Microeconomics vs. Macroeconomics: What's the Difference?

Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services. Economy Economics PartOf PracticalLookAtMicroeconomics ExploreTheGuide Overview IntroductiontoMicroeconomics Overview MicroeconomicsTopics Economists'AssumptionsintheirEconomicModels 5NobelPrize-WinningEconomicTheories UnderstandingPositivevs.NormativeEconomics WhatFactorsInfluenceCompetitioninMicroeconomics? HowDoesGovernmentPolicyImpactMicroeconomics? Microeconomicsvs.Macroeconomics Overview UnderstandingMicroeconomicsvs.Macroeconomics DifferentiateBetweenMicroandMacroEconomics Microeconomicsvs.MacroeconomicsInvestments SupplyandDemandBasics Overview IntroductiontoSupplyandDemand IsDemandorSupplyMoreImportanttotheEconomy? Demand LawofDemand DemandCurve Supply LawOfSupply SupplyCurve Elasticity Overview Elasticity PriceElasticityofDemand UnderstandingElasticityvs.InelasticityofDemand Inelastic FactorsDeterminingtheDemandElasticityofaGood WhatFactorsInfluenceaChangeinDemandElasticity? Utility Overview Utility WhatIstheConceptofUtilityinMicroeconomics? WhatIstheUtilityFunctionandHowIsitCalculated? TotalUtility MarginalUtility LawOfDiminishingMarginal WhatDoestheLawofDiminishingMarginalUtilityExplain? MicroeconomicsConcepts Overview EconomicEquilibrium IncomeEffect IndifferenceCurve ConsumerSurplus ComparativeAdvantage EconomiesofScale PerfectCompetition InvisibleHand MarketFailure TableofContents Expand Microeconomicsvs.Macroeconomics:AnOverview Microeconomics Macroeconomics InvestorsandMicroeconomicsvs.Macroeconomics Canmacroeconomicfactorsaffectmyinvestmentportfolio? Whatisaglobalmacrostrategy? Whatisthebasicdifferencebetweenmicroeconomicsandmacroeconomics? Howdocoreconceptsofmicroeconomicssuchassupplyanddemandaffectstockprices? Doesmyportfolioperformancehingeonbothmicroeconomicandmacroeconomicfactors? Microeconomicsvs.Macroeconomics:AnOverview Economicsisdividedintotwocategories:microeconomicsandmacroeconomics.Microeconomicsisthestudyofindividualsandbusinessdecisions,while macroeconomicslooksatthedecisionsofcountriesandgovernments. Thoughthesetwobranchesofeconomicsappeardifferent,theyareactuallyinterdependentandcomplementoneanother.Manyoverlappingissuesexistbetweenthetwofields. KeyTakeaways Microeconomicsstudiesindividualsandbusinessdecisions,while macroeconomicsanalyzesthedecisionsmadebycountriesandgovernments.Microeconomicsfocusesonsupplyanddemand,andotherforcesthatdeterminepricelevels,makingitabottom-upapproach.Macroeconomicstakesatop-downapproachandlooksattheeconomyasawhole,tryingtodetermineitscourseandnature.Investorscanusemicroeconomicsintheirinvestmentdecisions,whilemacroeconomicsisananalyticaltoolmainlyusedtocrafteconomicandfiscalpolicy. Microeconomics Microeconomicsisthestudyofdecisionsmadebypeopleandbusinessesregardingtheallocationofresources,andpricesatwhichtheytradegoodsandservices.Itconsiderstaxes,regulations,andgovernmentlegislation. Microeconomicsfocusesonsupplyanddemandandotherforcesthatdeterminepricelevelsintheeconomy.Ittakesabottom-upapproachtoanalyzingtheeconomy.Inotherwords,microeconomicstriestounderstandhumanchoices,decisions,andtheallocationofresources. Havingsaidthat,microeconomicsdoesnottrytoanswerorexplainwhatforcesshouldtakeplaceinamarket.Rather,ittriestoexplainwhathappenswhentherearechangesincertainconditions. Forexample,microeconomicsexamineshowacompanycouldmaximizeitsproductionandcapacitysothat itcouldlowerpricesandbettercompete.Alotofmicroeconomicinformationcanbegleanedfromcompanyfinancialstatements. Microeconomicsinvolvesseveralkeyprinciples,including(butnotlimitedto): Demand,Supplyand Equilibrium:Pricesaredeterminedbythelawofsupplyanddemand.Inaperfectlycompetitivemarket,suppliersofferthesamepricedemanded byconsumers.Thiscreateseconomicequilibrium. ProductionTheory:Thisprincipleisthestudyofhowgoodsandservicesarecreatedormanufactured. CostsofProduction:Accordingtothistheory,thepriceofgoodsorservicesisdeterminedbythecostoftheresourcesusedduringproduction. LaborEconomics:Thisprinciplelooksatworkersandemployers,andtriestounderstandpatternsofwages,employment,and income.  