Relations

Preference relations are defined simply as a set of different choices that an entity can make. Preference refers to the set of assumptions related to ordering some alternatives, based on the degree of satisfaction, enjoyment, or utility they provide; a process which results in an optimal choice. Completeness is taken into consideration, where "completeness" is a situation in which every party is able to exchange every good, directly or indirectly, with every other party without transaction costs. In order to analyze the problem further, the assumption of transitivity, a term for how preferences are transferred from one entity to another is considered. These two assumptions of completeness and transitivity that are imposed upon the preference relations together compose rationality, the standard by which a choice is measured.

Supply and Demand

In microeconomics, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity.

Opportunity Cost

Opportunity cost of an activity (or goods) is equal to the best next alternative uses. Opportunity cost is one way to measure the cost of something. Rather than merely identifying and adding the costs of a project, one may also identify the next best alternative way to spend the same amount of money. The forgone profit of this next best alternative is the opportunity cost of the original choice.

Macroeconomics research and analyze data on national and global economies. They gather information from longitudinal studies, surveys and historical statistics , and use it to make predictions in the economy or even offer solutions to problems. Specific aspects of an economy, like the manufacture and distribution of raw materials, poverty rates, inflation, or the success of trade are also a prime focus for macroeconomists, who are frequently consulted by politicians and civic authorities when making public policy decisions.

Micro-economists focus on specific industries or businesses. An expert microeconomist conducts thorough research on the financial matters of a business, and offers advice on how to scale or make improvements. They often constructs supply and demand ratio graphs to determine the budget and resources to be allocated to production. A micro-economist can help business owners and CFOs set pay scales based on industrial trends and the availability of funds.

Macroeconomics and Microeconomics are, in the college world, generally relegated to specific higher level courses that fall under the parent subject of Economics. Most of the time, an actual degree program will simply be in economics, though a student majoring in this subject may then choose to specialize in the micro or macro areas as electives. All economics majors regardless of the area will be required to take multiple math courses, particularly calculus, and, typically, a few statistics courses as prerequisites to higher level economics courses. Business students as well as a few other potential majors will often be required to take a basic economics course or two as a part of their core coursework for foundation, and some students will simply choose to take Economics 101 for what it offers to their education. A student can also minor in economics, a practice which is often done to provide a good background for students seeking careers in law, business, government , journalism, and teaching.

Opinions On Economic Change

Macroeconomists tend to be all about economic stimulus and what accompanies it, though there is a lack of unity even among macroeconomists on this particular issue. From the macroeconomist point of view, what it takes to fix the economy of a given country today is to pour money into it. This action is done in order to provide economic growth, and is then analyzed in terms of how much growth is produced, how much unemployment is caused or prevented, and when the government will get its money back, if at all. Most macroeconomists are Keynesians, or economists who support government intervention and steering of the economy, and so measure success primarily by the above factors when considering what to do with government money.

Microeconomists, on the other hand, are often not as positive about stimulus action by the government. They believe that macroeconomists tend to ignore the most basic microeconomic question: Where are the incentives? Who has an incentive to improve the economy? Microeconomists believe it is a mistake to look at the country as an entity, because is not the actual country which decides where stimulus money will be spent. Rather, it is the politicians who are governing the country. So, instead of looking at what would be best for the country, we need to look at what politicians would have an incentive to do. Instead of assuming that politicians would choose based on what it best for a country's economic health , microeconomists believe people need to recognize at the microeconomic level that a politician is choosing based entirely on his own incentives.

The issue is such that at the very basic framework level, microeconomists are looking at entirely different factors than macroeconomists when they analyze the health of our attempts at economic recovery.

• Wikipedia: Macroeconomics
• Wikipedia: Microeconomics
• Macroeconomics: Economic Performance and Growth - Investopedia
• What Are the Different Economist Jobs? - wiseGEEK
• Majoring in Economics - University of North Carolina
• The stimulus: A microeconomic analysis - Right Speak

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1.2 Microeconomics and Macroeconomics

Learning objectives.

By the end of this section, you will be able to:

• Describe microeconomics
• Describe macroeconomics
• Contrast monetary policy and fiscal policy

Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes. Economics acknowledges that production of useful goods and services can create problems of environmental pollution. It explores the question of how investing in education helps to develop workers’ skills. It probes questions like how to tell when big businesses or big labor unions are operating in a way that benefits society as a whole and when they are operating in a way that benefits their owners or members at the expense of others. It looks at how government spending, taxes, and regulations affect decisions about production and consumption.

It should be clear by now that economics covers considerable ground. We can divide that ground into two parts: Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports and imports. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy.

To understand why both microeconomic and macroeconomic perspectives are useful, consider the problem of studying a biological ecosystem like a lake. One person who sets out to study the lake might focus on specific topics: certain kinds of algae or plant life; the characteristics of particular fish or snails; or the trees surrounding the lake. Another person might take an overall view and instead consider the lake's ecosystem from top to bottom; what eats what, how the system stays in a rough balance, and what environmental stresses affect this balance. Both approaches are useful, and both examine the same lake, but the viewpoints are different. In a similar way, both microeconomics and macroeconomics study the same economy, but each has a different viewpoint.

Whether you are scrutinizing lakes or economics, the micro and the macro insights should blend with each other. In studying a lake, the micro insights about particular plants and animals help to understand the overall food chain, while the macro insights about the overall food chain help to explain the environment in which individual plants and animals live.

In economics, the micro decisions of individual businesses are influenced by whether the macroeconomy is healthy. For example, firms will be more likely to hire workers if the overall economy is growing. In turn, macroeconomy's performance ultimately depends on the microeconomic decisions that individual households and businesses make.

Microeconomics

What determines how households and individuals spend their budgets? What combination of goods and services will best fit their needs and wants, given the budget they have to spend? How do people decide whether to work, and if so, whether to work full time or part time? How do people decide how much to save for the future, or whether they should borrow to spend beyond their current means?

What determines the products, and how many of each, a firm will produce and sell? What determines the prices a firm will charge? What determines how a firm will produce its products? What determines how many workers it will hire? How will a firm finance its business? When will a firm decide to expand, downsize, or even close? In the microeconomics part of this book, we will learn about the theory of consumer behavior, the theory of the firm, how markets for labor and other resources work, and how markets sometimes fail to work properly.

Macroeconomics

What determines the level of economic activity in a society? In other words, what determines how many goods and services a nation actually produces? What determines how many jobs are available in an economy? What determines a nation’s standard of living? What causes the economy to speed up or slow down? What causes firms to hire more workers or to lay them off? Finally, what causes the economy to grow over the long term?

We can determine an economy's macroeconomic health by examining a number of goals: growth in the standard of living, low unemployment, and low inflation, to name the most important. How can we use government macroeconomic policy to pursue these goals? A nation's central bank conducts monetary policy , which involves policies that affect bank lending, interest rates, and financial capital markets. For the United States, this is the Federal Reserve. A nation's legislative body determines fiscal policy , which involves government spending and taxes. For the United States, this is the Congress and the executive branch, which originates the federal budget. These are the government's main tools. Americans tend to expect that government can fix whatever economic problems we encounter, but to what extent is that expectation realistic? These are just some of the issues that we will explore in the macroeconomic chapters of this book.

