In any economy there are a number of factors that affect how individuals and businesses use their resources. This then has an effect on the collective economy in a country.
Economists generally study and give insights into how economies work. In order to do this effectively, they need to understand the mechanics of microeconomics and macroeconomics.
At a basic level, scarcity is what drives economic decisions. This is the tension between limited resources and unlimited wants and needs. Microeconomics examines these decisions at an individual level, while macroeconomics is the study of the economy as a whole. In other words, it examines how governments make decisions in the form of fiscal and monetary policies, which in turn has an effect on individuals by way of interest rates.
Before the 1930s, there wasn’t really a separate branch of economics called macroeconomics. With developments in the study of economics however, economists began to understand the differences between microeconomics and macroeconomics and how these concepts are interdependent.
Understanding microeconomics vs macroeconomics
What is microeconomics?
Microeconomics is essentially the study of individual and business decisions. It’s an analysis of certain aspects of human behaviour, how individuals and firms respond to changes in price. It aims to explain how individuals make financial decisions.
Microeconomics focuses on supply and demand as well as other forces that determine price levels. Supply and demand is a central concept to microeconomics, as it looks at how both factors influence price setting.
It is the study of particular markets and segments of the economy.
What is macroeconomics?
Macroeconomics is the study of government decisions, or the economy at a national and international level.
Macroeconomics is concerned with factors such as international trade, fiscal and monetary policy, interest rates, as well as level of inflation. It includes looking at concepts like a nation’s Gross Domestic Product (GDP) as well as unemployment rates.
Macroeconomics examines the way in which a nation allocates its limited resources.
Ultimately, a clear understanding of microeconomics vs macroeconomics can be helpful in making smarter financial decisions.