Understanding Macroeconomics and Microeconomics


Macroeconomics examines the economy as a whole. It answers questions such as:

  • What causes the economy to grow over time?
  • What causes short-run fluctuations in the economy?

One Must Understand Microeconomics to Understand Macroeconomics

Macroeconomics considers the larger picture, or how all of these decisions sum together. An understanding of microeconomics is crucial to understand macroeconomics. To understand why a change in interest rates leads to changes in real GDP, we need to understand how lower interest rates influence decisions, such as the decision of how much to save, at the firm or household level. Once we understand how an individual, on average, will change their behavior we will then understand the large scale relationships in an economy.

Like most definitions in economics, there are various competing definitions of the term Macroeconomics. According to WordReference.com, “Macroeconomics is the branch of economics concerned with aggregates, such as national income, consumption, and investment.”

What Is Microeconomics? 

Roughly speaking, microeconomics deals with economics decisions made at a low, or micro, level. More precisely, I would define microeconomics as “the analysis of the decisions made by individuals and groups, the factors that affect those decisions, and how those decisions effect others”.

Microeconomic decisions by both firms and individuals are motivated by cost and benefit considerations. Costs can be either in terms of financial costs such as average fixed costs and total variable costs or they can be in terms of opportunity costs, which consider alternatives foregone.

Microeconomists consider questions such as “What determines how much a consumer will save?”, “How much should a firm produce, given the strategies their competitors are using” and “Why do people buy both insurance and lottery tickets?”


Example of a Microeconomic Question

How does the change of a price of good influence a family’s purchasing decisions? If my wages rise, will I be inclined to work more hours or less hours? Contrast this with Macroeconomics, which deals with questions of a large scope, such as how does a change in interest rates influence national savings?

Microeconomics Versus Macroeconomics

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.



  • 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


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 causes of economic upswings and downturns
  • The effects of monetary and fiscal policy on economic health
  • How interest rates are determined
  • Why some economies grow faster than others

The Relationship Between Microeconomics and Macroeconomics




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