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Microeconomics Vs. Macroeconomics

• U.S. Economy
• Supply & Demand
• Archaeology
• Ph.D., Business Economics, Harvard University
• M.A., Economics, Harvard University
• B.S., Massachusetts Institute of Technology

Microeconomics and macroeconomics are two of the largest subdivisions of the study of economics wherein micro- refers to the observation of small economic units like the effects of government regulations on individual markets and consumer decision making and macro- refers to the "big picture" version of economics like how interest rates are determines and why some countries' economies grow faster than others'.

According to comedian P.J. O’Rourke, “microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally. Or to be more technical, microeconomics is about the money you don’t have, and macroeconomics is about money the government is out of.”

Although this humorous observation pokes fun at economists, the description is accurate. However, a closer observation of both fields of economic discourse will provide a better understanding of the basics of economic theory and study.

Microeconomics: Individual Markets

Those who have studied Latin know that the prefix “micro-“ means “small,” so it shouldn’t be surprising that microeconomics is the study of small economic units . The field of microeconomics is concerned with things like

• consumer decision making and utility maximization
• firm production and profit maximization
• individual market equilibrium
• effects of government regulation on individual markets
• externalities and other market side effects

Put another way, microeconomics concerns itself with the behavior of individual markets, such as the markets for oranges, the market for cable television, or the market for skilled workers as opposed to the overall markets for produce, electronics, or the entire workforce. Microeconomics is essential for local governance, business and personal financing, specific stock investment research, and individual market predictions for venture capitalistic endeavors.

Macroeconomics: The Big Picture

Macroeconomics, on the other hand, can be thought of as the “big picture” version of economics. Rather than analyzing individual markets, macroeconomics focuses on aggregate production and consumption in an economy, the overall statistics that macroeconomists miss. Some topics that macroeconomists study include

• effects of general taxes such as income and sales taxes on output and prices
• causes of economic upswings and downturns
• effects of monetary and fiscal policy on economic health
• effects of and process for determining  interest rates
• causes for some economies growing faster than other economies

To study economics at this level, researchers must be able to combine different goods and services produced in a way that reflects their relative contributions to aggregate output. This is generally done using the concept of the  gross domestic product  (GDP), and goods and services get weighted by their market prices.

The Relationship Between Microeconomics and Macroeconomics

There is an obvious relationship between microeconomics and macroeconomics in that aggregate production and consumption levels are the result of choices made by individual households and firms, and some macroeconomic models explicitly make this connection by incorporating " microfoundations ."

Most of the economic topics covered on television and in newspapers are of the macroeconomic variety, but it’s important to remember that economics is about more than just trying to figure out when the economy is going to improve and what the Fed is doing with interest rates, it's also about observing local economies and specific markets for goods and services.

Although many economists specialize in one field or the other, no matter which study one pursues, the other will have to be utilized in order to understand the implications of certain trends and conditions on both the micro and macro economic levels.

• What Is Microeconomics?
• The Short Run vs. the Long Run in Microeconomics
• Books to Study Before Going to Graduate School in Economics
• What Are the Various Subfields of Economics?
• Online Macroeconomics Textbook Resources
• The Cobb-Douglas Production Function
• The Basic Assumptions of Economics
• The Slope of the Aggregate Demand Curve
• Online Microeconomics Textbook
• Economics for Beginners: Understanding the Basics
• A Primer on Arc Elasticity
• Economic Utility
• What Is the Indirect Utility Function?
• The Use of Marginal Utility in Economics
• The Definition and Concepts of Economic Efficiency

• Key Differences

Know the Differences & Comparisons

Difference Between Micro and Macro Economics

‘Economics’ is defined as the study of how humans work together to convert limited resources into goods and services to satisfy their wants (unlimited) and how they distribute the same among themselves. Economics has been divided into two broad parts i.e. Micro Economics and Macro Economics. There are two broad categories into which Economics is classified, i.e. Micro Economics and Macro Economics.

Here, in the given article we’ve broken down the concept and all the important differences between microeconomics and macroeconomics, in tabular form, have a look.

Contents: Micro Economics Vs Macro Economics

Comparison chart.

• Pros and Cons

Interdependency

Definition of Micro Economics

Microeconomics is the branch of economics that concentrates on the behaviour and performance of the individual economic agents within the economy such as consumers, family, industry, firms, etc. It ascertains how the limited resources are allocated among various individuals to satisfy their wants? As well as it specifies the conditions for the best possible utilization of the resources, in order to attain maximum output and social welfare.

Here, the demand plays a key role in determining the quantity and the price of a product along with the price and quantity of related goods (complementary goods) and substitute products, so as to make a judicious decision regarding the allocation of scarce resources, concerning their alternative uses.

Microeconomics analyzes how individuals and households spend their income? How do people decide what amount to save for future contingencies? What set of goods and services best fulfils their needs and wants, in the limited income?

It also determines what products and how many products the firm should manufacture to sell? At what price the firm should offer its goods and services to the target audience? What sources of finance are to be used by the firm to commence or operate the business? How many and at what rate the workers are to be hired to work for the firm? When should the firm expand, downsize and close the business?

Definition of Macro Economics

In macroeconomics, the entire economic phenomena or the overall economy is talked about. Basically, it focuses on the behaviour and performance of aggregate variables and those issues which affect the whole economy.

It includes regional, national and international economies and covers the major areas of the economy like unemployment, poverty, general price level, total consumption, total savings, GDP (Gross Domestic Product), imports and exports, economic growth, globalisation, monetary/ fiscal policy, etc.

Here we discuss, how the equilibrium is attained as a result of changes in the macroeconomic variables. It ascertains the level of economic activity in the economy? What is the rate of unemployment, poverty and inflation in the country? What are the issues that result in speeding up or slowing down of the economy? What is the standard of living of people in the country? What is the cost of living in the country?

Further, macroeconomics not only discusses issues with which the economy goes through but also helps in resolving them, thereby enabling it to function efficiently.

Key Differences between Micro and Macro Economics

The points given below explains the difference between micro and macro economics in detail:

• Microeconomics studies the particular segment of the economy, i.e. an individual, household, firm, or industry. It studies the issues of the economy at an individual level. On the other hand, Macroeconomics studies the whole economy, that does not talk about a single unit rather it studies aggregate units, such as national income, general price level, total consumption, etc. It deals with broad economic issues.
• Microeconomics stresses on individual economic units. As against this, the focus of macroeconomics is on aggregate economic variables.
• Microeconomics is applied to operational or internal issues, whereas environmental and external issues are the concern of macroeconomics.
• The basic tools of microeconomics are demand and supply. Conversely, aggregate demand and aggregate supply are the primary tools of macroeconomics.
• Microeconomics deals with an individual product, firm, household, industry, wages, prices, etc. Conversely, Macroeconomics deals with aggregates like national income, national output, price level, total consumption, total savings, total investment, etc.
• Microeconomics covers issues like how the price of a particular commodity will affect its quantity demanded and quantity supplied and vice versa. In contrast, Macroeconomics covers major issues of an economy like unemployment, monetary/ fiscal policies, poverty, international trade, inflationary increase in prices, deficit, etc.
• Microeconomics determine the price of a particular commodity along with the prices of complementary and the substitute goods, whereas the Macroeconomics helps maintain the general price level, as well as it helps in resolving major economic issues like inflation, deflation, disinflation, poverty, unemployment, etc.
• While analysing any economy, microeconomics takes a bottom-up approach, whereas the macroeconomics considers a top-down approach.

