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Microeconomics vs.
Macroeconomics
An Overview
Introduction
Microeconomics and macroeconomics are the two approaches to

economic problems and analysis. Microeconomics relates to the study
of individual economic units while macroeconomics is a study of
economy as a whole. Ragnar Frisch was the first to use the terms micro
and macro in economics in 1933.
Though these two branches of economics appear different, they are
actually interdependent and complement one another. Many overlapping
issues exist between the two fields.
Key Takeaways
• Microeconomics studies individuals and business decisions, while

macroeconomics analyses the decisions made by countries and
governments.
• Microeconomics focuses on supply and demand, and other forces
that determine price levels, making it a bottom-up approach.
• Macroeconomics takes a top-down approach and looks at the
economy as a whole, trying to determine its course and nature.
• Investors can use microeconomics in their investment decisions,
while macroeconomics is an analytical tool mainly used to craft
economic and fiscal policy.
Microeconomics
• Microeconomics is the study of decisions made by people and

businesses regarding the allocation of resources, and prices at which
they trade goods and services. It considers taxes, regulations and
government legislation.
• Microeconomics focuses on supply and demand and other forces that
determine price levels in the economy. It takes a bottom-up approach
to analysing the economy. In other words, microeconomics tries to
understand human choices, decisions and the allocation of resources.
Microeconomics involves several key principles :
• Demand, Supply and Equilibrium: Prices are determined by the law

of supply and demand. In a perfectly competitive market, suppliers offer the
same price demanded by consumers. This creates economic equilibrium.
• Production Theory: This principle is the study of how goods and
services are created or manufactured.
• Costs of Production: According to this theory, the price of goods or
services is determined by the cost of the resources used during production.
• Labour Economics: This principle looks at workers and employers,
and tries to understand patterns of wages, employment and income.
The rules in microeconomics flow from a set of compatible laws and
theorems, rather than beginning with empirical study.
Macroeconomics
Macroeconomics, on the other hand, studies the behaviour of a country

and how its policies impact the economy as a whole. It analyses entire
industries and economies, rather than individuals or specific companies,
which is why it's a top-down approach. It tries to answer questions such
as, "What should the rate of inflation be?" or "What stimulates
economic growth?"
Macroeconomics examines economy-wide phenomena such as gross
domestic product (GDP) and how it is affected by changes in
unemployment, national income, rates of growth and price levels.
Macroeconomics analyses how an increase or decrease in net exports
impacts a nation's capital account, or how gross domestic product
(GDP) is impacted by the unemployment rate.
• Macroeconomics focuses on aggregates and econometric correlations
which is why governments and their agencies rely on macroeconomics
to formulate economic and fiscal policy. Investors who buy interest-
rate sensitive securities should keep a close eye on monetary and fiscal
policy. Outside a few meaningful and measurable impacts,
macroeconomics doesn't offer much for specific investments.
• John Maynard Keynes is often credited as the founder of

macroeconomics, as he initiated the use of monetary aggregates to
study broad phenomena. Some economists dispute his theories, while
many Keynesians disagree on how to interpret his work.
• Microeconomics is the study of particular markets, and segments
of the economy. It looks at issues such as consumer behaviour,
individual labour markets, and the theory of firms.
• Macro economics is the study of the whole economy. It looks at
‘aggregate’ variables, such as aggregate demand, national output and
inflation.
Micro economics involves
• 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.
Macro economics involves
• Monetary / fiscal policy. e.g. what effect does interest rates have
on the 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
Moving from micro to macro
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.
Macro economic 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.
• Instead of just looking at individual demand for cars, we are looking at
aggregate demand (AD) – total demand in the economy.
• 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)
The main differences between micro and macro
economics
• Small segment of economy vs. whole aggregate economy.

• Microeconomics works on the principle that markets soon create
equilibrium. In macro economics, the economy may be in a state
of disequilibrium (boom or recession) for a longer period.
• There is little debate about the basic principles of micro-economics.
Macro economics is more contentious. There are different schools of
macro economics offering different explanations (e.g. Keynesian,
Monetarist, Austrian, Real Business cycle etc.).
• Macro economics places greater emphasis on empirical data and trying
to explain it. Micro economics tends to work from theory first though
this is not always the case.
The main difference is that micro looks at small segments and macro
looks at the whole economy. But, there are other differences.
Equilibrium – Disequilibrium
• Classical economic analysis assumes that markets return to
equilibrium(S=D). If demand increases faster than supply, this causes
price to rise, and firms respond by increasing supply. For a long time,
it was assumed that the macro economy behaved in the same way as
micro economic analysis. Before, the 1930s, there wasn’t really a
separate branch of economics called macroeconomics.
Great Depression and birth of Macroeconomics
• In the 1930s, economies were clearly not in equilibrium. There was
high unemployment, output was below capacity, and there was a state
of disequilibrium. Classical economics didn’t really have an
explanation for this dis-equilibrium, which from a micro perspective,
shouldn’t occur.
• In 1936, J.M. Keynes produced his The General Theory of Employment,
Interest and Money; this examined why the depression was lasting so long. It
examined why we can be in a state of disequilibrium in the macro economy.
Keynes observed that we could have a negative output gap (disequilibrium in
the macro-economy) for a prolonged time. In other words, microeconomic
principles of markets clearing, didn’t necessarily apply to macro economics.
Keynes wasn’t the only economist to investigate this new branch of
economics. For example, Irving Fisher examined the role of debt deflation in
explaining the great depression. But, Keynes’ theory was the most wide-
ranging explanation and played a large role in creating the new branch of
macro-economics.
• Since 1936, macroeconomics developed as a separate strand within
economics. There have been competing explanations for issues such as
inflation, recessions and economic growth.
Similarities between microeconomics and
macroeconomics
Although it is convenient to split up economics into two branches –

microeconomics and macroeconomics, it is to some extent an artificial
divide.
• Micro principles are used in macroeconomics. If you study the impact
of devaluation, you are likely to use same economic principles, such as
the elasticity of demand to changes in price.
• Micro effects macroeconomics and vice versa. If we see a rise in oil
prices, this will have a significant impact on cost-push inflation. If
technology reduces costs, this enables faster economic growth.
• Blurring of distinction: If house prices rise, this is a micro economic
effect for the housing market. But, the housing market is so influential
that it could also be considered a macro-economic variable, and will
influence monetary policy.
• There have been efforts to use computer models of household
behaviour to predict the impact on the macro economy.

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Microeconomics vs.

Microeconomics and macroeconomics are the two approaches to

• Microeconomics studies individuals and business decisions, while

• Microeconomics is the study of decisions made by people and

• Demand, Supply and Equilibrium: Prices are determined by the law

Macroeconomics, on the other hand, studies the behaviour of a country

• John Maynard Keynes is often credited as the founder of

• Supply and demand in individual markets.

• Small segment of economy vs. whole aggregate economy.

Although it is convenient to split up economics into two branches –

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