The Difference between Microeconomics and Macroeconomics
The words Microeconomics and Macroeconomics sound almost the same, but if you ever wondered what the difference between these two words is – continue reading.
This guide will breakdown both micro and macroeconomics and will discuss their interdependency, as well as their effects on decision-making.
Microeconomics and macroeconomics are the two branches of the study of Economics.
So, let us firstly look at their root – Economics.
Economics is part of our everyday lives since it influences every aspect of our living including the price of goods and services we utilize regularly.
The economic status of a given country directly affects the livelihoods of its citizens starting with their incomes and narrowing down to their business operations.
For instance, economic factors like hyperinflation and unemployment directly affect the country’s finances and growth that is evident in the lives of the common citizens.
Economics has embedded its roots deeply into our lives, and its core disciplines are Microeconomics and Macroeconomics.
These two can be confusing at a first glance.
However, you will soon get to know and understand what exactly makes them different.
MICROECONOMICS VS. MACROECONOMICS
The remarkable difference between Microeconomics and Macroeconomics is evident in how their prefixes take two different dimensions in regards to their meaning.
The word “micro” carries the meaning “small”.
Therefore, Microeconomics is defined as the study of individuals, firms or household’s behavior in regards to decision-making and the allocation of resources.
It focuses on economic issues at an individual, company or group level.
Microeconomics digs deep to find out what factors influence peoples’ choices, and hence the impact of these choices on the general market in terms of price, demand, and supply of goods and services.
On the other hand, Macroeconomics just as the name suggests (“macro” which means “big/large”) studies the structure, performance, behavior, and the decision-making process of an economy as a whole.
It is majorly concerned with the aggregate economic changes that include factors like the national output, inflation, changes in unemployment, gross domestic product (GDP) and national income.
Owing to the complex world we live in, the economic changes in one way or another affects each individual.
The economy plays a critical role of providing people with jobs, business opportunities, and many other life demands, so you can use the earnings you get to access goods and services you need to survive and be productive in the modern society.
Consequently, the study of macroeconomics is crucial in enabling us better understand the factors that lead to the growth of our economy, and vice versa (the economy’s contraction).
Economic growth contributes to improved living standards while its contraction leads to poor living standards.
Macroeconomics deals with regional, national, and global economies. It comprehensively analyses all the aggregate factors including microeconomics, to aid the national decision-making processes.
For instance, the Government utilizes macroeconomics in the formulation of economic policies as well as in controlling the economic fluctuations; which if not controlled may lead to capitalism.
Macroeconomic policies include Government’s borrowing and spending, taxes, exchange rate determinants, monetary and credit rules.
Now that you are familiarized with the two disciplines, let us carry on.
The formulation of economic policies is made easier by the macroeconomic principle of economics.
Nevertheless, it does not apply smoothly without any hitches.
WHAT ARE THE CHALLENGES IN THE FORMULATION OF MACROECONOMIC POLICIES?
Every policy-maker/Government would wish to be able to control all the factors that influence the process of formulating good macroeconomic policies.
There are certain economic factors that should be aligned in order for the country and its citizens to secure benefits such as striking the balance of payments equilibrium, economic growth in terms of real income levels, high and stable employment levels, stable price levels (hence curbing inflation), and the aggregate increase in national output.
However, this is not always possible due to numerous reasons like:
- Political instability – it is impossible to provide a single factor in the evaluation of policies since numerous issues like political instability may lead to reverse of the already planned and declared Government’s economic agendas.
- Incomplete policies – there are no completely formulated policies to help propel the macroeconomic objectives (like stable income rates, and stable employment) considering that economists are still in the process of analyzing and establishing all of these policies.
- Unsuccessful policy implementation – economists only offer advice on the viability of given policies but the implementation process is solely undertaken by the policy-makers.
- Limitations in policy implementation – in some countries like the United Kingdom, the macroeconomic policies are not solely controlled by the Government but are also determined by the private sector. A good example being the employment sector (which may include international organizations), hence the restricted freedom in the implementation of the Government’s policies. This is so considering that the international policies have to be adhered to as well without any form of compromise.
- Setbacks in policy implementation – some macroeconomic policies implemented by the policy-makers may sometimes face a setback especially when it comes to monetary and fiscal policies implementation. For instance, the policy methods employed to solve issues like liquidity trap may prove to be ineffective hence requiring repeated attempts, which may lead to fast deterioration of the economy.
THE INTERDEPENDENCY OF MICRO AND MACROECONOMICS
Although the two disciplines of economics differ in their focus just as you have seen above, they remain related and dependent on one another.
