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Most people understand how physics is classified as a science, however, there might be some confusion when including economics in the same category. In fact, economics is a social science, as it shares the same qualitative and quantitative elements common to all social sciences.1 Economics focuses on the manufacturing, distribution, and consumption of goods and services, and how people, organisations, governments, and nations choose to allocate resources in order to gain these goods and services.2 As with the studies of all sciences, establishing different sections makes it easier to understand. Economics can be broken into two sections: microeconomics and macroeconomics.3 Here we delve into these sections; their differences, how they affect each other, and their impact on business. Microeconomics can be defined as the study of decision-making behaviour of individuals, companies, and households with regards to the allocation of their resources.4 Microeconomics strives to discover what factors contribute to peoples’ decisions, and what impact these choices have on the general market as far as price, demand, and supply of goods and services is concerned. It’s a ‘bottom-up’ approach with a focus on the basic elements that make up the economy’s three sectors (agriculture, manufacturing, and services/tertiary), such as land, entrepreneurship, and capital.5 It aims to understand the pattern of wages, employment, and income,6 as well as consumer behaviour, spending trends, wage-price behaviour, corporate policies, and how regulations impact on companies.7 Microeconomics tries to determine decisions and resource allocation at an individual level, as well as explain what happens when certain conditions change. To summarise, microeconomics determines to understand the following:8 For example, microeconomics could use information from a company’s financial reports in order to determine how an organisation could maximise its production and output capacity, in order to lower prices and become more competitive. Macroeconomics is the holistic study of the structure, performance, behaviour, and decision-making processes of an economy, at a national level.9 Essentially, macroeconomics is a ‘top-down’ approach.10 It seeks to understand changes in the nation’s Gross Domestic Product (GPD), inflation and inflation expectations, spending, receipts and borrowings at a governmental level (fiscal policies), unemployment, and monetary policy. This is done to interpret and know the state of the economy, so that policies can be formulated at a higher level, and macro research can be carried out for academic purposes. Macroeconomics analyses entire industries and economies, rather than singular companies or individuals.11 It seeks to answer questions such as, “What should the inflation rate be?” and, “What stimulates economic growth?”. To summarise, macroeconomics strives to answer the following:12
Macroeconomics vs microeconomics: the key differencesMicroeconomics and macroeconomics both explore the same elements, but from different points of view.13 The main differences between them are:
Macroeconomics vs microeconomics: the overlapIt is clear that macroeconomics does not exist in isolation, but rather is entwined with microeconomics, and works in tandem in order to be efficient.15 Choices based on microeconomic factors, whether from individuals or businesses, can impact macroeconomics in the long run. Similarly, a national policy that involves microeconomics could affect how households and enterprises interact with their economy. For example, if the government raises the tax on a certain product (macroeconomics), an individual shop owner will have to increase the price, which will impact on the consumer and their decision for or against the product at that price (microeconomics). How macroeconomics and microeconomics affect each otherMacro’s effects on micro17 Should a national policy be passed, such as when the nation’s central bank cuts the interest rate (a macro impact) by 100 basis points (100 bps = 1%), this will lower the borrowing costs of commercial banks. This, in turn, helps their deposit rate to drop, which gives room to lower the interest rate on credit, and to individuals and business. This causes a rise in borrowings and creates a climate of greater investment, which helps businesses invest in new assets, projects, and expansion plans (a micro impact). Micro’s effect on macro18 The condition of the microeconomy is one of the many factors that determine macroeconomic policies. To continue the example, the central bank observes the lending and investment trends of businesses, individuals and households, now that the interest rate has been lowered, in order to determine whether or not they should make additional cuts. If the outlook is weak, keep rates as is, or increase them if the outlook is picking up. How micro- and macroeconomics affect business
In order to make balanced, informed business decisions, it is important to take local and global economic trends into account, as well as relevant data and interactions with your customers. Look for opportunities that arise from economic trends, both on a micro- as well as a macroeconomic levels. Learn more about the impact of economic forces on business with the MIT Sloan Economics for Business online program.
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