In basic terms, microeconomics and macroeconomics are both branches of economics. While one concerns itself with economic decisions undertaken at the household or individual level, the other explores the functioning of the economy in overall terms. In this discussion, I take into consideration the key differences between these two branches of economics. In so doing, I will give an example of each phenomenon and later highlight decisions made under both the microeconomic and macroeconomic context.
The Key/Main Differences between Microeconomics and Macroeconomics
Derived from the word “micros” which is essentially a Greek name for “small,” microeconomics’ primary focus remains on small individual groups or units. Derived from the word “macros” which is a Greek term literally taken to mean “large” or “long,” macroeconomics concentrates on the analysis of the aggregate economy (Mishra, 2010). According to Miles and Scott (2005), the primary concern of microeconomics is the decisions a limited number of agents make. However, macroeconomics comes in with a view of decisions (in totality) of all the agents in aggregation.
To begin with, the behavior of individuals in economic terms is the main concern of microeconomics. In this case, microeconomics seeks to chart the behavior of individual industries, markets, firms or producers. Thus in this regard, this branch of economics focuses on a particular segment of the entire economy. However, macroeconomics on the other hand has its attention focused on the economy as a whole. Thus in regard to income, macroeconomics looks at the national income as opposed to individual incomes. Further, when it comes to prices, macroeconomics concerns itself with general price levels as opposed to particular prices.
Secondly, when it comes to objectives, optimum resource allocation remains a key objective of microeconomics. On the other hand, Hussain (2010) is of the opinion that economic resources development and full employment is the main objective of macroeconomics.
Next, it can be noted that in both cases; demand and supply is dependent on different factors. In regard to microeconomics, demand depends on a particular market’s price and expectations of consumers. Further, supply in this case is dictated upon by the individual price of a certain good and the expectations of firms in terms of profits, returns or otherwise. On the other hand, demand when it comes to macroeconomics is largely dependent on the expectations of households coupled with the prices of all the products. Supply in this scenario is dictated upon by the cost of production (in total) and the expectations of producers (Hussain, 2010).
Fourth, the two branches of economics can be distinguished on the basis of the nature of activity they undertake. For instance, while disaggregation is the basis of microeconomics, microeconomics is largely founded on aggregation. Hence in this case, one could say that both branches of economics differ in their degree of aggregation.
Next, there being full employment remains a key assumption of microeconomics. On the other hand, constant allocation of resources is taken to be the key assumption of macroeconomics. Further, when it comes to equilibrium, it can be noted that in regard to microeconomics, the occurrence of equilibrium is signaled by the equaling of the quantity demanded with quantity supplied. However, in an economy, equilibrium in the case of macroeconomics takes place when aggregate supply equals aggregate demand. Also, the analysis of equilibrium conditions in the case of microeconomics is done at a particular period. As such there is no explanation of the time element. In this sense, Mishra (2010) argues that “microeconomics is considered as a static analysis.” However, time lags act as the basis of macroeconomics. Also, variable values (expected and past) as well as change rates are taken to be some of the factors on which macroeconomics is based. Further, the two can also be distinguished in terms of price. While there is an assigned price for each good or service in microeconomics, macroeconomics has a price level in an economy at which aggregate supply equals aggregate demand.
In the light of the differences I highlight above, it should be noted that in a way, both branches of economics are interdependent. To highlight this assertion with an example, it is reasonable to say that an individual’s investment in a given industry is largely dependent on the economy’s investment level as a whole. To highlight this interdependence, one can also note that in regard to macroeconomics, demand (aggregate) remains a summation of demand at the micro level. Hence in appreciation of the above examples, one could conclude that regardless of the two branches of economics being different, they also happen to be interdependent.
An Example of a Microeconomic Phenomenon
A good example of a microeconomic phenomenon is where a given firm; , seeks to embrace the latest advances in technology with an aim of enhancing labor productivity by 45%. In this case, a microeconomic analysis of the issue at hand would primarily concern itself with the various costs Firm X would incur in its quest to have this technology in place as well as the productivity (likely) and returns that such a move would bring about.
