Difference Between Microeconomics and Macroeconomics

PRINCIPLES OF ECONOMIC
(DIFFERENCE BETWEEN MICROECONOMICS AND MACROECONOMICS)

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DIFFERENCE BETWEEN MICROECONOMICS AND MACROECONOMICS

The study of economics is divided into microeconomics and macroeconomics by the modern economists. Both of them discuss the economic activities but are used in different sectors under different circumstances. In spite of having some similarities, they also have some differences which have been given below:

(a) Name Origination : The word ‘micro’ comes from the Greek word ‘mikros’ which means ‘millions of parts’. And the word ‘macro’ is also from a Greek word ‘makros’ which means ‘large’.

(b) Definition : Microeconomics –Study individual economic units such as households and firms. Macroeconomics- deals with economy as a whole, It study the aggregate behaviour of the entire economy.

(c) Theory : Microeconomics - price theory which is the combination of theory of demand and theory of production. Macroeconomics - called income theory that explains the result of total production and why the level rises and falls.

Example : 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.

This micro economic analysis shows that the increased demand leads to higher price, and higher quantity.

Macroeconomic analysis
This looks at all goods and services produced in the economy.

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.
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)

(d) Focus : Microeconomics- focuses on supply and demand and other forces that determine the price levels seen in the economy.

Macroeconomics - would look at how an increase/decrease in net exports would affect a nation's capital account.

(e) Analyze : Microeconomics - analyses the partial behaviour of economy Macroeconomics - analyses the entire behaviour of economy

(f) Importance :

Microeconomics- helps in the formulation of economic policies calculated to promote efficiency in production and the welfare of the masses.

Macroeconomics- has got the importance in the economic theory in its pursuit of the solution of urgent problems.

(g) Approach Microeconomics takes a bottoms-up approach. With this approach, aspects of the economy from the bottom up, the consumer, are studied first. This information is analyzed by working up towards the whole economy. Macroeconomics takes a top-down approach, starting with the top of the economy: the government. It works its way down to the consumer, trying to relate effects and patterns of the economy, in order to develop theories.

(h) Equilibrium : Partial equilibrium method is used in microeconomics General equilibrium method is used in macroeconomics

(i) Concerned:
Microeconomics is concerned with: * Supply and demand in individual markets * Individual consumer behaviour. e.g. Consumer choice theory * Individual labour markets – e.g. demand for labour, wage determination * Externalities arising from production and consumption.

Macroeconomics is concerned with * Monetary / fiscal policy. e.g. what effect does interest rates have on 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

(j) Example
The micro economist may study the types of cars consumers are purchasing. He will try to determine the motivating factors, which might include gas prices and unemployment rates. If gas prices are high, consumers might be avoiding buying SUVs. In unemployment rates are low, car sales might be up.

The macro economist will study the car industry as a whole. He will do an analysis to determine why production is up or down. He will study inflation rates and average income rates to determine the effects these things have on the production of vehicles.