Download File

Microeconomics vs. Macroeconomics
Microeconomics is generally the study of individuals and business decisions; macroeconomics
looks at higher up country and government decisions.
Microeconomics
Microeconomics is the study of decisions that people and businesses make regarding resources
and prices of goods and services. This means also taking into account taxes and regulations
created by governments. Microeconomics focuses on supply and demand and other forces that
determine the price levels seen in the economy. For example, microeconomics would look at
how a specific company could maximize its production and capacity so it could lower prices and
better compete in its industry.
A government policy has microeconomic effects whenever its implementation alters the inputs
and incentives for individual economic decisions. These changes come in many forms, including
tax policy, fiscal policy, regulations and tariffs. These policies manipulate the costs and benefits.
Sometimes the impacts of government policy are intentional. The government might provide a
subsidy to farmers to make their businesses more profitable and encourage farm production.
Conversely, the government might put a tax on cigarettes and alcohol to discourage behavior
that it doesn't approve of. Other impacts are unintentional.
When the U.S. government propped up wages during the Great Depression, for example, it
unintentionally made it unprofitable for individual firms to hire extra employees. The nature of
these causes can be understood by identifying the forces behind microeconomic decisions.
Governments are financed through taxes, which must be taken from private actors. When this
happens, individuals and businesses must either spend less income or work and produce an
additional amount to offset the impact of the taxes.
Governments can also alter markets when they decide to spend money. Any individuals or
businesses that receive government funds receive, in effect, a wealth transfer from every other
taxpayer. When the government spends $1 million purchasing computers, it bids up the price of
computers in the short run. This crowds out other individuals who are subsequently priced out
of the market. This crowding out becomes even more disruptive when the government directly
provides services and employs workers.
Governments either change the quantity of a good available (supply) or the amount of funds
that can be directed toward those goods (demand). Governments can also make some forms of
trade illegal or make them illegal under certain contexts. All of these impact the choices that
microeconomic actors face and change their decision-making processes.
Macroeconomics
Macroeconomics, on the other hand, is the field of economics that studies the behavior of the
economy as a whole and not just on specific companies, but entire industries and economies.
This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is
affected by changes in unemployment, national income, rate of growth, and price levels. For
example, macroeconomics would look at how an increase/decrease in net exports would affect
a nation's capital account or how GDP would be affected by unemployment rate.
John Maynard Keynes is often credited with founding macroeconomics. He started the use of
monetary totals to study broad phenomena; some economists reject his theory and many of
those who use it disagree about how to interpret it.
Needless to say, macroeconomy is very complicated and there are many factors that influence
it. These factors are analyzed with various economic indicators that tell us about the overall
health of the economy.
Macroeconomists try to forecast economic conditions to help consumers, firms and
governments make better decisions.
• Consumers want to know how easy it will be to find work, how much it will cost to buy
goods and services in the market, or how much it may cost to borrow money.
• Businesses use macroeconomic analysis to determine whether expanding production
will be welcomed by the market. Will consumers have enough money to buy the
products, or will the products sit on shelves and collect dust?
• Governments turn to the macroeconomy when budgeting spending, creating taxes,
deciding on interest rates and making policy decisions.
While these two studies of economics appear to be different, they are actually interdependent
and complement one another since there are many overlapping issues between the two fields.
For example, increased inflation (macro effect) would cause the price of raw materials to
increase for companies and in turn affect the end product's price charged to the public.
The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy
while macroeconomics takes a top-down approach. Microeconomics tries to understand
human choices and resource allocation, and macroeconomics tries to answer such questions as
"What should the rate of inflation be?" or "What stimulates economic growth?"
Regardless, both micro- and macroeconomics provide fundamental tools for any finance
professional and should be studied together in order to fully understand how companies
operate and earn revenues and thus, how an entire economy is managed and sustained.