Video: Micro Economics Vs Macro Economics

Micro Economics

• It helps in the determination of prices of a particular product and also the prices of various factors of production, i.e. land, labour, capital, organisation and entrepreneur.
• It is based on a free enterprise economy, which means the enterprise is independent to take decisions.
• The assumption of full employment is completely unrealistic.
• It only analyses a small part of an economy while a bigger part is left untouched.

Macro Economics

• It helps determine the balance of payments along with the causes of deficit and surplus of it.
• It helps in deciding the economic and fiscal policies and solves the issues of public finance.
• Its analysis says that the aggregates are homogeneous, but it is not so because sometimes they are heterogeneous.
• It covers only the aggregate variables which avoid the welfare of the individual.

As microeconomics focuses on the allocation of limited resources among the individuals, the macroeconomics examines that how the distribution of limited resources is to be done among many people, so that it will make the best possible use of the scarce resources. As microeconomics studies about the individual units, at the same time, macroeconomics studies about the aggregate variables.

Both are of the view that the nation’s economic welfare is possible only when there is the best possible utilization of productive resources. In this way, we can say that they are interdependent. Further, to have a full understanding of economics, the study of both the two branches is pertinent.

Micro and Macro Economics are neither different subjects, nor they are contradictory, rather, they are complementary. As every coin has two aspects – micro and macroeconomics are also the two aspects of the same coin, wherein one’s demerit is others merit and in this way, they cover the whole economy. The only important point which makes them different is the area of application.

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April 22, 2018 at 7:55 am

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May 6, 2018 at 10:09 am

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May 11, 2018 at 3:08 pm

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July 10, 2018 at 2:55 pm

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Tai Chinh says

October 14, 2018 at 11:53 pm

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p karri says

December 16, 2018 at 10:06 pm

very useful blog i learnt some thing new very easily

vinish parikh says

January 13, 2019 at 11:03 am

Nicely Explained as the majority of economic students gets confused between both the terms, but you have explained this topic very well. Thanks for sharing the article.

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February 1, 2019 at 4:03 pm

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July 16, 2019 at 8:34 am

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July 23, 2019 at 12:06 am

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Nellie says

July 25, 2019 at 7:39 pm

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November 28, 2019 at 4:05 pm

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November 2, 2020 at 8:56 pm

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March 16, 2021 at 7:31 am

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March 26, 2021 at 2:00 pm

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Difference Between Microeconomics and Macroeconomics Compare & Contrast Essay

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Introduction

Difference between microeconomics and macroeconomics.

Economics is a process of making decision using scientific tools of research and analysis. This paper is a presentation of distinction between microeconomic and macroeconomics. These terms are critical in economics since they offer insight into economic discipline. Examples of each Distinctive difference between microeconomics and macroeconomics will be discussed in depth.

It will be fair to illustrate microeconomic decisions and factors that contributed to such a decision. Furthermore, macroeconomic event with its impact will be specified in the deliberation.

Microeconomics

Microeconomics can be defined as economics that examines how persons allocate the minimum resource among the households and firms (Bade, 2001). The decisions made in the market regarding the purchase of specific goods and services affects directly or indirectly supply and demand chain. Such decisions also have an influence on the prices of products and ultimately the demand and supply.

We can note therefore that microeconomics deals with the aspects of prices and its efficiency in a market environment where decisions are made. Microeconomics revolves round production, consumption, and sale of goods and services (Colander, 2008). Some economic policies like change of taxes affect microeconomics of a country. If more tax is charged on market goods, then demand decreases. It is also in microeconomics that a market failure like monopoly is speculated.

Macroeconomics

Macroeconomics emphasizes on the bigger picture of the economy thus acquitting on how things in the world in terms of the structure, performance, behavior and decision making process of the whole economy.

Macroeconomics examines aggregates in the system such as gross domestic product, unemployment rates and price levels so as to gain insight into the working of an economy. Economist who have studied macroeconomics have developed models to explain the working relationship between national income, output, consumption, savings, investments, balance of payment and international finance (Blanchard, 2000).

While recognizing that microeconomics is a wide area of study, some of its special characteristic can be highlighted as: effort to understand the causes and effects of short run changes in national income and an effort to synthesize determinants of economic growth in the long run period of time.

National governments use macroeconomic models to develop economic policy and strategies for the business (Blanchard, 2000). In trying to avoid depression in an economy, policies are formulated to assist in stabilizing the government. Fiscal policies and monetary are instrument commonly used as a strategy to maintaining stability and continue with economic development and growth.

Example of each observable fact

An example of microeconomic dimension is the pricing strategy which affects demand and ultimately supply of a product to the market (Colander, 2008). If the price of a product is increased through taxes, quantity demanded would reduce while quantity supplied would increase.

The reason for this observation is that supplies are motivated by high prices to produce more while consumers shy away fro buying expensive commodities. This will distort the point of equilibrium in the market. It is the role of microeconomics to study the different aspects of the market and establish the relevant prices. On the other hand, macroeconomics specifies facet of national income, output, consumption, savings, investments, balance of payment and international finance.

Microeconomic decision and factors that contributed to such decision

A real life microeconomic decision is a reduction in the purchase of fuel following a rise in the price of crude oil in the world market. The skyrocketing price reduced the power of the buyer. A decision to reduce on purchase of fuel was also necessitated by inflation rates affecting consumer goods. There is a reason to meet basic wants along the Maslow hierarchy of needs. This factor contributed to a decision to cut down on demand for fuel.

Illustration of specific macroeconomic event and its impact

Fiscal policy involves increasing government expenditure and collections of revenue so as to jump start an economy (Snowdon & Vane, 2005). Expansionary fiscal policy has been employed by President Obama to deal with financial crisis. The government has to spend more on health, employment creation, tax incentive, and provision of security.

The net effect is a deficit financing. If a change in tax and government expenditure is done, its effect will be on such variables as aggregate demand, pattern of resource allocation and distribution of incomes (Snowdon & Vane, 2005). A more progressive tax bridges the gab between the haves and have not thus necessary in balancing income distribution in an economy.

There exist a distinct difference between microeconomics and macroeconomics both in its definition and functioning. Microeconomics examines scarce resource between competing wants in a household or a firm. A microeconomic decision regarding purchase of goods affects directly and indirectly the demand and supply.

Such decisions also have an influence on the prices of products on the other hand, macroeconomics deals with the economy as a whole while highlighting on policy instruments, national income, output, consumption, savings, investments, balance of payment and international finance. These are the features of an outward looking economy. The discussion also focused on illustration of both macroeconomics and microeconomic decisions.