Let us kick off by looking at their roles in decision-making so that you may get to understand why these two principles go hand in hand.
THE EFFECTS OF MICRO AND MACROECONOMICS IN DECISION-MAKING
It is obvious that when you make decisions concerning your business, you have to consider several factors that include the environment you operate/intend to operate in, the economic status of your country, and even the one of the world at large.
This clearly shows the interdependency of these two disciplines.
For better understanding, let us break this further to a simple life scenario of decision-making.
So, how do Microeconomics and Macroeconomics affect your decision-making process?
Have in mind that Microeconomics entails all the local factors while Macroeconomics deals with national and international economic factors.
a) Macroeconomics and decision making
Analysis of your economic environment is crucial when it comes to starting a business and ensuring the smooth operation of your business.
Nevertheless, it is important to note that factors like high rates of unemployment, bankruptcies, and many others, also play a key role in the determination of your customers’ purchase patterns – since these may make them become more cautious with their spending.
Therefore, in order to make sound decisions in your business, you need to consider things like reducing your inventory budget or pursuing other more profitable ventures.
b) Microeconomics and decision making
The most difficult task in the world of business is the prediction of consumer tastes and preferences (even attempted to do so through interaction with the consumers and getting their feedback).
A change in the consumer tastes and preferences may knock at your door when you least expect.
This implies that as an entrepreneur, you need to get yourself equipped with the trending products and services and always monitor the latest market trends.
Keeping yourself at per with the current market trends enables you to tap into the incoming business due to satisfied customers.
To achieve this, you not only need to analyze your economic business environment; but, also critically analyze your customers – as an environment that your business operates in.
This is so considering that your customers’ needs are what propels your business forward.
Always make your business decisions based on the changes in your customers’ expectations and needs.
In most cases, customizing your services in line with customers’ lowered expectations may save you a great deal by cutting down your expenses.
|Note: It is important to note that exaggerated information about the economic environment that in most cases may be carried by the media sources may be misleading at times.|
As an entrepreneur, your small business is your micro-economy, so analyze it by looking at your profits, expenses, and sales turnover the same way you would do in a larger economy.
Increased profits mean your business is better positioned to face the stiff competition or the tough economic conditions as may be propagated.
All you need to do is to focus and not let any form of information influence your existing plans; that is in case your business has a consistent income. All the same, you may decide to add a new strategy to your existing ones by providing more economical goods and services to your customers.
Economic recession contributes to the low expenditures by consumers given that this is the period when most of them prefer to cut down on their expenses or otherwise resort to more economical products.
The good news is that they do not stop buying, so strategize well in your business decisions and tap in these calculated purchases.
You must have balanced decisions
You can never go up against the force of gravity unless you put other mechanisms in place; like utilizing advanced technological equipment that gives you balance in the space.
The same way, smart business decisions call for a balance between your understanding of the local and international economic trends and your customers’ interests.
Striking this balance helps you maintain a profitable business.
HOW MACROECONOMICS AND MICROECONOMICS APPLY TO OUR EVERYDAY LIVES
As you have seen above, these two disciplines –directly and indirectly – affect our daily lives in innumerable ways.
Let us break down this matter further by first focusing on the principles or the basis on which these two disciplines work.
The principles of microeconomics
Individual consumer spending accounts for a greater part of the national economy.
Before you make a decision to buy a given product, in most cases you will tend to consider a product that offers you maximum satisfaction even before you think about the price.
Price comes as a second thought, but once you find out the price, you may now want to settle for an alternative product because the choice you prefer is out of your reach – due to limited resources.
Your choice to have what offers you maximum satisfaction is known as utility, which is one of the basic principles of microeconomics.
Considering the scarcity of resources, most people in most cases have limited resources with an unlimited list of wants, and so because you cannot get everything you need/want with the limited resources at hand, it now becomes essential that you choose a product/service that seems to be of the bigger importance than the other products/services.
The same applies to businesses, as businesses have limited time, finances and other resources, and hence have to make decisions that minimize their expenditure and maximize their profit.
The act of settling on a given choice and foregoing the other is called an opportunity cost since an individual or business has to calculate first, the cost of foregoing the next best alternative.
For instance, if you choose to use a bicycle to get to your office because you cannot afford the bus fare, you can no longer be able to redeem the lost time for cash.
The wasted/lost time is an opportunity cost. See more real-life examples of opportunity costs.
Another principle of Microeconomics is the diminishing marginal utility. Going from an individual perspective, what offers you satisfaction today, may not offer the same level of satisfaction tomorrow.
