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Difference between microeconomics and macroeconomics Tejvan Pettinger
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February 4, 2017 (https://www.economicshelp.org/blog/6796/economics/difference-between-
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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. (/shop)
Micro economics is concerned with:
Supply and demand in individual markets Individual consumer behaviour. e.g. Consumer choice theory (https://www.economicshelp.org/university/consumer-choice.html) Individual labour markets – e.g. demand for labour, wage determination (https://www.economicshelp.org/labour-markets/wage-determination.html) Externalities arising from production and consumption. e.g. Externalities (https://www.economicshelp.org/blog/9448/economics/externalities-free-market/)
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Macro economics is concerned with A-Level revision guide
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
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Moving from Micro to Macro
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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.
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Macro economic analysis
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This looks at all goods and services produced in the economy.
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This micro economic analysis shows that the increased demand leads to higher price and higher quantity.
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
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1. Small segment of economy vs whole aggregate economy. 2. 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. 3. 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). 4. Macro economics places greater emphasis on empirical data and trying to explain it. Micro economics tends to work from theory first.
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 (https://www.economicshelp.org/microessays/equilibrium/market-equilibrium.html) (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.
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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 macroeconomy) 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.
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Since 1936, macroeconomics developed as a separate strand within economics. There have been competing explanations for issues such as inflation, recessions and economic growth.
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Similarities between microeconomics and macroeconomics
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Although it is convenient to split up economics into two branches – microeconomics and macroeconomics, it is to some extent an artificial divide.
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1. Micro principles are used in macro economics. 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. 2. Micro effects macro economics 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. 3. 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. 4. There have been efforts to use computer models of household behaviour to predict the impact on the macro economy. Related Summary of Economics (https://www.economicshelp.org/blog/3155/economics/economicssummary/) External Links Micro and macro economics (https://www.imf.org/external/pubs/ft/fandd/basics/bigsmall.htm) at IMF
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machere says:
February 5, 2013 at 9:44 am (https://www.economicshelp.org/blog/6796/economics/differencebetween-microeconomics-andmacroeconomics/#comment-78687)
thanx a lot, this a very informing simlified session Reply (https://www.economicshelp.org/blog/6796/economics/difference-between-microeconomicsand-macroeconomics/?replytocom=78687#respond)
machere says:
February 5, 2013 at 9:45 am
Causes of Wall Street Crash 1929 (https://www.economicshelp.org/blog/76/economics street-crash-1929/) Causes of Great Depression (http://econ.economicshelp.org/2008/10/causesof-great-depression.html) UK economy in 1920s (https://www.economicshelp.org/blog/5948/econom economy-in-the-1920s/) UK Economy of 1970s (http://econ.economicshelp.org/2010/02/economyof-1970s.html) UK Economy - 1980s (https://www.economicshelp.org/blog/630/economic in-1980s/) Keynesian Economics (https://www.economicshelp.org/blog/6801/econom economics/)
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The problem of printing money thanx a lot (https://www.economicshelp.org/blog/634/economic this is a very informing simplified version problem-with-printing-money/) The importance of economics Reply (https://www.economicshelp.org/blog/6796/economics/difference-between(http://econ.economicshelp.org/2008/06/importance microeconomics-and-macroeconomics/?replytocom=78688#respond) of-economics.html) Understanding exchange rates (https://www.economicshelp.org/blog/749/economic Shimul says: July 27, 2013 at 6:40 pm exchange-rate/) (https://www.economicshelp.org/blog/6796/economics/difference10 reasons for studying economics between-microeconomics-and(http://econ.economicshelp.org/2007/08/topmacroeconomics/#comment-112593) 10-reasons-for-studying-economics.html) very good lectures Impact of immigration on UK economy (https://www.economicshelp.org/blog/6399/econom Reply (https://www.economicshelp.org/blog/6796/economics/difference-betweenof-immigration-on-uk-economy/) microeconomics-and-macroeconomics/?replytocom=112593#respond)
sentayehu says:
February 5, 2013 at 11:59 am (https://www.economicshelp.org/blog/6796/economics/differencebetween-microeconomics-andmacroeconomics/#comment-78744)
What a short and clear explanation. Reply (https://www.economicshelp.org/blog/6796/economics/difference-between-microeconomicsand-macroeconomics/?replytocom=78744#respond)
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Diddi Darko says:
February 13, 2013 at 6:13 pm (https://www.economicshelp.org/blog/6796/economics/differencebetween-microeconomics-andmacroeconomics/#comment-81112)
Simplicity at its best. Reply (https://www.economicshelp.org/blog/6796/economics/difference-between-microeconomicsand-macroeconomics/?replytocom=81112#respond)
wambeo says:
April 27, 2013 at 1:12 pm (https://www.economicshelp.org/blog/6796/economics/differencebetween-microeconomics-andmacroeconomics/#comment-100568)
simplified well enough to understand. Thanks a lot. Reply (https://www.economicshelp.org/blog/6796/economics/difference-between-microeconomicsand-macroeconomics/?replytocom=100568#respond)
wambeo says:
April 27, 2013 at 1:13 pm (https://www.economicshelp.org/blog/6796/economics/differencebetween-microeconomics-andmacroeconomics/#comment-100569)
this is great.well understood Reply (https://www.economicshelp.org/blog/6796/economics/difference-between-microeconomicsand-macroeconomics/?replytocom=100569#respond)
tashua says:
July 16, 2013 at 8:37 pm (https://www.economicshelp.org/blog/6796/economics/differencebetween-microeconomics-andmacroeconomics/#comment-111525)
Thanks Reply (https://www.economicshelp.org/blog/6796/economics/difference-between-microeconomicsand-macroeconomics/?replytocom=111525#respond)
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