Bade, R., & Parkin, M. (2001). Foundations of Microeconomics . London: Addison Wesley.

Blanchard, O. (2000). Macroeconomics . New Jersey: Prentice Hall.

Colander, D. (2008). Microeconomics. California: McGraw-Hill.

Snowdon, B., & Vane, H. (2005). Modern Macroeconomics: Its Origins, Development And Current State . Cheltenham: Edward Elgar Publishing.

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• Microeconomics And Macroeconomics

Difference between Microeconomics and Macroeconomics

“Economics is the science which studies human behaviour as a relationship between given ends and scarce means which have alternative uses.”

Economic is a study about how individuals, businesses and governments make choices on allocating resources to satisfy their needs. These groups determine how the resources are organised and coordinated to achieve maximum output. They are mostly concerned with the production, distribution and consumption of goods and services.

Economics is divided into two important sections, which are: Macroeconomics & Microeconomics

Macroeconomics deals with the behaviour of the aggregate economy and Microeconomics focuses on individual consumers and businesses.

What is Microeconomics?

Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources and prices of goods and services. The government decides the regulation for taxes. Microeconomics focuses on the supply that determines the price level of the economy.

It uses the bottom-up strategy to analyse the economy. In other words, microeconomics tries to understand human’s choices and allocation of resources. It does not decide what are the changes taking place in the market, instead, it explains why there are changes happening in the market.

The key role of microeconomics is to examine how a company could maximise its production and capacity, so that it could lower the prices and compete in its industry. A lot of microeconomics information can be obtained from the financial statements.

The key factors of microeconomics are as follows:

• Demand, supply, and equilibrium
• Production theory
• Costs of production
• Labour economics

Examples: Individual demand, and price of a product.

What is Macroeconomics?

Macroeconomics is a branch of economics that depicts a substantial picture. It scrutinises itself with the economy at a massive scale, and several issues of an economy are considered. The issues confronted by an economy and the headway that it makes are measured and apprehended as a part and parcel of macroeconomics .

Macroeconomics studies the association between various countries regarding how the policies of one nation have an upshot on the other. It circumscribes within its scope, analysing the success and failure of the government strategies.

In macroeconomics, we normally survey the association of the nation’s total manufacture and the degree of employment with certain features like cost prices, wage rates, rates of interest, profits, etc., by concentrating on a single imaginary good and what happens to it.

The important concepts covered under macroeconomics are as follows:

• Capitalist nation
• Investment expenditure

Examples: Aggregate demand, and national income.

Top 7 Differences Between Microeconomics And Macroeconomics

Let us look at some of the points of difference between Microeconomics and Macroeconomics

