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Microeconomics and Macroeconomics. What are they and their differences?

Microeconomics and Macroeconomics. What are they and their differences?

Next, a very brief introduction to these two extensive branches of the study of economic science, which due to their breadth have deserved an immense number of publications, here we will only try to present a definition and how they are related.

First a simple definition of economics:

Economy is the science that studies how scarce resources are used to satisfy the needs of men in society; on the one hand, it is interested in the essential operations of the production, distribution and consumption of goods, and on the other, in the institutions and activities whose object is to facilitate these operations. Edmond Malinvaud (Schettino, p.4)

What is Microeconomics?

Microeconomics is called the study of how individuals make their decisions and how these decisions influence each other. (Krugman, Olney, and Wells, p.3)

Microeconomics studies how a person, company, or family makes their decisions every day and what these decisions bring as a consequence, from the economic point of view. (Sow, p.17)

It focuses on the analysis of the behavior of economic units, such as families or consumers, and companies. It also studies the markets where demanders and suppliers of goods and services operate.

Although it is considered that microeconomics had its origin with the theories of Adam Smith, in the 18th century, its existence was only formalized towards the end of the 19th century and the beginning of the 20th century with the appearance of the neoclassical school of economics.

The key concepts of Microeconomics are:

  • Individuals or families and how to determine their demand for goods and services.
  • Companies and their production of goods and services, that is supply.
  • The Markets and their way of relating supply and demand is the market theory.

Explain how the interaction of supply and demand determines the prices of each good, the level of wages, and the profit margin. However, it does not solve two problems inherent to its internal logic, first, the relationship between partial equilibrium and general equilibrium, if there are substitute goods in the markets and changes in demand give rise to changes in production costs. , that is, in the offer. And, secondly, the equilibrium of the firm in the long term under the assumption that it operates with a homogeneous production function of degree one, that is, with constant returns to scale.

Because it is a bottom-up view of economics, it forms the basis of any branch of economics.

What is Macroeconomics? What is Macroeconomics looking for?

Macroeconomics seeks to respond to the behavior and how the whole group decides, that is, all the companies, all the families, all the organizations, as well as how these decisions affect the decisions of the others involved. (Sow, p.18)

It studies the growth and fluctuations of a country’s economy from a broad perspective, that is, a perspective that does not go into too much detail about a particular sector or business.

Modern macroeconomics is founded on microeconomics, which studies the individual decisions of commercial and family businesses and their interaction in the market.

Macroeconomists explicitly recognize that global trends in the economy are the result of millions of individual decisions.

Although they do not intend to study each of these decisions, they are clear that their theories must be consistent with the behavior of the millions of families and companies that make up the economy. (Larrain and Sachs, pp.3 and 4)

Macroeconomics was born in the 18th and 19th centuries with the theories of Smith, Ricardo, and Say, but it was only in the 1930s, with the studies and publications of Keynes, those modern macroeconomics originated.

Macroeconomics analyzes economic processes from the perspective of a broad aggregation of economic factors and behaviors, national and regional dimensions.

It defines, therefore, in its theoretical and conceptual context, hypothetical approaches developing concepts, models, and instruments that contemplate economic processes under highly aggregated magnitudes that seek an explanation for the great phenomena of the economy such as unemployment, inflation, economic growth, investment, exports, imports, etc.

To be able to analyze within its economic system the behaviors that are integrated within these macro magnitudes, it develops microeconomics as one of its key instruments that respond to and interpret, at the same time, the supposed behaviors of the productive units, the companies, of public institutions, of domestic economies, to estimate the effects to integrate them into that explanation that requires the construction of the macroeconomic design. (Garcia, p.109)

One of the proposals, from economic theorists, to understand the difference between macroeconomics and microeconomics consists of studying the types of problems that each one addresses, Díaz-Giménez (p.39)  puts it this way:

The questions that microeconomics poses have to do with the decisions of individuals and individual companies. Some examples of these questions are the following: How do the hiring decisions of a company change if the labor legislation changes? How does the introduction of a titanium blue machine, faster and easier to operate, affect the computer market? then the others, and ten percent cheaper than similar machines from the competition?

The questions that macroeconomics asks have to do with problems that affect all the people who live in a given country, or even in the whole world. Some examples of the questions that macroeconomics asks are the following: why do some economies grow faster than others? Why do economies suffer recurring periods of recession? Why are there people who want to work and cannot find work?  why do the prices of almost all merchandise tend to increase?

Microeconomics and Macroeconomics. What are they and their differences?

Differences between Macroeconomics and Microeconomics

Case and Fair (p.8) expose the difference in approaches to microeconomics and macroeconomics as follows:

While microeconomics focuses on individual product prices and relative prices, macroeconomics examines the general level of prices and how quickly (or slowly) they rise (or fall). Microeconomics asks how many people will be hired (or laid off) this year in a given industry or geographic area, as well as the factors that determine how much labor a company or industry will hire. Macroeconomics deals with aggregate employment and unemployment: how many jobs exist in the economy as a whole and how many of the people who are willing to work will not be able to find employment.

Here are a couple of sentences that summarize the concepts, differences, and relationships between macroeconomics and microeconomics:

Microeconomics looks at the trees, while macroeconomics looks at the forest. Both categories generate the formulation of theories and political guidelines, activities that constitute the central core of the economy. Milton H. Spencer

It studies the behavior of the economy as a whole: variations in prices, production or global jobs. Microeconomics looks, in a sense, at the economy through a microscope and studies the behavior of molecules in an economy, such as businesses and families. Paul Samuelson and William Nordhaus

Bibliography

  • Case, Karl, and Fair, Ray C. Principles of Microeconomics, Pearson Education, 1997.
  • Cerda Gomez, Jose Baltazar. Microeconomics: A Latin American Approach, Palibrio, 2012.
  • Diaz-Gimenez, Javier. Macroeconomics: first concepts. Antonio Bosch Publisher, 1999.
  • Garcia Echevarria, Santiago. Introduction to the economy of the company, Ediciones Díaz de Santos, 1994.
  • Herce Pagliai, Silvia and Sánchez Romero, Manuel. Cultural, literary and linguistic transfers within the European Union, University of Seville, 2006.
  • Jimenez, Felix. Macroeconomy. Approaches and models. Volume 1. Publishing Fund of the Pontifical Catholic University of Peru, 2006.
  • Krugman, Paul R.; Olney, Martha L., and Wells, Robin. Basics of the economy. Editorial Reverté, 2008.
  • Larraín B., Felipe and Sachs, Jeffrey D. Macroeconomics in the global economy, Pearson Education, 2002.
  • Schettino, Macario. Introduction to Economics for Non-Economists, Pearson Education, 2003.
  • Taxon Chen, Rodolfo. Elements of Macroeconomics, EUNED, 2007.

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