Microeconomics and macroeconomics: Differences you need to know

Microeconomics and macroeconomics: Differences you need to know
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  • Economics is the study of the production, distribution, and consumption of goods and services in a given society.

  • The need to divide economics into two categories, namely microeconomics and macroeconomics, was felt during the economic downturn that shook the world during the 1920s.

  • Microeconomics and macroeconomics refer to the narrower and more broad pictures of a society’s economy respectively.
It was John Maynard Keynes who underlined the need to divide the field of economics into two categories. He laid out a new way to organize the economy in his paper ‘The General Theory of Employment, Interest and Money.’

Many economists subscribed to Keynes’ new approach, and macroeconomics emerged as a new offshoot of economics to study the structure and behavior of the entire economy parallel to the classical approach of microeconomics.

There is discord among economists and students on drawing the thin line of difference between microeconomics and macroeconomics. Here we compare these two fields of study, trying to understand how they differ from each other.

Point of comparisonMicroeconomicsMacroeconomics
DefinitionMicroeconomics is the study of the behaviour of individual markets and their stakeholders including buyers, sellers and business owners. Macroeconomics is the overall study of the economy. It analyses the aspects that affect the entire economy including GDP.
PurposeMicroeconomics analyses what will happen when the buyers make choices and how their choices can impact the supply and demand for resources and consequently the prices of goods. Macroeconomics analyses how factors like unemployment, national income, and prices of goods affect the economy at large.
FocusMicroeconomics focuses on the characteristics, trends, and changes noticed in individual markets.Macroeconomics focuses on bigger aspects like inflation, employment and aggregate demand.
ScopeMicroeconomics deals with the smaller segments of economy namely the individual markets. It studies the individual market’s behavior for the sake of drawing conclusions on distributing limited resources. Microeconomics deals with the sum total of economic activity in a nation or the world. It studies the countrywide global issues like growth, inflation and unemployment.
ApproachMicroeconomics makes a study of individuals and business decisionsMacroeconomics studies the decisions made by nations and governments
ApplicationInvestors use microeconomics to guide their investment decisionsGoverning entities use macroeconomics as an analytical tool to draft the economic policies.
StrategyAdopts a bottom-up approach focusing on supply and demand and the other aspects that impact the prices. Adopts a top-down approach studying the entire economy to ascertain its nature and course.
InferencesMicroeconomics does not answer what forces must happen in a given market, instead, it explains what can happen when certain conditions change. Macroeconomics enables understanding the policies of governments and how these policies can impact the economy. It can answer questions like what can promote economic growth and what should be the rate of inflation in a given economic scenario.
Relevance to investorsInvestors must focus on microeconomics as it can give useful insights that can guide investment decisions. Seasoned investors pay little attention to macroeconomics to guide their investment decisions. For instance, Warren Buffet said macroeconomic forecasts never influenced his investment choices.