Economics is a broad word that refers to the study of how limited resources are distributed to meet unlimited needs or demands. In other words, it looks at the how demand is met, despite limitation in availability of resources, hence giving us the notion that while supply in many cases is limited, demand on the other hand almost always tends to be unlimited. Microeconomics refers to a branch of economics that deals with distribution of resources at the lowest levels of the economy and these include households and small scale firms. In other words, it looks at the forces of demands and supply at small scale levels. It is involved with establishing or analyzing market forces that determine the price of products and services in any given market. (Deivedi 2005).
Unlike microeconomics, macroeconomics on the other hand refers to the larger branch of the discipline that deals with the economics of the nation as a whole. In that case, macroeconomics looks at issues like unemployment, international trade, and inflation. Needless to say, it is through an involvement in macroeconomics that economics are able to determine factors like gross domestic product (GDP) and a nation's capital account. (Paish 2002).
From the above definition hence, it would be correct beyond every reasonable doubt to say that macroeconomics is the bigger version of microeconomics and that without microeconomics there would be no microeconomics. This is because demand and supply at the local household level, affects demand and supply at the firms level, which consequently affects demand and supply at the national level.
So, what are the main differences between macro and microeconomics?
To begin with, one of the differences can be drawn from the definition of the terms. Microeconomics deals with the smaller market, while macroeconomics tends to analyze the larger market forces. Microeconomics tend to explain phenomena like scarcity (a situation where the only available resources cannot meet the wants/ demands at hand i.e. demand exceeds supply), opportunity cost (the price that one pays when one option has to be forgone to acquire another option, for example assuming the price of a packet of pasta is $1, equivalent to the price of a packet of 1 lire of milk and a person only has $1 and need to choose the two. Assuming the person chooses a packet of milk, its opportunity cost is the price of the item forgone, in this case the packet of pasta thus $1. In other words, it is getting less of something to get more of something else), marginal analysis (comparison between the benefit and cost of a good or product) among other factors. (Musgrave & Kacapyr 2009)
Macroeconomics on the other hand looks in deep details at aspects such as unemployment and the impact it has on a country's economic growth, inflation, international trade and capitalism versus communism. Macroeconomics is the basis upon which a nation is able to draw its budget, make and balance its accounts as far as international debt and credit is concerned, as well as quantify just how much its currency is worth in comparison to other currencies around the world (Deivedi 2005).
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In view of the description above, let us have a look at an example of a microeconomic phenomenon. Assuming a given market is faced with a high demand of a certain good, let's say textbooks, but the supply of the said item is low. The most likely scenario to occur is that the price of the textbook will go up. Consumers may in the initial phase of the market forces cope with the rising prices, but with time, once the consumer needs have been met, the demand goes down. Consequently, in relation to market price mechanism, the price of the textbooks will do down to match the decreasing demand of the said good. In this situation, price control to match demand and supply is a phenomenon that applies to microeconomics. An example of a macroeconomic phenomenon is for example when a country imposes taxes on its citizens in order to be able to raise revenue to meet its national obligations. Money raised through taxation is included in the national budget and is allocated for matters of national development (Paish 2002).
An example of a microeconomic decision made at work is recruitment of personnel. To elaborate on this, assume a firm needs to hire three managers at three different levels. The cost of hiring manager number 1 is $5,000 that of manager 2 is $4,000, while that of manager 3 is $2,500. The firm however realizes that it cannot afford to hire manager 3 due to factors arising in the budget allocation. It in addition realizes that the role of manager 3 can be played by manager 2. In this scenario, the firm brings about the factor of opportunity cost, which is the value of the manager not hired, in other words, the alternative forgone (Investopedia 2010).
A macroeconomic phenomenon that has impacted on businesses is for example the government's decision to get involved in the business of importing goods that would otherwise be produced in the local market. Think for example of the much adored designer clothes that the government has allowed to flood in the local market, hence slimming the chances of growth for local industries that would otherwise produce the same products for the market and raise revenue. Such industries have gone underground, with adverse effects like loss of jobs and unemployment for people who previously worked in the industries, unemployment being yet another macroeconomic issue that needs to be addressed (Deivedi 2005).
In conclusion therefore, both micro and macroeconomics play a major role despite their differences in definition. They mutually co-exist and an aspect in one affects the other, whether in a big or a small way.
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