Microeconomics and Macroeconomics Essay
Microeconomics and Macroeconomics
Microeconomics is a branch of economics which deals with the study of resource allocation decisions within the confines of the sub-segments of an economy such as households and business firms (Arnold, 2010). Central to this study is an examination of how prices of goods and services in a market influence their demand and supply. Macroeconomics on the other hand deals with the study of the nature of the economy as a whole; national, regional or a global economy (Agarwal, 2007). It deals with such issues such as GDP (Gross Domestic Product) and the influences of a larger economy such as employment and inflation.
The main difference is thus the scope of study since it can be argued that microeconomics is a subset of macroeconomics. Another difference is that microeconomics focuses on consumers and businesses while macroeconomics deals with industries and nations (Arnold, 2007). Additionally, microeconomics deals with the forces of demand and supply in a market while macroeconomics studies the effect of such issues as interest rates, exchange rates and employment output on a national scale. Generally, microeconomic studies take a bottom-up approach while the macroeconomic studies take a top-down approach.
An example of a microeconomic phenomenon would be on pricing policies. A company may want to know what price to charge for a product they are introducing to the market. This is a microeconomic decision since to answer such a question, knowledge of the nature of market and the economic forces prevailing in it is important. One would need to study in detail the demand and supply of the commodity, utility to the consumer, competition from other suppliers and other microeconomic factors before coming up with a pricing decision.
The increase in oil prices in an economy is an example of a macroeconomic phenomenon. Such price changes may be influenced by various factors which can only be explained at a macroeconomic level. The reasons could be inflation in an economy, war or political instability in a particular region of the world.
A microeconomic decision made at home would be a changeover to taking tea as opposed to coffee. This is informed by an increase in the prices of coffee with no change in the level of income. The factors influencing this decision are thus the price, cost, the income level and the availability of a substitute which is tea. This therefore leads to a consumer being cushioned against price increases which would otherwise affect his economic welfare.
Macroeconomic factors prevailing upon an economy affect the operations of the sub-segments of the economy. This in turn would have an effect on the economic decisions made by consumers. The macroeconomic phenomenon of increase in oil prices in the world market coupled with inflation influenced a personal decision to buy a smaller car which is fuel economical as opposed to larger cylinder capacity vehicles which consume more fuel. Such larger capacity cars are a symbol of status but are fairly expensive to maintain in light of higher oil prices. This therefore has to be foregone in light of a benefit of reduction in cost. This has led to more savings by reducing on the budget on transportation.
In summary, it can be said that microeconomics and macroeconomics are two major and indeed very important fields of study in economics. They are different but interrelated and interdependent since they have certain common objects of study. Both microeconomic and macroeconomic factors are key in decision making and thus the study of both is invaluable to understanding the operations of the economy. They provide necessary tools to the understanding the generation of revenue in the business operations of firms; and the economy as a whole.
Agarwal, V. (2007). Macroeconomics. New Delhi: McDraw-Hill.
Arnold, R. (2010). Microeconomics. Mason, OH: Cengage Learning.
Melvin, M., & Boyes, W. (2008). Microeconomics. Mason, OH: Cengage Learning.