Macroeconomics vs Microeconomics: Similarities and Differences

Economics is “the study of how people allocate scarce resources for production, distribution, and consumption, both individually and collectively.”  Economics is one of the prominent fields of study as it helps us understand how individuals, businesses, and even countries make use of their scarce resources to achieve various ends. It is concerned with how such resources are used to maximise the output. It is concerned with the production, distribution, and consumption of resources.

Economics is also a popular field of study. Many prominent personalities have economics degrees, such as some of the richest people on earth – Elon Musk, and Warren Buffett, entrepreneurs – Sam Walton (founder of Walmart), heads of state – George Bush, Ronald Regan, Donald Trump (former Presidents of the United States of America), Manmohan Singh (former Indian Prime Minister), and many more.

The field of economics is divided into two broad disciplines – Macroeconomics and Microeconomics. Microeconomics is concerned with the behaviour of individual consumers and businesses while Macroeconomics is the study of the aggregate economy – a combined outlook of all individual consumers and businesses.

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What is Microeconomics?

Microeconomics looks at how individual consumers and businesses use scarce resources to achieve various ends. It is concerned with how individual consumers and businesses decide on the production, distribution, and consumption of goods and services. It is a bottom-up way to look at how behaviour at a micro-individual level leads to the larger economic phenomenon that we observe. For example, how prices of goods and services influence their demand and supply and how equilibrium is achieved between demand and supply in the market. This demand-supply-equilibrium helps us understand how businesses can remain competitive and how consumers respond to increases and decreases in prices. The following topics are prominently studied under the category of microeconomics:

●     Demand, supply, and equilibrium.

The law of demand states that the quantity demanded for a good or service varies inversely with its price. When the prices increase demand decreases, and vice versa. This occurs because of diminishing marginal utility. To better understand this, imagine you are extremely thirsty and you need a glass of your favourite soft drink. The utility that you get from consuming the first glass versus the utility you will get from consuming the second, third or fourth glass will continually decrease. By the time you consume a second or third glass, you may not even want to consume the third glass.

The law of supply states that the quantity supplied of a good or service varies directly with its price. As the price increases, so does the supply and vice versa. With the increase in prices, suppliers are willing to supply more as they are making more profits as prices increase. A decrease in prices makes supplying non-lucrative for them as may not be as profitable anymore.

Market equilibrium is reached at a price point where the quantity demanded equals the quantity supplied. Theoretically, this is the market price that will prevail in a free market. However, these laws have a lot of assumptions and limitations which are catered to in the in-depth study of microeconomics.

●     Income and savings. This section studies the relationship between individual income and savings. How savings are influenced by an increase or decrease in income. How savings can also be influenced by the availability and utility of goods and services in the market. This topic introduces deep insights into how a typical household goes about budgeting and the decisions a household takes at various times such as during a recession or growth. What items see an increase or decrease in expenditure, what items get eliminated, etc? This section presents deep insights to businesses on how consumers plan their spending and how they decide upon the spending allocation to their specific goods or services.

●     Production theories. Relationship between output and factors of production. How costs of production and labour economics influence the pricing of goods and services. The production possibility frontier looks at how businesses can respond to demand by choosing the right quantity to produce.

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What is Macroeconomics?

Macroeconomics, as the name suggests, looks at the broader scale of how a country’s economy works. It is concerned with how countries use and allocate their scarce resources to achieve various ends. It looks at how economic policies are framed and how they impact business domestically and internationally. Topics usually studied under macroeconomics are – economic output (e.g. GDP), inflation, interest rates, foreign exchange rates, balance of payments, unemployment, etc. Macroeconomics helps us understand how the economy of a country works. How economic policies influence ground behaviours. For example, an increase in income might lead to people spending more, which might lead to inflation and higher prices, which might lead to an increase in supply, which might lead to a reduction in unemployment, but higher prices in the medium term will suppress demand, and again the reverse cycle starts. It is interesting to understand the interplay between macroeconomic and microeconomic factors and how they pan out.

Micro and macroeconomics have a circular effect on each other. It will not be wise to conclude which one affects the other. Economic policies such as interest rates affect the individual demand and supply and individual utilities determine market demand which influences aggregate demand thus influencing the overall GDP of the economy.

Top differences between microeconomics and macroeconomics