Microeconomics is the branch of Economics that is related to the study of individual, household and firm’s behaviour in decision making and allocation of the resources. It comprises markets of goods and services and deals with economic issues.	Macroeconomics is the branch of Economics that deals with the study of the behaviour and performance of the economy in total. The most important factors studied in macroeconomics involve gross domestic product (GDP), unemployment, inflation and growth rate etc.
Microeconomics studies the particular market segment of the economy	Macroeconomics studies the whole economy, that covers several market segments
Microeconomics deals with various issues like demand, supply, factor pricing, product pricing, economic welfare, production, consumption, and more.	Macroeconomics deals with various issues like national income, distribution, employment, general price level, money, and more.                                                           Business Application   It is applied to environmental and external issues.                                                                                   Scope                                                                                Significance It is useful in regulating the prices of a product alongside the prices of factors of production (labour, land, entrepreneur, capital, and more) within the economy. It perpetuates firmness in the broad price level, and solves the major issues of the economy like deflation, inflation, rising prices (reflation), unemployment, and poverty as a whole.                                                                               Limitations It is based on impractical presuppositions, i.e., in microeconomics, it is presumed that there is full employment in the community, which is not at all feasible. It has been scrutinised that the misconception of composition’ incorporates, which sometimes fails to prove accurate because it is feasible that what is true for aggregate (comprehensive) may not be true for individuals as well. After learning the above concepts, we can come to the conclusion that these two concepts are not antithetical but complementary to each other and they are bound to go hand in hand. This article was all about the topic of Difference between Microeconomics and Macroeconomics, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S. Frequently Asked Questions What is the difference between macroeconomics and microeconomics. Microeconomics is the study of economics at an individual, group, or company level. Whereas, macroeconomics is the study of a national economy as a whole. Microeconomics focuses on issues that affect individuals and companies.  Macroeconomics focuses on issues that affect nations and the world economy.  What is the example of Microeconomics and Macroeconomics? Unemployment, interest rates, inflation, GDP, all fall into Macroeconomics. Consumer equilibrium, individual income and savings are examples of microeconomics. How do Microeconomics and Macroeconomics are interrelated? Microeconomics and macroeconomics are interrelated as both the strategies focus on improving the economy of their certain fields and branches. What are the two fields of Economics? The field of economics is divided into microeconomics, i.e., the study of individual markets, and macroeconomics, i.e., the study of the economy as a whole. COMMERCE Related Links Leave a Comment Cancel reply Your Mobile number and Email id will not be published. Required fields are marked * Request OTP on Voice Call Post My Comment Good explanation . It is very helpful. The information given is also appropriate. Nice to have your summary it is helping a lot Best summary of microeconomics and macroeconomics Good and reliable write up. It helps a lot. Thanks The information was very helpful Register with BYJU'S & Download Free PDFs Register with byju's & watch live videos. Microeconomics, Macroeconomics and Economic Policy Essays in Honour of Malcolm Sawyer © 2011 Philip Arestis 0 University of Cambridge, UK University of the Basque Country, Spain You can also search for this editor in PubMed   Google Scholar 6973 Accesses 41 Citations 5 Altmetric This is a preview of subscription content, log in via an institution to check access. Access this book Subscribe and save. Get 10 units per month Download Article/Chapter or eBook 1 Unit = 1 Article or 1 Chapter Cancel anytime Available as EPUB and PDF Read on any device Instant download Own it forever Compact, lightweight edition Dispatched in 3 to 5 business days Free shipping worldwide - see info Durable hardcover edition Tax calculation will be finalised at checkout Other ways to access Licence this eBook for your library Institutional subscriptions About this book Similar content being viewed by others. Macroeconomics: Relations with Microeconomics Rethinking Macroeconomics in Light of the Great Crisis Macroeconomics, origins and history of. economic growth economic policy fiscal policy income distribution John Maynard Keynes macroeconomics microeconomics political economy unemployment Table of contents (15 chapters) Front matter, microeconomics, the function of firms: alternative views. Nina Shapiro Industrial Structure and the Macro Economy Keith Cowling, Philip R. Tomlinson Unemployment, Power Relations, and the Quality of Work David A. Spencer The Problem of Young People Not in Employment, Education or Training: Is There a ‘Neet’ Solution? John McCombie, Maureen Pike The Business of Macro Imbalances: Comparing ‘Gluts’ in Savings, Money and Profits William Milberg, Lauren Schmitz Macroeconomics A critical appraisal of the new consensus macroeconomics. Philip Arestis Bringing Together the Horizontalist and the Structuralist Analyses of Endogenous Money Giuseppe Fontana Economic Growth and Income Distribution: Kalecki, the Kaleckians and Their Critics Amitava Krishna Dutt The Influence of Michał Kalecki on Joan Robinson’s Approach to Economics G. C. Harcourt, Peter Kriesler Shared Ideas Amid Mutual Incomprehension: Kalecki and Cambridge Jan Toporowski Economic Policy Is there a role for active fiscal policies supply-side and demand-side effects of fiscal policies. Jesus Ferreiro, Teresa Garcia del Valle, Carmen Gomez, Felipe Serrano Fiscal Policy and Private Investment in Mexico U. Emilio Caballero, G. Julio López A Keynes-Kalecki Model of Cyclical Growth with Agent-Based Features Mark Setterfield, Andrew Budd Unsurprising to Keynes, Shocking to Economists: The Normalisation of Capital Controls in the Global Financial Crisis Ilene Grabel Regulating Wall Street: Exploring the Political Economy of the Possible Gerald Epstein, Robert Pollin Back Matter Editors and affiliations, university of cambridge, uk, university of the basque country, spain, about the editor, bibliographic information. Book Title : Microeconomics, Macroeconomics and Economic Policy Book Subtitle : Essays in Honour of Malcolm Sawyer Editors : Philip Arestis DOI : https://doi.org/10.1057/9780230313750 Publisher : Palgrave Macmillan London eBook Packages : Palgrave Economics & Finance Collection , Economics and Finance (R0) Copyright Information : Palgrave Macmillan, a division of Macmillan Publishers Limited 2011 Hardcover ISBN : 978-0-230-29019-8 Published: 26 July 2011 Softcover ISBN : 978-1-349-33137-6 Published: 01 January 2011 eBook ISBN : 978-0-230-31375-0 Published: 26 July 2011 Edition Number : 1 Number of Pages : XXIV, 296 Topics : Microeconomics , Macroeconomics/Monetary Economics//Financial Economics , Labor Economics , International Relations , Industrial Organization , Political Economy/Economic Systems Publish with us Policies and ethics Find a journal Track your research Microeconomics: Essay on Microeconomics Microeconomics studies the economic actions and behaviour of individual units and small groups of individual units. In microeconomic theory we discuss how the various cells of economic organism, that is, the various units of the economy such as thousands of consumers, thousands of producers or firms, thousands of workers and resource suppliers in the economy do their economic activities and reach their equilibrium states. “Microeconomics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body economic-the individuals or households as consumers, and the individuals or firms as producers—play their part in the working of the whole economic organism.”- Professor Lerner. In other words, in microeconomics we make a microscopic study of the economy. But it should be remembered that microeconomics does not study the economy in its totality. Instead, in microeconomics we discuss equilibrium of innumerable units of the economy piecemeal and their inter-relationship to each other. For instance, in microeconomic analysis we study the demand of an individual consumer for a good and from there go on to derive the market demand for the good (that is, demand of a group of individuals consuming a particular good). Likewise, microeconomic theory studies the behaviour of the individual firms in regard to the fixation of price and output and their reactions to the changes in the demand and supply conditions. From there we go on to establish price-output fixation by an industry (Industry means a group of firms producing the same product). ADVERTISEMENTS: Thus, microeconomic theory seeks to determine the mechanism by which the different economic units attain the position of equilibrium, proceeding from the individual units to a narrowly defined group such as a single industry or a single market. Since microeconomic analysis concerns itself with narrowly defined groups such as an industry or market. However it does not study the totality of behaviour of all units in the economy for any particular economic activity. In other words, the study of economic system or economy as a whole lies outside the domain of microeconomic analysis. Microeconomic Theory Studies Resource Allocation, Product and Factor Pricing : Microeconomic theory takes the total quantity of resources as given and seeks to explain how they are allocated to the production of particular goods. It is the allocation of resources that determines what goods shall be produced and how they shall be produced. The allocation of resources to the production of various goods in a free-market economy depends upon the prices of the various goods and the prices of the various factors of production. Therefore, to explain how the allocation of resources is determined, microeconomics proceeds to analyse how the relative prices of goods and factors are determined. Thus the theory of product pricing and the theory of factor pricing (or the theory of distribution) falls within the domain of microeconomics. The theory of product pricing explains how the relative prices of cotton cloth, food grains, jute, kerosene oil and thousands of other goods are determined. The