Microeconomics Versus Macroeconomics

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According to comedian P.J. O’Rourke, “microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally. Or to be more technical, microeconomics is about money you don’t have, and macroeconomics is about money the government is out of.” This is probably closer to the truth than economists would like, but let’s examine the distinction in more detail.

Microeconomics

Those who have studied Latin know that the prefix “micro-“ means “small,” so it shouldn’t be surprising that microeconomics is the study of small economic units. The field of microeconomics is concerned with things like:

  • Consumer decision making and utility maximization
  • Firm production and profit maximization
  • Individual market equilibrium
  • Effects of government regulation on individual markets
  • Externalities and other market side effects

Put another way, microeconomics concerns itself with the behavior of individual markets, such as the markets for oranges, the market for cable television, or the market for skilled workers.

Macroeconomics

Macroeconomics can be thought of as the “big picture” version of economics. Rather than analyzing individual markets, macroeconomics focuses on aggregate production and consumption in an economy. Some topics that macroeconomists study are:

  • The effects of general taxes such as income and sales taxes on output and prices

To study economics at this level, researchers must be able to combine different goods and services produced in a way that reflects their relative contributions to aggregate output.

 This is generally done using the concept of gross domestic product, and goods and services get weighted by their market prices.

The Relationship Between Microeconomics and Macroeconomics

There is an obvious relationship between microeconomics and macroeconomics in that aggregate production and consumption levels are the result of choices made by individual households and firms, and some macroeconomic models explicitly make this connection.  (These models incorporate what are known as "microfoundations.")

Most of the economic topics covered on television and in newspapers are of the macroeconomic variety, but it’s important to remember that economics is about more than just trying to figure out when the economy is going to improve and what the Fed is doing with interest rates.