An Example of a Macroeconomic Phenomenon
For instance, if the government were to consider the effect of the adoption of new technology by many firms on the economy, this would be taken to be a macroeconomic issue. This is more so the case were the government to set about to determine how such a move by many firms to adopt new technology would decrease costs in the whole economy or how such a move would affect the demand of skilled labor. Such a view as highlighted above can be considered a preserve of macroeconomics.
In the above examples, the difference between macroeconomics and microeconomics is well brought out. In regard to the first microeconomic example, the firm i.e. Firm X is contemplating embracing new technology in isolation. In this case, this is not a decision being contemplated or deliberated upon by many firms in the economy. Further, the emphasis in this case remains Firm X’s employment and pricing decisions (perhaps with wages held or considered fixed). Hence in this case, a key assumption of the analysis is that the background economic environment is not in any way influenced by Firm X’s decisions.
However, when it comes to the second example in which case I highlight a macroeconomic issue, the insistence is largely on the consequences the adoption of new technology by a many entities will have on unemployment, wages and in general terms; economy-wide output.
A Microeconomic Decision I Made: Description
In the past, I have found myself considering how the increase in the price of a certain good or service will affect my purchasing power. For instance, there was a time I was considering purchasing a more efficient lawn mower. I had paid the local general retail store a visit a few months earlier and took note of prices of the particular models I was interested in. With these prices in mind, I set about to save enough cash to purchase the particular model I was interested in at a later date. A few months down the line, armed with the amount of cash I had already saved, I set about to pick up the lawn mower but to my disappointment found that the price of the same had been revised upwards. It was time for me to make a decision as the change of price would most definitely affect what I would have left as my disposable income.
In this case, I only had three alternatives. One was to get what I wanted at its asking price. Two, I could have got a cheaper model of a lawn mower though in this case the cheaper models did not have the specific features I needed. Third, I had the option of going back home and hence in the process abandon the decision to purchase a lawn mower. To begin with, the cost of the lawn mower was one of the key factors that contributed to my decision. The other factor that contributed to my decision in this case was the prices of other related goods and services, i.e. In this case other lawn mowers with the same functionality. Further, my decision was impacted upon by the amount of money I had in the pocket and hence what I would have left after purchasing the lawn mower. I ended up purchasing a lawn mower from a different manufacturer which in my opinion had almost the same specifications (but not all) as the earlier one despite being cheaper. Hence effectively, the change in the price of that particular good ended up affecting my purchasing decision.
A Macroeconomic Phenomenon/Event
In order to sustain the growth of the economy, the government through its various organs uses a number of macroeconomic strategies. Such a strategy might be the monetary policy or the fiscal policy. In my case, the macroeconomic event that impacted on me was informed by an adjustment of the monetary policy. A few months ago, the government reviewed the taxation rate of a number of goods and services with some of the goods affected being commodities I use on a regular basis. In my view, this was a move undertaken by the government in its quest to stimulate growth of the economy after the sustained downturn in economic activity.
However, despite the same being a macroeconomic event, it effectively affected me in that I had to pay more for some of the products I used on a regular basis as retailers promptly reviewed their prices upwards. Hence on that front, and given that my income remained constant, a significant portion of my disposable income was eaten into. This further affected my savings as I had to less money left to save.
In conclusion, it can be noted that microeconomics and macroeconomics remain two important branches of economics. Though both differ in one way or the other, they must not be taken to be mutually exclusive activities. As I have already discussed in an earlier section, these two branches of economics are largely interdependent. Hence with that in mind, both branches should not be taken as distinct activities but rather as different approaches or techniques in the study of economics.
Hussain, T. (2010). Engineering Economics. Laxmi Publications
Miles, D. & Scott, A. (2005). Macroeconomics: Understanding the Wealth of Nations. John Wiley and Sons.
Mishra, S. (2010). Engineering Economics and Costing. PHI Learning Pvt. Ltd.