theory of distribution explains how wages (price for the use of labour), rent (payment for the use of land), interest (price for the use of capital) and profits (the reward for the entrepreneur) are determined. Thus, the theory of product pricing and the theory of factor pricing are the two important branches of microeconomic theory. Prices of the products depend upon the forces of demand and supply. The demand for goods depends upon the consumers’ behaviour pattern, and the supply of goods depends upon the conditions of production and cost and the behaviour pattern of the firms or entrepreneurs. Thus the demand and supply sides have to be analysed in order to explain the determination of prices of goods and factors. Thus the theory of demand and the theory of production are two subdivisions of the theory of pricing. Microeconomics as a Study of Economic Efficiency: Besides analysing the pricing of products and factors, and the allocation of resources based upon the price mechanism, microeconomics also seeks to explain whether the allocation of resources determined is efficient. Efficiency in the allocation of resources is attained when the resources are so allocated that maximises the satisfaction of the people. Economic efficiency involves three efficiencies; efficiency in production, efficiency in distribution of goods among the people (This is also called efficiency in consumption) and allocative economic efficiency, that is, efficiency in the direction of production. Microeconomic theory shows under what conditions these efficiencies are achieved. Microeconomics also shows what factors cause departure from these efficiencies and result in the decline of social welfare from the maximum possible level. Economic efficiency in production involves minimisation of cost for producing a given level of output or producing a maximum possible output of various goods from the given amount of outlay or cost incurred on productive resources. When such productive efficiency is attained, then it is no longer possible by any reallocation of the productive resources or factors among the production of various goods and services to increase the output of any good without a reduction in the output of some other good. Efficiency in consumption consists of distributing the given amount of produced goods and services among millions of the people for consumption in such a way as to maximize the total satisfaction of the society. When such efficiency is achieved it is no longer possible by any redistribution of goods among the people to make some people better off without making some other ones worse off. Allocative economic efficiency or optimum direction of production consists of producing those goods which are most desired by the people, that is, when the direction of production is such that maximizes social welfare. In other words, allocative economic efficiency implies that pattern of production (i.e., amounts of various goods and services produced) should correspond to the desired pattern of consumption of the people. Even if efficiencies in consumption and production of goods are present, it may be that the goods which are produced and distributed for consumption may not be those preferred by the people. There may be some goods which are more preferred by the people but which have not been produced and vice versa. To sum up, allocative efficiency (optimum direction of production) is achieved when the resources are so allocated to the production of various goods that the maximum possible satisfaction of the people is obtained. Once this is achieved, then by producing some goods more and others less by any rearrangement of the resources will mean loss of satisfaction or efficiency. The question of economic efficiency is the subject-matter of theoretical welfare economics which is an important branch of microeconomic theory. That microeconomic theory is intimately concerned with the question of efficiency and welfare is better understood from the following remarks of A. P. Lerner, a noted American economist. “In microeconomics we are more concerned with the avoidance or elimination of waste, or with inefficiency arising from the fact that production is not organised in the most efficient possible manner. Such inefficiency means that it is possible, by rearranging the different ways in which products are being produced and consumed, to get more of something that is scarce without giving up any part of any other scarce item, or to replace something by something else that is preferred. Microeconomic theory spells out the conditions of efficiency (i.e., for the elimination of all kinds of inefficiency) and suggests how they might be achieved. These conditions (called Pareto-optimal conditions) can be of the greatest help in raising the standard of living of the population.” The four basic economic questions with which economists are concerned, namely: (1) What goods shall be produced and in what quantities, (2) How they shall be produced, (3) How the goods and services produced shall be distributed, and (4) Whether the production of goods and their distribution for consumption is efficient fall within the domain of microeconomics. The whole content of microeconomic theory is presented in the following chart: Microeconomics and the Economy as a whole: It is generally understood that microeconomics does not concern itself with the economy as a whole and an impression is created that microeconomics differs from macroeconomics in that whereas the latter examines the economy as a whole; the former is not concerned with it. But this is not fully correct. That microeconomics is concerned with the economy as a whole is quite evident from its discussion of the problem of allocation of resources in the society and judging the efficiency of the same. Both microeconomics and macroeconomics analyse the economy but with two different ways or approaches. Microeconomics examines the economy, so to say, microscopically, that is, it analyses the behaviour of individual economic units of the economy, their inter-relationships and equilibrium adjustment to each other which determine the allocation of resources in the society. This is known as general equilibrium analysis. No doubt, microeconomic theory mainly makes particular or partial equilibrium analysis, that is, the analysis of the equilibrium of the individual economic units, taking other things remaining the same. But microeconomic theory, as stated above, also concerns itself with general equilibrium analysis of the economy wherein it is explained how all the economic units, various product markets, various factor markets, money and capital markets are interrelated and interdependent to each other and how through various adjustments and readjustments to the changes in them, they reach a general equilibrium, that is, equilibrium of each of them individually as well as collectively to each other. Professor A. P. Lerner rightly points out, “Actually microeconomics is much more intimately concerned with the economy as a whole than is macroeconomics, and can even be said to examine the whole economy microscopically. We have seen how economic efficiency is obtained when the “cells” of the economic organism, the households and firms, have adjusted their behaviour to the prices of what they buy and sell. Each cell is then said to be in equilibrium.’ But these adjustments in turn affect the quantities supplied and demanded and therefore also their prices. This means that the adjusted cells then have to readjust themselves. This in turn upsets the adjustment of others again and so on. An important part of microeconomics is examining whether and how all the different cells get adjusted at the same time. This is called general equilibrium analysis in contrast with particular equilibrium or partial equilibrium analysis. General equilibrium analysis is the microscopic examination of the inter-relationships of parts within the economy as a whole. Overall economic efficiency is only a special aspect of this analysis.” Importance and Uses of Microeconomics: Microeconomics occupies a vital place in economics and it has both theoretical and practical importance. It is highly helpful in the formulation of economic policies that will promote the welfare of the masses. Until recently, especially before Keynesian Revolution, the body of economics consisted mainly of microeconomics. In spite of the popularity of macroeconomics these days, microeconomics retains its importance, theoretical as well as practical. It is microeconomics that tells us how a free-market economy with its millions of consumers and producers works to decide about the allocation of productive resources among the thousands of goods and services. As Professor Watson says, “microeconomic theory explains the composition or allocation of total production, why more of some things are produced than of others.” He further remarks that microeconomic theory “has many uses. The greatest of these is depth in understanding of how a free private enterprise economy operates.” Further, it tells us how the goods and services produced are distributed among the various people for consumption through price or market mechanism. It shows how the relative prices of various products and factors are determined, that is, why the price of cloth is what it is and why the wages of an engineer are what they are and so on. Moreover, as described above, microeconomic theory explains the conditions of efficiency in consumption and production and highlights the factors which are responsible for the departure from the efficiency or economic optimum. On this basis, microeconomic theory suggests suitable policies to promote economic efficiency and welfare of the people. Thus, not only does microeconomic theory describe the actual operation of the economy, it has also a normative role in that it suggests policies to eradicate “inefficiency” from the economic system so as to maximize the satisfaction or welfare of the society. The usefulness and importance of microeconomics has been nicely stated by Professor Lerner. He writes, “Microeconomic theory facilitates the understanding of what would be a hopelessly complicated confusion of billions of facts by constructing simplified models of behaviour which are sufficiently similar to the actual phenomena to be of help in understanding them. These models at the same time enable the economists to explain the degree to which the actual phenomena depart from certain ideal constructions that would most completely achieve individual and social objectives. They thus help not only to describe the actual economic situation but to suggest policies that would most successfully and most efficiently bring about desired results and to predict the outcomes of such policies and other events. Economics thus has descriptive, normative and predictive