Oct 18, Read time: 5 mins. Microeconomics and Macroeconomics: Understanding the Difference Most people understand how physics is classified as a science, however, there might be some confusion when including economics in the same category. What is microeconomics? What is macroeconomics? How micro- and macroeconomics affect business The law of supply and demand 19 Businesses use microeconomic principles to better understand the behavioural patterns of their consumers, in order to be successful and generate a profit.
Start-ups 21 When starting a business, it is important to do extensive research into the industry you are interested in. Know where customer demand is, to better provide and develop the products and services that would best match the needs of your target market.
Investing in this microeconomic research can help you reach a competitive advantage to attract customers. Economic cycles 22 Macroeconomics is cyclic; just as positive influences and changes promote prosperity, higher demand levels may trigger price increases, which may, in turn, dampen the economy, as households adopt leaner budgets.
Then, when supply starts to outweigh demand, prices may go down again, leading to further prosperity, until the next cycle of economic supply and demand. The cost of goods and services 23 Regardless of what a business produces, the goal is usually to keep costs down in order to improve profits. In microeconomic theory, companies run at the highest level of efficiency, with production decisions based on how the maximum output can be achieved with minimal extra costs.
So, for example, if production is ramped up, a need for extra labour may arise, resulting in the wage costs increasing, and a potential change in sales prices. In microeconomics, the cost of labour is typically the highest expense of a business. The decided price of the product or service will impact on the number of people willing to buy it.
Click here to view sources. Retrieved from Investopedia. Apr, Aug, Retrieved from Cleverism. Microeconomics is the field of economics that looks at the economic behaviors of individuals, households, and companies. Macroeconomics takes a wider view and looks at the economies on a much larger scale—regional, national, continental, or even global. Microeconomics and macroeconomics are both vast areas of study in their own rights.
Because microeconomics focuses on the behavior of small units of the economy, it tends to limit itself to specific and specialized areas of study. This includes the balance of supply and demand in individual markets, the behavior of individual consumers which is referred to as consumer theory , workforce demand, and how individual companies determine wages for their workforces.
Macroeconomics has a much broader reach than microeconomics. Prominent areas of research in the field of macroeconomics concern the implications of fiscal policy, locating the reasons for inflation or unemployment, the implications of government borrowing and economic growth on a nationwide scale. Macroeconomists also examine globalization and global trading patterns and perform comparative studies between different countries in areas such as living standards and economic growth.
While the main difference between the two fields concerns the scale of the subjects under analysis, there are further differences. Macroeconomics evolved out of classic economic theory and microeconomics, as a means of explaining nationwide economic developments and behavior. Macroeconomics developed as a discipline in its own right in the s when it became apparent that classic economic theory derived from microeconomics was not always directly applicable to nationwide economic behavior.
Classic economic theory assumes that economies always return to a state of equilibrium. In essence, this means that if demand for a product increases, the prices for that product get higher and individual companies rise to meet the demand. However, during the Great Depression, there was low output and wide-scale unemployment.
Clearly, this did not indicate equilibrium on a macroeconomic scale. In response to this, John Maynard Keynes published "The General Theory of Employment, Interest and Money," which identified the potential and reasons for a negative output gap over a prolonged period of time on a macroeconomic scale.
Keynes' work, along with that of other economists, such as Irving Fisher, played a large role in establishing macroeconomics as a separate field of study.
While there are differential lines between microeconomics and macroeconomics, they are interdependent to a large extent. A prime example of this interdependency is inflation.
Inflation and its implications for the cost of living are a common focus of investigation in the study of macroeconomics. However, since inflation raises the prices of services and commodities, it can also have acute implications for individual households and companies. Companies may be compelled to raise prices to respond to the increasing amounts that they have to pay for materials and the inflated wages they have to pay to their employees. Microeconomics studies the behavior of individual households and firms in making decisions on the allocation of limited resources.
Another way to phrase this is to say that microeconomics is the study of markets. In contrast macroeconomics involves the sum total of economic activity, dealing with the issues such as growth, inflation, and unemployment.
Macroeconomics is the study of economies on the national, regional or global scale. This key difference alters how the two approach economic situations.
Microeconomics does consider how macroeconomic forces impact the world, but it focuses on how those forces impact individual firms and industries. While macroeconomists study the economy as a whole, microeconomists are concerned with specific firms or industries. Many economic events that are of great interest to both microeconomist and macroeconomists, though they differ in how they analyze those events.
A shift in tax policy would interest economists in both disciplines. Privacy Policy. Skip to main content. Principles of Economics. Search for:. Differences Between Macroeconomics and Microeconomics. Macroeconomics Macroeconomics is the study of the performance, structure, behavior and decision-making of an economy as a whole.
Learning Objectives Define macroeconomics and identify the main users of macroeconomics. Key Takeaways Key Points For most macroeconomists, the purpose of this discipline is to maximize national income and provide national economic growth. The most common macroeconomic topics of study for national entities are sustainability, full employment, price stability, external balance, equitable distribution of income and wealth, and increasing productivity.
Macroeconomists hope that their models help address two key areas of research: the causes and consequences of short-run fluctuations in national income otherwise known as the business cycle and what determines long-run economic growth.
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