6/14/11

Microeconomics vs. Macroeconomics, what is the difference?


So what is the difference between microeconomics and macroeconomics?  This post will go over the fundamental differences between the two studies, and give some examples of each.


As if economics itself wasn’t hard enough to understand, now we need to consider the differences between microeconomics, and macroeconomics.  If you remember one little trick, understanding the difference is easy.  


When you think of microeconomics, think of a microscope.  You are analyzing one little bit of information at a time.  In microeconomics, we tend to focus on one individual, or one firm, and how it interacts with the market.  Examples include deciding how many pieces of pizza to buy, or whether or not you should purchase insurance.  Problems generally deal with utility functions and budget constraints for consumers, and profit maximization problems for firms.

Now imagine you are standing on the moon looking at the economy on earth.  You would see huge land masses only.  This far away approach is considered a macro approach, because it aggregates all of the decisions of the individuals and firms to a regional or national level.  Macro tends to focus on government policy and the potential impacts it can have on the general economy.  Government policies include taxes, subsidies, regulations and rules.  Macroeconomics strives to understand how these policies impact the economy.

Also, in microeconomics we are concerned with things like individual salaries, purchasing decisions, exports or taxes for one product, and welfare or help for a specific demographic.  In macroeconomics we tend to think about more general terms, such as money supply, inflation, unemployment, GDP, exchange rates and trade.

Remember: Micro focuses on the individual, and decisions they make.  Macro focuses on countries, and indices like GDP, inflation, and unemployment.

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