In this paper “The General Theory of Employment, Interest, and Money” John Maynard Keynes emphasized on the necessity for dividing the Economics field into two categories. This was how macroeconomics materialized as a fresh branch of Economics, a branch that assessed the behavior and structure of the whole economy, running parallel to the conventional microeconomic approach.
What is Economics?
Before we dive into the specifics of macro and microeconomics let’s get an idea of what Economics is first. When we talk about Economics as a subject, it is a social science that is concerned with the production, distribution, and consumption of goods and services. It also looks after the allocation of resources among individuals by a nation.
Economics works on the assumption that humans acquire a rational behavior to achieve the optimal level of utility. It focuses on these actions performed by humans. The two building blocks of economics are labor and trade.
You can also check out our blog on Capital in Economics.
Since there are many possible ways to acquire and use resources including human labor, it is economics that ensures that the best way is chosen. It ensures efficiency and sustainability in the use of resources.
“One of the most important skills of the economist, therefore, is that of simplification of the model. Two important methods of simplification have been developed by economists. One is the method of partial equilibrium analysis (or microeconomics), generally associated with the name of Alfred Marshall and the other is the method of aggregation (or macro-economics), associated with the name of John Maynard Keynes.”
-Kenneth E. Boulding, American Economist
In this blog, we will be discussing the two branches of economics - macro and microeconomics in detail. We will understand the definition and different concepts of microeconomics as well as macroeconomics. We will then look at the differences between micro and macroeconomics.
What is Microeconomics?
Microeconomics is the branch of economics that focuses on the decisions of individuals and businesses over resource allocation and the price at which goods and services are traded. It takes taxes, government legislation, and regulations into consideration.
This branch of economics primarily focuses on discovering which factors are contributing to the decisions of individuals and how these decisions will in turn influence the general market in terms of the price, demand, and supply of goods and services.
You can also take a look at our blog on Price Elasticity of Demand.
Microeconomics shows how and why different goods have different values, how individuals and businesses conduct and benefit from efficient production and exchange, and how individuals best coordinate and cooperate with one another.
Microeconomics has several key concepts that are leveraged to understand the change in decisions of firms and the dynamics of the market.
Utility theory: This theory explains the behavior shown by consumers. It says, consumers will opt for those combinations of goods and services that give them maximum happiness, or we can say that are of maximum utility. However, this is subject to the constraint of how much funds they have available with them to spend.
Price theory: Utility and production theory are combined to obtain the theory of supply and demand, which is used to determine prices in a competitive market. In a perfectly competitive market, it concludes that the price demanded by consumers is the same supplied by producers. That results in economic equilibrium.
Microeconomics is applied in a positive or normative sense. Positive microeconomics describes economic behavior and change in this behavior when certain conditions are tampered with. Normative microeconomics determines the desirability of people towards various economic programs and conditions, focusing on what "should" be.
The fluctuation in demand and supply, rise or fall in prices, production, all are explained with the help of microeconomics.
What is Macroeconomics?
Macroeconomics is a branch of economics that studies how an overall economy— the market and other operations that operate on a larger scale, function. Macroeconomics studies economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.
Macroeconomics addresses a series of questions concerning the long-term growth in an economy like, What causes unemployment? What causes inflation? What are the factors that stimulate or create economic growth?
Macroeconomics helps to monitor economic growth, the forces driving it, and also projects ways to improve it.
There are many types of Macroeconomics factors that attempt to discover ways for clarifying economic policy objectives and work towards achieving economic prosperity. These comprise :
- Positive: These factors comprise events that eventually stimulate economic stability and expansion amidst a nation or among a group of nations. Any change resulting in an escalation in demand for goods or services is determined to be a positive macroeconomic factor.
- Negative: These factors comprise events that can threaten the national or global economy. Examples of these factors include global pandemics (e.g., Covid-19) or natural disasters, like hurricanes, earthquakes, or floods.
- Neutral: A few economic changes are neither positive nor negative. Rather their consequences are based on the intention of action like trade control across regional or national borders. The consequences of such actions rely on the nation being affected and the purpose behind the undertaken action.
Given the colossal size of government financial plans and the effect of monetary arrangement on shoppers and organizations, macroeconomics obviously frets about huge issues. Appropriately applied, financial speculations can offer enlightening bits of knowledge on how economies work and the drawn-out outcomes of specific strategies and choices.
You can also spare a glance at our blog on Managerial Economics.
Macroeconomic hypotheses can likewise support singular organizations and speculators settle on better choices through a more careful comprehension of the impacts of wide financial patterns and strategies on their own businesses.