This implies that the more you utilize a product, the lesser satisfaction you get.
For instance, if you take a bottle of chilled water because you want to quench your thirst, the level of satisfaction it will offer you when you drink in the first place will not be the same with the satisfaction level you get in the second time you take the water.
In other words, your thirst for water would have decreased with the intake of the first bottle of water, and hence the reduced level of satisfaction when you take the second bottle.
Individual decisions on given product choices also affect the market demand and supply of goods and services in the market. Market demand entails the aggregate demand for goods and services while market supply refers to the aggregate supply of goods and services.
The interrelation of demand and supply forces can be used to determine the prices of goods and services in a market.
For instance, if the demand for certain commodities is higher than the supply of that particular commodity, then it becomes automatic that the commodity’s price will increase, and vice versa for a low demand scenario.
You may want to know more about what demand and supply entail – check out this video:
Renting an apartment vs. buying a home
To help you understand better how microeconomics plays a key role in our everyday lives, we will review the logic behind renting an apartment or buying a home.
Homes offer a perfect serene environment for one to unwind after all the day’s work, and it is everyone’s desire to own a home.
However, several factors like cost may hinder one from realizing this dream and hence opt to rent an apartment.
In most of the developed states, there is a limited supply of apartments that have been met by a high demand, and hence the price hikes.
This literally depicts the effects of demand and supply mentioned earlier.
Therefore, for you to decide on renting an apartment, you must have a budget that acts as the reference point concerning the type and standard of the apartment you would wish to stay in.
At this point, your income becomes the determinant factor considering that you have to decide on how much to spend on the apartment, how much to spend on other basic needs, as well as how much to save.
Thus, you’ll have to settle for what best suits your house rent allocation with consideration to factors like a good neighborhood, easy accessibility to social amenities, and many other factors that would make your life comfortable.
In order to achieve most (if not all) of the above factors, you must have a set budget that offers you the best deal at an affordable price.
But how can you land the best deal when the same apartments are in high demand and can be easily afforded by other people in need?
Here, is where you have to forego or cut down on your expenditures on certain things like vacations or even entertainment in order for you to secure an apartment with the current market prices.
The act of foregoing these events is known as the opportunity cost.
In the same manner, landlords/landladies will always go for the best prices in order to realize great returns.
However, in doing that, first, they will have to consider the current market prices as well as the demand for the apartments (and this is key when it comes to considering the location of the apartment).
If the demand is higher than the supply, then this automatically implies that he/she will consider renting out the apartment at a very high cost.
But, this only becomes possible after considering the market prices since setting higher prices than what her competitors offer may render her out of business.
This is because consumers will go for similar houses but those that charge below the hiked prices.
It is evident here that the landlords will also have to make pricing decisions based on the market prices, which in most cases is influenced by the demand and supply forces.
Consider a different scenario whereby the property owner decides to lower the price below the set market prices. Potential house seekers will gladly occupy this apartment, but the property owner, on the other hand, will be missing out on a significant amount of income, and hence not maximizing utility.
The owner will have to set prices in accordance with the current market rates in order to realize maximum income. This implies that both the apartment owner and the apartment seeker will have to make sound decisions in order to achieve maximum satisfaction considering the numerous challenges they may face.
The illustration above implies that thousands of consumers and suppliers make regular decisions (both small and big) based on the principles of microeconomics.
Consumers apply these principles in all their purchase decisions while suppliers utilize the same principles in setting their price. Both decisions aim at achieving maximum satisfaction.
2. Principals of Macroeconomics
As you already know, macroeconomics is majorly concerned with the bigger picture of economic issues that defines our economic well-being.
Given that macroeconomics deals with the general performance of a given nation’s economy, there are several major principles that take the center stage in determining a nation’s economic performance.
They include productivity growth, inflation, and unemployment rates.
People utilize macroeconomics in analyzing the behavior and the trends exhibited by these factors and hence are able to make sound economic decisions.
The Government also utilizes macroeconomics to formulate policies. We will begin by looking at how these macroeconomic principles affect our daily lives.
a. Productivity growth
Productivity greatly defines the output of a nation in terms of goods and services. High productivity rates are always associated with high living standards.
This is so considering that the faster the rate of production, the faster the rate of development of a nation in the form of infrastructures like roads, real estates, availability of good health care, schools, and many others.
High development rates also mean improved living standards given that people can comfortably own homes, cars, and many other luxurious things.
An economy with zero growth rates will always call for the foregoing of other important economic issues in order to realize another beneficial factor.