aspects.” We have noted above that microeconomics reveals how a decentralised system of a free private enterprise economy functions without any central control. It also brings to light the fact that the functioning of a complete centrally directed economy with efficiency is impossible. Modern economy is so complex that a central planning authority will find it too difficult to get all the information required for the optimum allocation of resources and to give directions to thousands of production units with various peculiar problems of their own so as to ensure efficiency in the use of resources. To quote Professor Lerner again, “Microeconomics teaches us that completely ‘direct’ running of the economy is impossible—that a modern economy is so complex that no central planning body can obtain all the information and give out all the directives necessary for its efficient operation. These would have to include directives for adjusting to continual changes in the availabilities of millions of productive resources and intermediate products, in the known methods of producing everything everywhere, and in the quantities and qualities of the many items to be consumed or to be added to society’s productive equipment. The vast task can be achieved, and in the past has been achieved, only by the development of a decentralised system whereby the millions of producers and consumers are induced to act in the general interest without the intervention of anybody at the centre with instructions as to what one should make and how and what one should consume. Microeconomic theory shows that welfare optimum of economic efficiency is achieved when there prevails perfect competition in the product and factor markets. Perfect competition is said to exist when there are so many sellers and buyers in the market so that no individual seller or buyer is in a position to influence the price of a product or factor. Departure from perfect competition leads to a lower level of welfare, that is, involves loss of economic efficiency. It is in this context that a large part of microeconomic theory is concerned with showing the nature of departures from perfect competition and therefore from welfare optimum (economic efficiency). The power of giant firms or a combination of firms over the output and price of a product constitutes the problem of monopoly. Microeconomics shows how monopoly leads to misallocation of resources and therefore involves loss of economic efficiency or welfare. It also makes important and useful policy recommendations to regulate monopoly so as to attain economic efficiency or maximum welfare. Like monopoly, monopsony (that is, when a single large buyer or a combination of buyers exercises control over the price) also leads to the loss of welfare and therefore needs to be controlled. Similarly, microeconomics brings out the welfare implications of oligopoly (or oligopsony) whose main characteristic is that individual sellers (or buyers) have to take into account, while deciding upon their course of action, how their rivals react to their moves regarding changes in price, product and advertising policy. Another class of departure from welfare optimum is the problem of externalities. Externalities are said to exist when the production or consumption of a commodity affects other people than those who produce, sell or buy it. These externalities may be in the form of either external economies or external diseconomies. External economies prevail when the production or consumption of a commodity by an individual benefits other individuals and external diseconomies prevail when the production or consumption of a commodity by him harms other individuals. Microeconomic theory reveals that when the externalities exist free working of the price mechanism fails to achieve economic efficiency, since it does not take into account the benefits or harms made to those external to the individual producers and the consumers. The existence of these externalities requires government intervention for correcting imperfections in the price mechanism in order to achieve maximum social welfare. Several Practical Applications of Microeconomics for Formulating Economic Policies : Microeconomic analysis is also usefully applied to the various applied branches of economics such as Public Finance, International Economics. It is the microeconomic analysis which is used to explain the factors which determine the distribution of the incidence or burden of a commodity tax between producers or sellers on the one hand and the consumers on the other. Further, microeconomic analysis is applied to show the damage done to the social welfare or economic efficiency by the imposition of a tax. If it is assumed that resources are optimally allocated or maximum social welfare prevails before the imposition of a tax, it can be demonstrated by microeconomic analysis that what amount of the damage will be caused to the social welfare. The imposition of a tax on a commodity (i.e., indirect tax) will lead to the loss of social welfare by causing deviation from the optimum allocation of resources the imposition of a direct tax (for example, income tax) will not disturb the optimum resource allocation and therefore will not result in loss of social welfare. Further, microeconomic analysis is applied to show the gain from international trade and to explain the factors which determine the distribution of this gain among the participant countries. Besides, microeconomics finds application in the various problems of international economics. Whether devaluation will succeed in correcting the disequilibrium in the balance of payments depends upon the elasticity’s of demand and supply of exports and imports. Furthermore, the determination of the foreign exchange rate of a currency, if it is free to vary, depends upon the demand for and supply of that currency. We thus see that microeconomic analysis is a very useful and important branch of modern economic theory. Related Articles: Microeconomics: Notes on Meaning of Microeconomics – Discussed! Difference between Microeconomics and Macroeconomics Difference between Macroeconomics and Microeconomics Essay on Microeconomics and Macroeconomics Search Search Please fill out this field. Guide to Microeconomics How Microeconomics Affects Everyday Life: Renting an Apartment Learn to make the best use of limited resources Lease Definition and Complete Guide to Renting When Renting is Better Than Buying The Best Time to Rent an Apartment Microeconomics of Everyday Life: Renting CURRENT ARTICLE Homeowner Costs Renters Don't Pay Renting a Vacation Home Rent-to-Own Homes How to Read a Lease What's Rent Control? Do Your Have a Rent Ceiling? Step-up Lease What Landlords Aren't Allowed to Do Eviction: When It's Legal Retaliatory Eviction Month-to-Month Tenant Tenant at Will Holdover Tenant Renters Insurance vs. Homeowners Insurance Renters Insurance Guide to Renter's Insurance Best Renters Insurance Companies Microeconomics  is the study of how individuals and businesses make choices regarding the best use of limited resources. Its principles can be usefully applied to decision-making in everyday life—for example, when you rent an apartment. Most people, after all, have a limited amount of time and money. They cannot buy or do everything they want, so they make calculated microeconomic decisions on how to use their limited resources to maximize personal satisfaction. Similarly, a business also has limited time and money. Businesses also make decisions that result in the best outcome for the business, which may be to maximize profit.  The field of microeconomics interests investors because individual consumer spending accounts for roughly 70% of the U.S. economy. Microeconomics and macroeconomics (the study of the larger aggregate economy) together make up the two main branches of economics. Key Takeaways Microeconomics uses a set of fundamental principles to make predictions about how individuals behave in certain situations involving economic or financial transactions. These principles include the law of supply and demand, opportunity costs, and utility maximization. Microeconomics also applies to businesses. Some Principles of Microeconomics Before using microeconomics to understand its use in renting an apartment, it helps to understand some fundamentals. Microeconomics uses certain basic principles to explain how individuals and businesses make decisions. These are: Maximizing utility —Maximizing utility means that individuals make decisions to maximize their satisfaction. Opportunity cost —When an individual makes a decision, they also calculate the cost of forgoing the next best alternative. If, for instance, you use your frequent flier miles to take a trip to the Bahamas, you will no longer be able to redeem the miles for cash. The missed cash is an opportunity cost . Diminishing marginal utility — Diminishing marginal utility , another economic input, describes the general consumer experience that the more you consume of something, the lower the satisfaction you get from it. When you eat a burger, for example, you may feel very satisfied, but if you eat a second burger, you may feel less satisfaction than you experienced with the first burger. Supply and demand —Two other important economic principles are supply and demand as they appear in the market. Market supply refers to the total amount of a certain good or service available on the market to consumers, while market demand refers to the total demand for that good or service. The interplay of supply and demand helps determine prices for a product or service, with higher demand and limited supply typically making for higher prices. The amount of the U.S. economy accounted for by consumer spending Applying Microeconomics to Renting an Apartment  To help understand how microeconomics affects everyday life, let’s study the process of renting an apartment. In New York City there is a limited supply of housing and high demand. This explains why housing costs in New York are high, according to the principles of microeconomics just outlined. Maximizing utility To rent an apartment, first you must determine a budget. For this you will have to take into account your income and how much money you are looking to spend on housing, in such a way as to maximize your utility or satisfaction. If you allocate too much of your income to rent, you will limit the money you have left for other expenses. Thus, you will have to decide what amount of money is the maximum you are willing to part with for rent, what amenities you must have in your apartment, and which neighborhoods are acceptable to you. All of these decisions and calculations are about maximizing utility. Opportunity cost Based on all the above factors, you set a budget to get the most satisfaction for the least possible rent. You will not