What's the difference between Macro and Microeconomics?

Even if you’re not a formal student of economics, you might hear the prefixes “macro” or “micro” tacked on now and again. Through context, you may have a rough idea of what those terms mean:

Micro means small, so Microeconomics = Small Economics

Macro means big, ergo Macroeconomics = Big Economics

Can we call it a day? Not quite. Thinking in these terms is unhelpful and can lead to mistakes of significance.

“Surely small economics isn’t that important. It probably won’t affect me directly. I should be more worried about those big economics everyone’s talking about.”

I don’t blame people for making this mistake. Humans tend to attach more meaning or significance to that which is perceived as ‘larger’. After all, shouldn’t a Macroeconomic crisis demand more attention than some middling Microeconomic problem?

Here’s the truth: It was only relatively recently that those in positions higher than yours and mine decided that economics ought to be bisected into macro and micro.

Micro and Macro are still economics. They operate under the same laws, theories, and assumptions. They are mechanically similar, and the discipline of economic thinking (i.e., mental gymnastics) is required in both. One is not categorically more important than the other.

In our simple definition of an economy, there are three main participants: consumers, producers, and regulators. These starring roles remain present across the micro/macro distinction, but the actors are scaled up or down.

A consumer in the microeconomy is usually an average Joe, just like you and me. Microeconomics analyzes the actions of participants within a closed economy. This only means that microecon models don’t consider imports/exports of goods and services. What happens in the microeconomy stays in the microeconomy. Your hometown is a microeconomy. Deliberating over buying Downy fabric softener or the store brand is a microeconomic decision.

Common microeconomic questions include:

How does a consumer decide what to buy?

How does collusion or anticompetitive behavior affect a market?

Can we quantify satisfaction from a particular good?

How do we measure opportunity costs and sunk costs?

How do government policies affect markets?

The list goes on.

In the macroeconomy, the role of the consumer is more likely played by an entire country. A defining feature of the macroeconomy is that it observes economies interacting with one another. This means imports and exports, currency conversions, tariffs, comparative advantage, etc. The scale is more often international or global. A trade agreement between the United States and Mexico is a macroeconomic issue.

Common macroeconomic questions include:

What makes up a country’s GDP?

How are currency exchange rates determined?

How do countries decide what to make and what to import?

How do we know if a country is wealthy?

Who makes major financial decisions in the United States?

What is the relationship between inflation and unemployment?

Et cetera.

You might notice some overlap already.

If you read my last post, you know that economies come in all shapes and sizes. So, while micro and macro differ in scale, the distinction shouldn’t affect our analytical approach. Both are relevant to our daily lives and decision-making.

We all make choices, and we are all subject to the choices our governments make. Learning how to make better choices and how to best allocate our own scarce resources is what economics is all about.