Difference between Microeconomics and Macroeconomics

Economics can be divided into two broad categories: microeconomics and macroeconomics. Microeconomics deals with only specific segments of an economy such as individual labour market, demand and supply at the local level, consumer behavior, etc. Macroeconomics on the other hand covers a wide range of economic issues starting from national output, gross domestic product, fiscal deficit, inflation, etc. that affect the whole nation.

In this article, we will compare and contrast the different features of Microeconomics and Macroeconomics and highlight the points that differentiate the two.

What is Microeconomics?

Microeconomics is the study of how people and individual consumers make decisions in response to changes in pricing and cost of goods and services. Individuals are divided into microeconomic subgroups such as buyers, dealers, and company owners.

Microeconomics covers different verticals such as consumer behavior, wages, labour market dynamics, demand and supply in different marketplaces. Microeconomics takes a bottom-up approach to analyse the economy.

Key Concepts of Microeconomics

There are quite a lot of concepts in Microeconomics but here are the most important ones that one should be aware of −

Price Theory

Price theory explains the production, consumption and pricing of goods and services in an economy. It is the result of demand and supply of goods and services that determines the prices in a competitive market. In a completely competitive market, the price offered by the producers is same as the price requested by the consumers and hence there is perfect economic equilibrium.

The drawback of Price Theory is that it just provides a theoretical understanding of how particular sectors of the economy function. However, the operation of separate pieces does not provide a whole picture of how the economy works. Price Theory is based on limited data of individual groups and sometimes unrealistic assumptions, and hence it may not be entirely reliable.

Incentive Theory of Motivation

By definition, an "incentive" is a thing that motivates a person to do something or behave in a particular way. The incentive theory of motivation focuses on the psychology of individual consumers as well as companies and how they react to different economic situations. It relates to economic decision-making process (or the behavior) of individuals and companies when they are confronted with a situation.

The Incentive Theory generally suggests that people are motivated by incentives that drives them to behave in a way that will result in a reward and avoid actions that are risky.

Utility Theory

According to Utility Theory, consumers tend to buy and consume those goods and services that will maximize their happiness or "utility". Marginal Utility is a term in microeconomics that explains the incremental satisfaction of consumers in buying an additional unit of the same goods or services.

Theory of Production

Production is a process of combining various inputs to produce an output for consumption. It is the act of creating output in the form of a commodity or a service which contributes to the utility of individuals. In other words, it is a process in which the inputs are converted into outputs.

Theory of Production deals with the supply side of economics; it explains the decision-making process of producers in deciding how much of raw material, i.e., fixed capital and labour, they employ and how much of it they will use. It defines the relationships between the prices of the commodities and productive factors on one hand and the quantities of these commodities and productive factors that are produced on the other hand.

It is a natural tendency of Producers to go with a combination of inputs and methods that will minimize the cost of production in order to maximize their profits.

What is Macroeconomics?

Macroeconomics is a branch of economics that examines how an economy operates as a whole. It deals with the broad aspects of an economy such as gross domestic product (GDP), inflation, fiscal deficit, rate of growth, employment, etc. It studies the behavior of an entire economy and how well or how poorly an overall economy performs.

Economists use the Macroeconomic data to create models that describe how these variables interact. Government entities use macroeconomic models and the forecasts they generate to help them construct and evaluate economic, monetary, and fiscal policy.

How Micro- and Macroeconomics Affect Each Other

There is a close connection between micro and macroeconomics; they are very much interrelated. The factors and elements of microeconomics can have an effect on macroeconomic factors and vice versa. For example, when the government decides to raise corporate taxes, which is a macroeconomic factor, it will have a direct impact on how the companies price their products which in turn will impact the consumer behavior at the micro level. Similarly, if every employee at the individual level seeks to work from home at the same time, then it may give rise to an employment issue which is a macroeconomic factor.

It is impossible to determine how an economy performs as a whole without analyzing each sector of the economy. We aggregate all the microeconomic factors together to get a picture of how the economy performs at a macro level.

Differences: Microeconomics and Macroeconomics

The following table highlights the major differences between Microeconomics and Macroeconomics:

Key	Macroeconomics	Microeconomics
Deals with	Macroeconomics deals with the social and economic status of the system as a whole.	Microeconomics deals with individuals and activities within the system.
Tracking	Macroeconomics tracks the big picture, not just one unit.	Microeconomics tracks even the smallest units and their functioning.
Study	A businessman studies GDP, consumption trends, investment patterns, etc. to judge the market.	A businessman studies the resources available, costs, employees availability, etc to sustain the business.
Target	Macroeconomics helps in determining the aggregate demand and supply of the target economy.	Microeconomics helps in determining the current need of demand and supply chain.
Factor	Income is a major determining factor in macroeconomics.	Price is a major determining factor in microeconomics.
Equilibrium	Macroeconomics study helps in setting an equilibrium between income and employment in an economy.	Microeconomics study helps in setting equilibrium between consumer and firm.
Example	International organization studying money exchanges tracks macroeconomic factors.	Small firms track the microeconomics of their firm operations.

Conclusion

Microeconomics, as the name suggest, focuses on the smaller aspects of an economy such as the choices made by individual consumers and companies in a given situation. Macroeconomics, on the other hand, takes a top-down approach and looks at the economy as a whole. Investors and individual consumers can use microeconomic data in their investment decisions and adjusting their spending pattern according to their budget. Macroeconomics on the other hand is an analytical tool used by economists to craft economic and fiscal policy.