Economics · Ch 1 — Introduction to Macro Economics
Difference between Micro Economics and Macro Economics
Difference between Micro Economics and Macro Economics
Micro Economics and Macro Economics are the two great branches of economic theory, distinguished mainly by the LEVEL at which they study the economy. Micro Economics ('mikros' = small) studies the behaviour of INDIVIDUAL economic units — a single consumer, a single household, a single firm, or a single industry — and how prices and quantities are determined in individual markets, which is why it is also called Price Theory. Macro Economics ('makros' = large) studies the economy as a WHOLE, focusing on aggregates such as national income, aggregate output and total employment, which is why it is also called Income Theory.
| Basis | Micro Economics | Macro Economics |
|---|---|---|
| Meaning | Study of individual units of the economy | Study of the economy as a whole |
| Also called | Price Theory | Income Theory |
| Main concern | Determination of price in an individual market | Determination of national income, output and employment |
| Method | Slicing — the economy is examined one unit at a time | Lumping — individual units are added into economy-wide totals |
| Equilibrium | Partial equilibrium — one market studied, the rest held constant | General equilibrium — the economy-wide balance of many markets together |
| Key variables | Individual price, individual demand and supply, a single firm's output | Aggregate demand and supply, general price level, national income |
| Central assumption | 'Other things remain equal' at the economy level (full employment often assumed) | Aggregate levels themselves are what is being explained (employment may be less than full) |
| Example question | Why did the price of onions rise in one market last month? | Why did the country's overall inflation rate rise last year? |
The error of assuming that what is true for a single individual unit must also be true for the economy as a whole — for example, that because one household can grow richer by saving more, all households saving more together must raise total saving (which need not follow). It is a key reason macroeco …