MacroeconomicsMacroeconomics refers to the 'big picture' study of economics, so looking at concepts like industry, country, or global economic factors. Macroeconomics includes looking at concepts like a nation's Gross Domestic Product (GDP), unemployment rates, growth rate, and how all these concepts interact with each other.
Studying and applying macroeconomics is incredibly important at the government level as the policy and economic decision and regulations enacted by government can have a major impact on many aspects of the overall economy. To demonstrate macroeconomic theory in practice we'll briefly look at how interest rates fit into macroeconomic policy.
Extensive study goes into establishing the appropriate interest rates in an economy, where the government sets a base rate and banks work from there. If interest rates goes up:
- People may save more money as they get a better return on their deposits.
- Business will invest in less expansion as borrowing money will cost relatively more.
- The local currency will go up in value because now deposits in that currency can earn more compared to other currencies.
- Inflation will go down, because in general saving is up and spending is down and people are buying less.
This gets very complex because 'relatively go up' or 'relatively go down' are very loose relationships and many factors impact decision making also (i.e. taxes & employment rates). Then the impact of the policy decisions of other countries have to be considered also as they impact what happens to a countries economy also.
In theory, macroeconomics can be easy because for each change in a relevant figure it can be assumed that if all other factors are constant, this is what would happen. In reality, all of the factors are constantly shifting and enacting macroeconomic policy is very difficult to manage.
MicroeconomicsMicroeconomics refers to more individual or company specific studies in economics. How businesses establish prices, how taxes will impact individual decision making, the concept of supply and demand. So Microeconomics looks at all the small economic decisions and interactions that all add up to the big picture concepts that Macroeconomics looks at.
The study and application of macroeconomics is most commonly employed by businesses, in establishing how they price their products through understanding the needs of consumers. Central to this is the concept of supply and demand and how both factors influence price setting.
Supply: If there is an overabundance of supply for a specific product, the price will naturally be driven down (assuming demand for that product stays constant). People don't want the product any more than they did before, but since there's so much of that product out there people are only willing to pay a limited amount. Alternatively if supply drops, but the demand stays the same, people are willing to pay a more for that same product.
Demand: If people want a product more than they previously did, say it's become the 'must have' item of the year, the price for that product will go up if the supply of that product stays the same. People will pay more to obtain the product to make sure they get it. If demand goes down, say something goes out of fashion, there can still be the same amount of it on the market for sale but people don't want it anymore so the price goes down.
These relationships are the key focus of microeconomics and how various factors (i.e. taxes) impact the supply and demand model for products in general. Companies also need to be aware of these concepts in order to set an effective price for their products, to ensure they can maximize their profits.