For instance, a slow productivity rate would mean that a Government postpones the execution of some of its crucial mandates like building and upgrading of health facilities instead of constructing roads.
If you look at the two mandates of the Government, you realize that both of them are important in realizing the nation’s goal of growth and development.
Therefore, the Government, for example – has to sacrifice the construction of roads for the development of the healthcare sector.
b. The inflation rate
High inflation rate means increased prices.
When the rate of inflation goes up, it implies that you will have to spend more to buy the same product that you used to access at a lower price.
This leads to a negative impact on your savings since you will have increased expenditures.
But with this huge disadvantage, inflation also plays a fair game in rewarding borrowers – borrowers benefit a lot in times of inflation considering that it (inflation) redistributes income.
The most devastating fact about inflation is that it increases uncertainty about the future, and hence it becomes difficult to make sound economic decisions.
c. The unemployment rate
Most economists consider unemployment as the most critical macroeconomic issue owing to its magnitude on the economic wellness of a given nation.
High unemployment rates imply that most people will be living in poor conditions with no income to cater for their bills (including hospital bills), and as a result, many would resort to criminal activities like robberies in order to satisfy their daily needs.
Unemployment may also lead to depression because of psychological distress.
Given that we utilize macroeconomics in every aspect of our lives as an individual, as a nation, and as the world, we will summarize its impacts on our daily lives as below:
- Macroeconomics aids the study of the economy as a whole. You get to understand the behaviors of the major economic factors using macroeconomics since its analysis helps you to understand better, how the economy functions.
- It is used to formulate the Government’s economic policy. Governments deal with millions and millions of people who have entrusted this same Government for all their economic needs. The Government acts on behalf of its citizens by shouldering all their economic concerns and hence providing effective solutions to these concerns. However, to address these issues (inflation, unemployment, highinterest rates); the Government has to employ the use of macroeconomics to achieve the desired results. For instance, considering that it deals with multitudes of people, the only way to establish their concerns is through macroeconomics that studies the economy as a whole, and hence helpful in addressing the economic concerns of multitudes.
- Macroeconomics is used to understand microeconomics. The two principles can be compared to a forest of trees, in that, Microeconomics represents a single tree in the forest while Macroeconomics represents the whole forest. This implies that by studying macroeconomics, you will get a deeper understanding of microeconomics as well. For instance, business theories are developed out of the analysis of numerous individual firms and hence coming up with a common factor/ behavior that cuts across all the firms, which now becomes the trend in the analysis of such similar scenarios.
- Macroeconomics is used in controlling economic fluctuations. The study, analysis, and understanding of the economic fluctuations can only be possible by the help of macroeconomics, owing to the fact that the aggregate consumption, investment, and savings in the economy must be taken into consideration, thus, making it possible to analyze the causes of these fluctuations. For instance, income fluctuations, general output fluctuations, as well as employment fluctuations hence able to come up with effective control measures.
- Macroeconomics is used in the study of National Income. Macroeconomics is crucial when it comes to ascertaining the growth level of a given nation that is mainly determined through the study and analysis of the nation’s national income. The study of a nation’s national income is made possible by macroeconomics. It is only through macroeconomics that we can gauge the peoples’ living standards in developing countries, hence able to discover the reasons for increased poverty and how these conditions can be improved.
- The performance of an economy. This economic discipline helps us utilize the Gross National Product/Income in the analysis of an economy’s performance over time through the comparison of production output of any given years, that is, the present year and the preceding year.
- Inflation. Macroeconomics helps us understand the effects of inflation and hence come up with effective measures to control it. Not only does macroeconomics aid our inflation analysis, but also aids the analysis and understanding of deflation. Owing to the magnitude of inflation and deflation factors on our economy, macroeconomics stands out as the only way to explore various mitigation measures in a bid to realize a stable economy.
As a consumer, Microeconomics principles become useful in ensuring that you make the right purchase decisions that will deliver maximum satisfaction to your needs.
This also applies to companies considering that they have to make the right decisions when it comes to the pricing of their supplies – as good pricing ensures maximum return on investment.
As an entrepreneur/aspiring entrepreneur, you need to take all Macroeconomic factors into consideration in order to realize maximum profits.
Your business is directly affected by the general economic status,
Government policies and regulations, demand and supply factors, inflation, as well as the unemployment rate.
Your customers’ expectations and changes in tastes and preferences greatly affect your business growth, so you have to strike a balance in your decisions and your customers’ expectations in order to maximize your profits.
An important force within the Five Forces model is the bargaining power of suppliers. All …