Therulesinmicroeconomicsflowfromasetofcompatiblelawsandtheorems,ratherthanbeginningwithempiricalstudy. Macroeconomics Macroeconomics,ontheotherhand,studiesthebehaviorofacountryandhowitspoliciesimpacttheeconomyasawhole.Itanalyzesentireindustriesandeconomies,ratherthanindividualsorspecificcompanies,whichiswhyit’satop-downapproach.Ittriestoanswerquestionssuchas“Whatshouldtherateofinflationbe?”or“Whatstimulateseconomicgrowth?” Macroeconomicsexamineseconomy-widephenomenasuchasgrossdomesticproduct(GDP)andhowitisaffectedbychangesinunemployment,nationalincome,ratesofgrowth,andpricelevels. Macroeconomicsanalyzeshowanincreaseordecreaseinnetexportsimpactsanation’scapitalaccount,orhowgrossdomesticproduct(GDP)isimpactedbythe unemploymentrate. Macroeconomicsfocusesonaggregatesand econometriccorrelations,whichiswhygovernmentsandtheiragenciesrelyonmacroeconomicstoformulateeconomicandfiscalpolicy.Investorswhobuyinterest-rate-sensitivesecuritiesshouldkeepacloseeyeonmonetaryandfiscalpolicy. JohnMaynardKeynes isoftencreditedasthefounderofmacroeconomics,asheinitiated theuseofmonetaryaggregatestostudybroadphenomena.Someeconomistsdisputehistheories,whilemanyKeynesians disagreeonhowtointerprethiswork. InvestorsandMicroeconomicsvs.Macroeconomics Individualinvestorsmaybebetterofffocusingonmicroeconomics,butmacroeconomicscannotbeignoredaltogether.Fundamental andvalueinvestorsmaydisagreewithtechnicalinvestorsabouttheproperroleofeconomicanalysis.Whileitismorelikelythatmicroeconomicswillimpactindividualinvestments,macroeconomicfactorscanaffectentireportfolios. WarrenBuffettfamouslystatedthatmacroeconomicforecastsdidn’tinfluencehisinvestingdecisions.WhenaskedhowheandpartnerCharlieMungerchooseinvestments,Buffettsaid,“CharlieandIdon’tpayattentiontomacroforecasts.Wehaveworkedtogethernowfor54years,andIcan’tthinkofatimewemadeadecisiononastock,oronacompany...wherewe’vetalkedaboutmacro.”Buffettalsohasreferredtomacroeconomicliteratureas“thefunnypapers.” JohnTempleton,anotherfamouslysuccessfulvalueinvestor,sharedasimilarsentiment.“IneveraskifthemarketisgoingtogoupordownbecauseIdon’tknow,andbesides,itdoesn’tmatter,”TempletontoldForbesin1978.“Isearchnationafternationforstocks,asking:‘WhereistheonethatislowestpricedinrelationtowhatIbelieveit’sworth?’” Canmacroeconomicfactorsaffectmyinvestmentportfolio? Yes,macroeconomicfactorscanhaveasignificantinfluenceonyourinvestmentportfolio.Forexample,theGreatRecessionof2008–09andaccompanyingmarketcrashwerecausedbytheburstingoftheU.S.housingbubbleandsubsequentnear-collapseoffinancialinstitutionsthatwereheavilyinvestedinU.S.subprimemortgages.Foranotherexampleoftheeffectofmacrofactorsoninvestmentportfolios,considertheresponseofcentralbanksandgovernmentstothepandemic-inducedcrashofspring2020.Governmentsandcentralbanksunleashedtorrentsofliquiditythroughfiscalandmonetarystimulustopropuptheireconomiesandstaveoffrecession,whichhadtheeffectofpushingmostmajorequitymarketstorecordhighsinthesecondhalfof2020andthroughoutmuchof2021. Whatisaglobalmacrostrategy? Aglobalmacrostrategyisaninvestmentandtradingstrategythatcentersaroundlargemacroeconomiceventsatanationalorgloballevel.“GlobalMacro”involvesresearchandanalysisofnumerousmacroeconomicfactors,includinginterestrates,currencylevels,politicaldevelopments,andcountryrelations. Whatisthebasicdifferencebetweenmicroeconomicsandmacroeconomics? Microeconomicsisthestudyofhowindividualsandcompaniesmakedecisionstoallocatescarceresources.Macroeconomicsisthestudyofaneconomyasawhole. Howdocoreconceptsofmicroeconomicssuchassupplyanddemandaffectstockprices? Microeconomicconceptssuchassupplyanddemandaffectstockspricesintwoways:directlyandindirectly.Thedirecteffectcanbegaugedbytheimpactofdemandandsupplydisequilibriumonstockprices.Whendemandforastockexceedssupplyatagivenpointintimebecausetherearemorebuyersthansellers,thestockwillrise;conversely,whensupplyexceedsdemandbecausetherearemoresellersthanbuyers,thestockwillfall.Theindirecteffectisbasedonsupplyanddemandfortheunderlyingcompany’sproductsandservices.Ifthecompany’sproductsareflyingofftheshelvesbecauseofrobustdemand,itmaybeonaprobablestrongearningstrajectorythatwouldlikelytranslateintoahigherpriceforitsstock.Butifdemandissluggishandthereisexcessinventory(orsupply)ofitsproducts,thecompany’searningsmaydisappointandthestockmayslump. Doesmyportfolioperformancehingeonbothmicroeconomicandmacroeconomicfactors? Yes,theperformanceofyourportfoliohingesonbothmicroeconomicandmacroeconomicfactors.Microeconomicfactorssuchassupplyanddemand,taxesandregulations,andmacroeconomicfactorssuchasgrossdomesticproduct(GDP)growth,inflation,andinterestrates,haveasignificantinfluenceondifferentsectorsoftheeconomyandhenceonyourinvestmentportfolio. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. CNBC,WarrenBuffettArchive.“AfternoonSession—2013Meeting.”AccessedSept.23,2020. GoogleBooks.“TheOracleSpeaks:WarrenBuffettinHisOwnWords,”Page101.AccessedSept.23,2020. 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Provider Name Description PartOf PracticalLookAtMicroeconomicsGuide APracticalLookAtMicroeconomics 1of40 Whatkindsoftopicsdoesmicroeconomicscover? 2of40 Economists'AssumptionsinTheirEconomicModels 3of40 5NobelPrize-WinningEconomicTheoriesYouShouldKnowAbout 4of40 Positivevs.NormativeEconomics:What'stheDifference? 5of40 WhatFactorsInfluenceCompetitioninMicroeconomics? 6of40 HowDoesGovernmentPolicyImpactMicroeconomics? 7of40 Microeconomicsvs.Macroeconomics:What’stheDifference? 8of40 HowDoIDifferentiateBetweenMicroandMacroEconomics? 9of40 Microeconomicsvs.MacroeconomicsInvestments 10of40 IntroductiontoSupplyandDemand 11of40 IsDemandorSupplyMoreImportanttotheEconomy? 12of40 DemandDefinition 13of40 LawofDemandDefinition 14of40 DemandCurve 15of40 Supply 16of40 LawofSupplyDefinition 17of40 SupplyCurveDefinition 18of40 WhatDoesElasticityMean? 19of40 PriceElasticityofDemand 20of40 Elasticityvs.InelasticityofDemand:What'stheDifference? 21of40 WhatDoesInelasticMean? 22of40 WhichFactorsAreImportantinDeterminingtheDemandElasticityofaGood? 23of40 WhatFactorsCausetheDemandforaGoodtoChange 24of40 UtilityDefinition 25of40 Whatistheconceptofutilityinmicroeconomics? 26of40 WhatIsUtilityFunctionandHowIsItCalculated? 27of40 TotalUtility 28of40 AbovetheMargin:UnderstandingMarginalUtility 29of40 LawOfDiminishingMarginalUtilityDefinition 30of40 WhatDoestheLawofDiminishingMarginalUtilityExplain? 31of40 EconomicEquilibriumDefinition 32of40 IncomeEffectDefinition 33of40 IndifferenceCurve 34of40 ConsumerSurplusDefinition 35of40 ComparativeAdvantage 36of40 WhatAreEconomiesofScale? 37of40 UnderstandingPerfectCompetition 38of40 InvisibleHandDefinition 39of40 WhatIsMarketFailure? 40of40 RelatedArticles Economics IsEconomicsaScience? Economics Economists'AssumptionsinTheirEconomicModels Microeconomics HowDoIDifferentiateBetweenMicroandMacroEconomics? GovernmentSpending&Debt WhatIstheKeynesianMultiplier? Macroeconomics ExplainingtheWorldThroughMacroeconomicAnalysis Economics APracticalLookAtMicroeconomics PartnerLinks RelatedTerms EverythingYouNeedtoKnowAboutMacroeconomics Macroeconomicsstudiesanoveralleconomyormarketsystem,itsbehavior,thefactorsthatdriveit,andhowtoimproveitsperformance. more MicroeconomicsDefinition Microeconomicsisthebranchofeconomicsthatanalyzesmarketbehaviorofindividualsandfirmsinordertounderstandtheirdecision-makingprocesses. more WhatIstheAustrianSchool? TheAustrianschoolisaneconomicschoolofthoughtthatoriginatedinViennaduringthelate19thcenturywiththeworksofCarlMenger. more Economics Economicsisa branchofsocialsciencefocusedontheproduction,distribution,andconsumptionofgoodsandservices. more RecursiveCompetitiveEquilibrium(RCE) Recursivecompetitiveequilibrium(RCE)isanequilibriumconceptusedtoexploreeconomicissues,suchasunemploymentandGDP. more WhatIsInflation? Inflationisadecreaseinthepurchasingpowerofmoney,reflectedinageneralincreaseinthepricesofgoodsandservicesinaneconomy. more