The subject matter of Economics is broadly divided into two sub-fields: microeconomics and macroeconomics. Every topic, theory or application in Economics can be broadly classified into these two branches. Although economics has a number of sub-fields of study, all of them can be classified into the realm of either microeconomics or macroeconomics. For anyone interested in learning Economics, it is essential to understand the difference between microeconomics and macroeconomics.
A brief history of the difference between microeconomics and macroeconomics
Before the 1930s, there was no well-defined distinction between micro and macro economics. The terms “microeconomics” and “macroeconomics” were used first by Ragnar Frisch, a Norwegian Economist, in 1933. He was the first person to classify the study of economics into these two categories.
Before this period of the 1930s, economic theory was largely focused on the study of aspects that are now defined under microeconomics (even though the term itself was never used). The study of topics that are now under macroeconomics was mostly neglected. However, there was a change in this focus after 1936. In the year 1936, John Maynard Keynes published his renowned book “The General Theory of Employment, Interest and Money”. Because of this publication, Keynes is often referred to as the Father of Macroeconomics. The shifting of focus towards macroeconomics as a result of the ideas introduced by Keynes is sometimes called the “Keynesian Revolution”.
The major reason behind these events was The Great Depression during that period. Existing ideas of economics, which were highly focused on microeconomic studies, could not explain this phenomenon. The publication by Keynes was an attempt to understand and explain such macroeconomic phenomena. Economists around the world realised the importance of studying the bigger picture of the economy as a whole. This eventually led to an increased focus on topics under macroeconomics in the following decades. As a result, the distinction between microeconomics and macroeconomics became more and more clearly defined.
difference between microeconomics and macroeconomics definitions
Famous economists have defined microeconomics as:
“Microeconomics is concerned with individual behavior and with the decisions that firms make.” – Paul Samuelson
“Microeconomics is the study of how individuals allocate their limited resources among alternative uses.” – Milton Friedman
N. G. Mankiw: “Microeconomics is the study of the behavior of individual decision-makers in the economy: consumers, workers, and firms.”
These definitions of microeconomics by famous Economists have a key term in common: individuals. The term “microeconomics” itself is derived from the Greek word “mikros” meaning small.
As indicated above, microeconomics concerns itself with the study of individual decision-makers. It is focused on smaller parts of the whole picture. The individuals mentioned here can be individual consumers, firms, markets and so on. For instance, microeconomics studies how individuals make their consumption decisions and how firms make their decisions about production. As an example, the cardinal and ordinal utility analysis focuses on individual consumer behaviour and falls under the purview of microeconomics. Therefore, individual behaviour is the main focus of microeconomics.
The same economists define macroeconomics as:
“Macroeconomics is the study of the aggregate performance of an economy and its growth over time.” – Paul Samuelson
“Macroeconomics is the study of the economy-wide phenomena of output, inflation, and unemployment.” – Milton Friedman
N. G. Mankiw: “Macroeconomics is the study of the performance, structure, and behavior of the economy as a whole, rather than the individual parts that make it up.”
The same economists have defined macroeconomics using synonymous key terms: aggregate, economy-wide and economy as a whole. Similarly, the Greek word “makros” meaning large is used to coin the term macroeconomics.
Macroeconomics, therefore, is the study of relationships between overall aggregates of an economy. It tries to understand the factors that help determine overall employment, output, price levels and so on in the entire economy. The economic forces operating at a large scale fall under the study of macroeconomics. The causes and effects of inflation in the economy, employment levels, and effects of the government’s fiscal policies or monetary policies of a nation are some examples of macroeconomics studies.
Major points of difference between microeconomics and macroeconomics
The key differences between the two fields can be summarized under the following points:
- Focus of Study (individual vs whole): microeconomics focuses on studying the behaviour and decisions of individual economic units such as consumers, firms and markets. On the other hand, macroeconomics focuses on the bigger picture of the economy as a whole. For example, microeconomics will study the output of a single firm whereas macroeconomics will focus on national output. This logic can be extended to all the variables such as prices in individual markets vs price level in the economy or individual income vs national income.
- Techniques and tools of analysis: both the sub-fields use a different set of tools and techniques. For example, consumer behaviour and ordinal utility analysis using indifference curves is applicable in understanding the behaviour of individual consumers and the IS-LM approach is used in macroeconomics to study the effects of fiscal and monetary policies. Hence, the collection of methods, laws and techniques used in both fields are a lot different.
- Topics of study: the sub-topics are vastly different in both fields because of the focus of analysis. Broadly speaking, the topics under these fields can be divided into the following categories:
Flow chart showing the broad sub-fields of microeconomics and macroeconomics
- Underlying assumptions: all theories in economics are based on certain assumptions. The assumptions in microeconomics and macroeconomics are fundamentally different. Microeconomics assumes that the aggregates such as total output or income (and other macroeconomic variables) are given and constant. Similarly, macroeconomics assumes certain microeconomic variables such as relative prices, and allocation of resources are given and constant.
- Policy recommendations and implications: since microeconomics is focused on individual economic units, its policy recommendations are related to such units as well. For example, the administration of minimum support prices in the agricultural markets of India. Conversely, macroeconomic policy recommendations help in making economy-wide decisions. For instance, decisions regarding the government’s fiscal policy and monetary policy adopted by the Central Bank of a country.