Microeconomics and macroeconomic differs in scope and analytical approach. Microeconomics considers individuals, whether consumers or business firms, as decision-makers and core analytical units. This also focuses on factors such as demand, supply and price. An example is price cuts in response to competition. Macroeconomics covers the behavior of the economy as a whole before considering impact on individual units. An example is inflation or rate of increases in price that decreases purchasing power. The microeconomic factors of price, cost and income influenced by decision to trade my old car for a new one and the macroeconomic factors of inflation and credit crunch worsened by rising oil prices, has affected my decision to purchase a smaller fuel-efficient new car.
Microeconomics and macroeconomics are different but interrelated and the distinction between the two determines the nature, extent and direction of decision-making. The succeeding discussion explains the basic differences between microeconomics and macroeconomics together with real life examples.
Distinctions of Microeconomics and Macroeconomics
There are two primary differences. First difference is in terms of scope. Microeconomics revolves around the decisions of individual units, either a consumer or business firm over economic issues such as price, budget allocation, and purchasing (Perloff, 2004). Macroeconomics covers movements or shifts in the overall economy and the aggregate decisions of groups and institutions as response (Hubbard & O’Brien, 2008). This implies the distinction of the perspective over issues. Second difference is in relation to the analytical approach. On one hand, microeconomics applies the inductive approach because individual persons or entities constitute the core analytical unit in identifying the economic issues affecting them before collectively drawing together the experiences of individual units to generalize on overall impact (Rubinfeld, 2004). On the other hand, macroeconomics operates via the deductive approach since the base analytical unit is the economy as a whole and the analytical process commence by considering shifts and emerging issues before determining the impact on particular sub-units (Hubbard & O’Brien, 2008).
Specifically, the distinction between microeconomics and macroeconomics rests on the issues of concern. Microeconomics involves issues such as demand and supply, price, nature of commodities as complementary or substitutes, and competition (Perloff, 2004). Price cuts in a souvenir shop in response to the establishment of a competitor in the same street exemplify a microeconomic phenomenon because the decision the souvenir shop, as an individual analytical unit, made the decision in response to competition. Macroeconomics encompass issues such as GDP, GNP, economic growth rate, inflation, balance of payments, money market, labor market, and economic and fiscal policies (Hubbard & O’Brien, 2008). Inflation or the rate of increase in prices of commodities, which decreases purchasing power because of brought about by oil price hikes in the world market affecting costs of production and service delivery together with the economic and fiscal policies implemented by the government as response comprise an example of macroeconomic phenomenon.
As an individual within an economy, I make microeconomic decisions. Last year, I traded my old car for a new one. I made this decision for a number of reasons. One, my old car stalled for the third time on the freeway that made me late for an important appointment. Two, mortgage payments on my old car is lesser compared to payments for a new one but the cost of repairs exceeds the difference in mortgage payments. It becomes more rational to purchase a new car than to spend so much on repairs on the old car even with lower mortgage payments. This is a microeconomic decision because I weighed price and cost as well as impliedly my income as an individual analytical unit.
Macroeconomic phenomenon also affects my personal decisions. In purchasing my new car, I had a number of options. One is to buy an SUV, either a Chevrolet or GM, and the other is purchase a smaller car. Many car retail firms dropped the price of SUVs since last year when compared to smaller cars because of a decrease in demand and trade-ins. If price were the only consideration, then the decision would be to go for the larger, big engine SUV. However, with the continuing price in world oil prices together with the credit crunch and inflation, which are macroeconomic phenomenon affecting the economy as a whole, the other option is to purchase the more fuel-efficient smaller car even at a higher purchase price. In the long-term, the smaller car would mean cost-savings on fuel for allocation to other needs.
Hubbard, G., & O’Brien, A. (2008). Macroeconomics (2nd ed.). New York: Pearson Addison Wesley.
Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.
Pyndyck, R., & Rubinfeld, D. (2004). Microeconomics (6th ed.). New York: Pearson Addison Wesley.