What’s the difference between Micro and Macroeconomics?
The answer to this question a century ago would have been that there is no difference between micro and macroeconomics. As explained in the book Back to Basics: Economic Concepts Explained, there was not always a divide in this social science and “economics was economics”. Before the Great Depression in 1930, individual markets and the overall economy were believed to be so closely intertwined that there was no need to look at these separately.
But with the prolonged instability of the Great Depression, economists of the time conjectured that their existing economic theory was not enough to explain such abnormalities, and thereafter, economists began to take sides to mould the difference between microeconomics and macroeconomics. It was John Maynard Keynes, the father of macroeconomics, who kick started this division between disciplines in 1936 with his book The General Theory of Employment, Interest and Money, focusing on the instability of aggregate variables only.
Essentially, the main difference between these two disciplines is the perspective and methodology followed when approaching a resource allocation issue. Macroeconomists will follow a top-down approach, analysing the bigger picture first, and using their findings to explain its impact on individuals, households and firms. On the other hand, microeconomists will follow a bottom-up approach, analysing the behaviours and decisions of individuals first to explain the impact of the latter on the overall economy. Because their approaches are different, the tools and theories they look at when carrying out their analyses are different too.
How do Micro and Macroeconomics overlap?
Prominent economists such as Adam Smith, who built economic theory prior to Keynes and made no distinction between disciplines were not wrong in their beliefs. As a matter of fact, microeconomics and macroeconomics were and still are highly overlapping to the point where it may seem pointless to study them in isolation.
These two disciplines overlap because they are constantly impacting each other. For instance, if governments decide to increase their spending on public goods (a macroeconomic decision), individuals may have easier and possibly cheaper access to public transportation and decide not to buy a new car (a microeconomic decision), affecting thus the supply and demand of the car market.
This correlation works the other way round too. Individuals and firms might be spending less and less because the goods and services in the economy are too expensive to afford (microeconomic decision). Macroeconomists will identify this to be an event of increasing inflation. In turn, governments might decide to decrease taxes to increase the disposable income of individuals and firms (macroeconomics decision), encouraging them to spend.
Final thoughts & examples
Overall, the study of microeconomics and macroeconomics aids the decision making process at an individual and nationwide level.
Understanding how to best budget your weekly income, or setting the prices for your newborn entrepreneurial products are both examples of how microeconomics can assist individuals and firms to make decisions on a daily basis. Equally, macroeconomics can help governments and nations establish the optimal interest rate to keep inflation stable, or figure out the acceptable levels of unemployment to achieve the target economic growth in a nation.
Even though the approach and tools to decision-making are different for microeconomists and macroeconomists, all decisions should make sense in the context of the mirror discipline. That is, a decision will have implications on the microeconomy and the macroeconomy. Therefore, a clear understanding of both branches of knowledge is essential to make sensible decisions that maximise the welfare of all, so that no individual or larger systems are mistreated by a given policy.
Further Micro & Macroeconomics reading and resources on Perlego:
Microeconomics for Dummies
Macroeconomics for Dummies
The Principles of Microeconomics
The Principles of Macroeconomics
Thinking Fast and Slow
Intermediate Microeconomics: A Modern Approach