“Macroeconomic stability will be more elusive and that will affect all of our lives: from the risks many will face in childhood, to the security of employment at working age, to the challenge of accumulating for retirement. More financial instability will introduce more uncertainty all down the line, and that will be a very different world than the one we would have lived in only a couple of decades ago.”
-Alan M. Taylor, Professor of Economics and Finance, University of California
History of Macroeconomics
The term ‘macroeconomics’ is not that old, dating back to the 1940s. However, the core concepts in macroeconomics like unemployment, inflation, prices, growth, and trade have been in the focus of study for much longer. These topics have concerned economists right from the beginning, though the specialized studies started in the 20th and 21st centuries.
Macroeconomics, as we know it today in its modern form, emerged with John Maynard Keynes, and his book ‘The General Theory of Employment, Interest, and Money’, as mentioned above, which was published in 1936. Keynes offered an explanation for the consequence of the Great Depression when goods were not being sold and workers were left unemployed. His theory tried to explain the circumstances and why the markets might not clear.
Before Keynes’ theories became popular, economists could not generally differentiate between microeconomics and macroeconomics. The same microeconomic laws of supply and demand that operate in individual goods markets were understood to interact between individual markets to bring the economy into a general equilibrium, as described by Leon Walras, the French mathematical economist.
The link between goods markets and large-scale financial variables such as price levels and interest rates was explained through the unique role that money plays in the economy as a medium of exchange by economists such as Knut Wicksell, Irving Fisher, and Ludwig von Mises.
Also Read: Economic Calendar
Microeconomics vs Macroeconomics
Although we have explained both these concepts above separately, and you can draw the difference between these two branches of economics. We will compare these two in one place to avoid any kind of doubts. So, we will just begin with basic meanings.
Difference between Microeconomics and Macroeconomics
Microeconomics is more focused on the choices made by individual actors in the economy (like people, households, industries, etc.).
Macroeconomics, meanwhile, focuses on the performance, structure, and behavior of the entire economy.
These two economic branches play a significant role in influencing decision making. Microeconomics is the study of decisions made by individuals and businesses regarding the allocation and utilization of resources. It also looks after the prices at which individuals trade their goods and services, keeping the taxes, regulations, and government legislation in consideration.
Macroeconomics, on the other hand, studies the decisions made by governments in a country and the impact of the policies framed on the economy as a whole. Macroeconomics analyzes entire industries and economies rather than focusing on the decisions of private individuals or companies. It tries to answer questions such as, "What should the rate of inflation be?" or "What stimulates economic growth?"
Speaking of Economic Growth, you can also take a look at our blog on Difference between Economic Growth and Economic Development
Microeconomics focuses on supply and demand and other factors that affect the price levels. In other words, microeconomics tries to understand human choices made, decisions taken, and allocation of resources. Microeconomics does not try to suggest, answer, and explain what forces should take place in a market but rather tries to explain the effect of certain changes made in the market conditions.
Macroeconomics focuses on how factors like unemployment, national income, and prices of goods influence the overall economy. It examines the total employment in the economy and aggregates and economic correlations. This is the reason behind government agencies’ reliance on macroeconomics to frame economic and fiscal policy.
Microeconomics examines the individual market’s behavior. It looks at the ways the company could maximize its production and capacity so that it can lower the prices of goods or services. This helps the company to better place itself and survive the fierce competition.
Macroeconomics, on the other hand, analyzes the sum total of the economic activity. It analyses the factors impacting the whole economy including the gross domestic product (GDP). It studies how an increase or decrease in net exports impacts a nation's capital account. It assesses global issues such as inflation, unemployment, and growth. Macroeconomics gives clarity at the broad level to help the government in formulating economic policies.
Microeconomics takes a bottom-up approach to analyze the economy whereas macroeconomics takes a top-down approach.
Investors generally focus in-depth on microeconomics to gain effective insights for guiding investment decisions.
Generally, seasoned investors don’t pay as much attention to macroeconomics for guiding their investment decisions.
To conclude, we can just say microeconomics explains things at the lowermost end of an economy whereas macroeconomics deals with the things at the topmost end. We can not say anything about which is better as they both make two ends meet. In any economy, every individual is important thus making macroeconomics a relevant concept. On the other side, decisions taken by governments affect everyone who is a part of the economy, and this makes macroeconomics a concept to rely upon.
Micro and macroeconomics are the two most talked-about concepts of economics. Though these two branches of economics appear different, they are actually interdependent and complement one another. Many overlapping issues exist between the two fields.
Throughout the blog, we discussed the differences between the two branches of economics. How microeconomics studies individuals and macroeconomics analyzes the decisions taken at the top. You can now draw a line between the two parts of economics.