The Difference Between Macroeconomics and Microeconomics
We have already discussed the definition of economics. To review, economics is the efficient allocation of scarce resources. Basically, this means that economics is made up of the decisions people make on where to assign or distribute their limited resources, so that they get the most out of them.
Economics is actually separated into two kinds, or branches: macroeconomics, and microeconomics. “Macro” literally means “large,” or “large-scale.” Macroeconomics is the study of economics on a large scale (we’ll discuss that more later). On the other hand, “micro” literally means “very small,” or “especially small.” So microeconomics is the study of economics on a very small scale.
First, let’s start with microeconomics. Using our definition of economics, microeconomics is an individual, household (family), or company’s efficient allocation of its scarce resources. The simplest and smallest part of microeconomics is the individual (a single person). The individual decides how to use his limited resources (money, time, possessions (what he owns)) so that he gets the most of what he wants.
An example of microeconomics is a student trying to decide what to buy for lunch. The student is usually hungry for something specifically: pasta, fried chicken, and so forth. However, the student’s money is limited. He has to decide how to stretch his money so that he can eat something that he likes.
Second, let’s talk about macroeconomics. If we tweak the definition of economics, macroeconomics is the efficient allocation of a nation, region, or the world’s scarce resources. It looks at how one nation (such as the U.S.), or one region (such as North America), or the world assigns the limited resources that it has for the most efficient results.
The simplest way to describe macroeconomics is that it adds together everyone in microeconomics who are in a single nation, a region, or in the world. So in the U.S., macroeconomics looks at the decision-making of every individual, every household, and every company who buys and sells in the nation; plus the decision making of every government unit, from the local (city) level to the national level.
Let’s make it simpler, and put it this way. Say there’s no water in the U.S. and your country has to buy water from the United Kingdom. When you buy water from your local store, that’s microeconomics. When the government adds up everyone who ever bought water in the U.S., that is macroeconomics.
What is the use of splitting economics into microeconomics and macroeconomics? The importance is that the decision-makers at the micro level (individuals, families, companies) do not think or act the same way as decision-makers at the macro level (countries, regions, the world). At the same time, the decisions that the micro-level decision-makers make, have an effect on the decisions that the macro-level decision-makers make.
To review, microeconomics is the individual, family, or company’s efficient allocation of scarce resources. On the other hand, macroeconomics is the country, region, or the world’s efficient allocation of scarce resources. Both together make the wide study of economics.