pay more than you have to in order to get what you want. Given that in this supply-constrained market there are others also interested in renting the more in-demand apartments, you might find that you will have to increase your budget. To do this you will have to cut down on spending in another area, such as entertainment, travel, or eating out. That is the opportunity cost of finding the right apartment. Supply and demand Similarly, a landlord will seek to rent an apartment at the highest price possible, as their motivation generally is to get the best return from renting out the apartment. In setting the rent, the landlord would have to take into account the demand for the apartment in that specific neighborhood. If there are enough potential renters interested in the apartment, the landlord would set a higher rent. If the rent is set too high, compared with what other landlords in the neighborhood are charging for comparable apartments, renters will not be interested. Thus the business owner, in this case the landlord, also makes decisions based on supply and demand. And while the landlord would attract a larger pool of prospective renters by setting a rent that is lower than what other neighborhood landlords are charging for comparable apartments, they would be missing out on some rental income, which will not maximize their utility. Thus, both you and the landlord will make decisions to get the best outcome for yourselves given the constraints you face. The Bottom Line In a capitalist economy, both consumers and businesses make thousands of big and small decisions each year guided by microeconomic issues. Consumers seek to maximize their satisfaction when they go out and shop for anything from paper towels to apartments, houses, and cars. Businesses set prices and make other decisions based on microeconomics. The prices that consumers will pay depends on the supply of a specific good, such as an apartment, as well as how much others are willing to pay for it. Bureau of Economic Analysis. “ National Income and Product Accounts Tables ," Download "Table 1.1.6. Real Gross Domestic Product, Chained Dollars."  Terms of Service Editorial Policy Privacy Policy Pardon Our Interruption As you were browsing something about your browser made us think you were a bot. There are a few reasons this might happen: You've disabled JavaScript in your web browser. You're a power user moving through this website with super-human speed. You've disabled cookies in your web browser. A third-party browser plugin, such as Ghostery or NoScript, is preventing JavaScript from running. Additional information is available in this support article . To regain access, please make sure that cookies and JavaScript are enabled before reloading the page. 100 IMAGES Basics of Microeconomics and Macroeconomics Macroeconomics and Microeconomics, Scope, Difference & Limitations Essay on Microeconomics and Macroeconomics Microeconomic and Macroeconomic Activity Essay Example Macroeconomics and Microeconomics in Business PPT VIDEO A Level Economics Sample Answer A2 Paper 4 Economics 9708 A Level Economics A Level Economics Essay Guide: Subsidies, Explanation and Evaluation using diagrams Difference between Microeconomics and Macroeconomics COMMENTS Essay on Microeconomics and Macroeconomics Essay # 1. Meaning of Microeconomics: Microeconomics is the study of the economic actions of individuals and small groups of individuals. This includes "the study of particular firms, particular households, individual prices, wages, income, individual industries, and particular commodities.". It concerns itself with the analysis of price determination and the allocation of resources to ... Basics of Microeconomics and Macroeconomics Essay Conclusion. Microeconomics which tends to look at the output of an individual and firms within an economy is a scientific strategy that emphasizes all parts that constitute a country's economy. Both micro and macroeconomics are conjoined, and thus their understanding would help countries and firms make informed decisions (Case & Fair 110-105). Microeconomics vs. Macroeconomics: What's the Difference? Key Takeaways. Microeconomics studies individuals and business decisions. Macroeconomics analyzes the decisions made by countries and governments. Microeconomics focuses on supply and demand and ... Micro and Macro: The Economic Divide Macroeconomics often extends to the international sphere because domestic markets are linked to foreign markets through trade, investment, and capital flows. But microeconomics can have an international component as well. Single markets often are not confined to single countries; the global market for petroleum is an obvious example. Difference between microeconomics and macroeconomics 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. Macroeconomics vs Microeconomics Macroeconomics is the branch of economics that looks at economy in a broad sense and deals with factors affecting the national, regional, or global economy as a whole.Microeconomics looks at the economy on a smaller scale and deals with specific entities like businesses, households and individuals.. This comparison takes a closer look at what constitutes macro- and microeconomics, their ... 1.2 Microeconomics and Macroeconomics Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy. To understand why both microeconomic and macroeconomic perspectives are useful, consider the problem of studying a biological ecosystem like a lake. One person who sets out to study the lake might focus on ... Microeconomics Versus Macroeconomics According to comedian P.J. O'Rourke, "microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally. Or to be more technical, microeconomics is about the money you don't have, and macroeconomics is about money the government is out of.". Microeconomics and Macroeconomics Differences Essay Microeconomics is a branch of economics that investigates how households and firms formulate decisions to apportion inadequate resources, especially in a market scenario where the buying and selling of goods as well as services takes place (Pindyck & Rubinfeld, 2005, p.3). This branch of economics finds out how decisions made affect the supply ... Difference Between Micro and Macro Economics Micro Economics talks about the actions of an individual unit, i.e. an individual, firm, household, market, industry, etc. On the other hand, the Macro Economics studies the economy as a whole, i.e. it assesses not a single unit but the combination of all i.e. firms, households, nation, industries, market, etc. 1.6: Microeconomics and Macroeconomics Micro vs. Macro. It should be clear by now that economics covers a lot of ground. That ground can be divided into two parts: microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses; macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth ... How Do I Differentiate Between Micro and Macro Economics? Microeconomics is the field of economics that looks at the economic behaviors of individuals, households, and companies. Macroeconomics takes a wider view and looks at the economies on a much ... Difference between microeconomics and macroeconomics Conclusion. There exist a distinct difference between microeconomics and macroeconomics both in its definition and functioning. Microeconomics examines scarce resource between competing wants in a household or a firm. A microeconomic decision regarding purchase of goods affects directly and indirectly the demand and supply. Remember! The Differences Between Macroeconomics And Microeconomics Economics Essay Microeconomics and macroeconomics are the two major categories of economics: Microeconomics- examines the behaviour of individual economic entities: firms and consumers regarding the allocation of resources and prices of goods and services. It monitors and studies the demand-supply mechanism at individual level, effect of income and saving ... Difference between Microeconomics and Macroeconomics Microeconomics is the study of economics at an individual, group, or company level. Whereas, macroeconomics is the study of a national economy as a whole. Microeconomics focuses on issues that affect individuals and companies. Macroeconomics focuses on issues that affect nations and the world economy. Q2. The Differences Between Macroeconomics And Microeconomics Micro means small and microeconomics deals with the smaller parts of economics such as economic condition of an individual or a firms, demand and supply of any individual firms or household, price of a specific products etc. Macro means big or large, and deals with large part of economics such as aggregated demand and supply, inflation ... Interdependence between Micro and Macroeconomics Actually micro and macroeconomics are interdependent. The theories regarding the behaviour of some macroeconomic aggregates (but not all) are derived from theories of individual behaviour. For instance, the theory of investment, which is a part and parcel of the microeconomic theory, is derived from the behaviour of individual entrepreneur. Microeconomics, Macroeconomics and Economic Policy: Essays in Honour of Microeconomics, Macroeconomics and Economic Policy are at the core of research and study in economics. The essays in this volume have been specifically commissioned and brought together to celebrate the work of Malcolm Sawyer, who has made substantial contributions in these areas. Microeconomics: Essay on Microeconomics Microeconomics examines the economy, so to say, microscopically, that is, it analyses the behaviour of individual economic units of the economy, their inter-relationships and equilibrium adjustment to each other which determine the allocation of resources in the society. This is known as general equilibrium analysis. Microeconomics Essay Reflection Reflection and Analysis of the Microeconomics Essay. Upon reviewing the essay on microeconomics, several strengths and weaknesses can be identified. This reflection and analysis will examine the essay's structure, content, and presentation to evaluate its overall effectiveness and identify areas for improvement. Strengths: How Microeconomics Affects Everyday Life: Renting an Apartment Complete Guide to Renting. Microeconomics is the study of how individuals and businesses make choices regarding the best use of limited resources. Its principles can be usefully applied to ... Macroeconomics essay 2 (docx) Economics is the study of how individuals, businesses, and societies allocate scarce resources to meet their unlimited wants and needs. It is a social science that helps us understand how people make decisions in the face of limited resources and varying needs and preferences. Economics is a broad and diverse field that encompasses a wide range of topics, including microeconomics ... essay homework paper phd project resume review speech study thesis