Microeconomics and Macroeconomics

Microeconomics is the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms. Macroeconomics is the study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation. Microeconomics is concerned with:

· Supply and demand in individual markets

· Individual consumer behaviour. e.g. Consumer choice theory

· Individual labour markets – e.g. demand for labour, wage determination

· Externalities arising from production and consumption.

Macroeconomics is concerned with:

· Monetary / fiscal policy. e.g. what effect does interest rates have on whole economy?

· Reasons for inflation, and unemployment

· Economic Growth

· International trade and globalisation

· Reasons for differences in living standards and economic growth between countries.

· Government borrowing

The main difference is that micro looks at small segments, and macro looks at the whole economy. But, there are other differences. Classical economic analysis assumes that markets return to equilibrium (S=D). If demand increases faster than supply, this causes price to rise and firms respond by increasing supply. For a long time, it was assumed that the macro economy behaved in the same way as micro economic analysis. Before, the 1930s, there wasn’t really a separate branch of economics called macroeconomics.

In the 1930s, economies were clearly not in equilibrium. There was high unemployment, output was below capacity, and there was a state of disequilbrium. Classical economics didn’t really have an explanation for this dis-equilibrium, which from a micro perspective, shouldn’t occur.

Since 1936, macroeconomics developed as a separate strand within economics. There have been competing explanations for issues such as inflation, recessions and economic growth.

Although it is convenient to split up economics into two branches – microeconomics and macroeconomics, it is to some extent an artificial divide. Micro principles used in macroeconomics. If you study impact of devaluation, you are likely to use same economic principles, such as the elasticity of demand to changes in price. If we see a rise in oil prices, this will have a significant impact on cost-push inflation. If technology reduces costs, this enables faster economic growth. If house prices rise, this is a micro economic effect for housing market. But, housing market is so influential that it could also be considered a macro-economic variable, and will influence monetary policy. There have been efforts to use computer models of household behaviour to predict impact on macro economy.

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