Which of the following describes the basic difference between macroeconomics and microeconomics?

Economics is broadly divided into two different categories namely microeconomics and macroeconomics.  Microeconomics is the study of specific segments and markets of an economy. It looks at the issues like consumer behavior, individual labor market, and theory of firms. On the other hand, macroeconomics is the study of the whole economy. It looks at the aggregate variables such as aggregate demand, national output, and inflation. Read the article below to know more about the difference between Microeconomics and Macroeconomics with examples.

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What is Microeconomics?

Microeconomics focuses on the choices made by individual consumers as well as businesses concerning the fluctuating cost of goods and services in an economy. Microeconomics covers several aspects, such as – 

• Supply and demand for goods in different marketplaces.

• Consumer behaviour, as an individual or as a group.

• Demand for service and labour, including individual labour markets, demand, and determinants like the wage of an employee.

One of the main features of microeconomics is it focuses on casual situations when a marketplace experiences certain changes in the existing conditions. It takes a bottom-up approach to analyse the economy.

What are the Different Components of Microeconomics?

The different components of microeconomics include:

• Market demand and supply (For example Textile)

• Consumer Behavior ( for example Consumer Choice Theory)

• Producers are driven by individual preferences.

• Market-specific labor markets ( For example demand labor wage determination in specific markets).

What is Macroeconomics?

Macroeconomics studies the economic progress and steps taken by a nation. It also includes the study of policies and other influencing factors that affect the economy as a whole. Macroeconomics follows a top-down approach, and involves strategies like – 

• The overall economic growth of a country.

• Reasons that are likely to influence unemployment and inflation.

• Fiscal policies are likely to influence factors like interest rates.

• Effect of globalization and international trade.

• Reasons that affect varying economic growths among countries.

Another feature of macroeconomics is that it focuses on aggregated growth and its economic correlation.

What are the Different Components of Macroeconomics?

The different components of macroeconomics include:

• National Output

• Unemployment

• Inflation

How do Microeconomics and Macroeconomics Interdependent on Each Other?

The two parts of Economics i.e. microeconomic and macroeconomics are not interrelated but are mutually exclusive. A close connection exists between the two terms. All microeconomic studies can analyze the better understanding of micro and macroeconomics variables. Such a study will help in the formulation of economic policies and programs. As we know, changes and processes in the economy are a result of both small and large-scale elements which retain the capacity to affect each other or are directly affected by each other.  For example: Although the tax increase is a macroeconomic decision, its impact on firms ' savings is a microeconomics analysis.

Let us understand another example: if we know how the price of any commodity is determined and what is the role of buyer and seller in the price determination then it would help us in analyzing the changes that take place in the general price level for all commodities in the economy as a whole. A study of determining the price of a commodity and the role of buyers and sellers in this process is known as microeconomics whereas the study of the general price level in economics is a macroeconomic process. Similarly, if we want to determine the performance of an economy we will first have to find out the performance of each sector of the economy, and to find out the performance of each sector of the economy we have to find out the performance of each sector individually or in groups. A study of each sector of a production unit or each group is a microeconomics study whereas the study of all the production units of all the sectors is a macroeconomics study. Hence, microeconomics and macroeconomics are two interrelated parts of economics. Therefore, the study of both terms is important in economics.

Difference between Microeconomics and Macroeconomics

Examples of Microeconomics and Macroeconomics

Examples of Microeconomics

• Price determination of a particular commodity.

• Consumer equilibrium.

• Output generated by an individual organization.

• Individual income and savings.

Examples of Macroeconomics 

• National income and savings.

• General price level.

• Aggregate demand and Aggregate Supply 

• Poverty.

• Rate of unemployment

Effect of Micro and Macro Economics 

Any changes in these categories have a direct impact on a country’s economy. Several factors affect it; let’s take a look

Decision Making

Uncontrollable external factors such as changes in interest rate, regulations, number of competitors present in the market, cultural preferences, etc. play a key role in influencing an organization’s strategies and performance. These can have a cumulative effect on a nation’s economy as well.

Economic Cycles

Experts consider macroeconomics as a cyclic design. Higher demand levels, personal income, etc. can influence price levels, which in turn can affect a nation’s economy. Contrarily, when supply outweighs demand, the cost of daily goods reduces. This pattern continues until the next cycle of supply and demand.

Price of Products and Services

The primary goal of an organization is to keep costs at the minimum and increase the profit margin. The cost of labor is one of the highest expenses incurring factors in microeconomics, thereby directly affecting the overall cost of production and retail.

Did You know?

• The founding father of Macroeconomics ‘John Maynard Keynes’ wrote the General Theory of Interest, Employment, and Money in 1936.

• Alfred Marshall is regarded as the founding father of Microeconomics. 

• The Economist John Maynard Keynes tried to merge microeconomics and macroeconomics by introducing a microeconomics foundation for the macroeconomics model. The reason behind these efforts is the belief that individual households and businesses act in their best interests.

• Microeconomics study is determined by the method known as Partial Equilibrium whereas Macroeconomics study is determined by the method known as Quasi General Equilibrium Analysis.

• Microeconomics study is applied in the field of agricultural economics, international economics, labor economics, comparative economics, consumer economics, regional economics, welfare economics, aspects of public finance, and other fields. On the other hand, Macroeconomic studies are applied in the fields of formulation and execution of economic policies, studying economic development, understanding microeconomics, welfare studies, the study of inflation and deflation studies, and even international comparisons lie in the study of macroeconomics.

Conclusion

Although there are some dissimilarities between Micro economics and Macro economics, both are important and need to be understood to get a comprehensive knowledge of economics. To understand the domestic economy is important but at the same time it is also important to understand the household economy and the economy as a whole as it helps to to set a nation's economic policy.

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What is the basic difference between microeconomics and macroeconomics?

How does microeconomics differ from macroeconomics quizlet?