Loading the player...
A:

Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast; so here is a brief summary of what each covers. Microeconomics is generally the study of individuals and business decisions, while  macroeconomics looks at higher up country and government decisions.

Microeconomics

Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize its production and capacity, so that it could lower prices and better compete in its industry. (Find out more about microeconomics in How does government policy impact microeconomics?

Microeconomics' rules flow from a set of compatible laws and theorems, rather than beginning with empirical study.

Macroeconomics

Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole, not just of specific companies, but entire industries and economies. It looks at economy-wide phenomena, such as Gross Domestic Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by the unemployment rate. (To keep reading on this subject, see Macroeconomic Analysis.)

John Maynard Keynes is often credited with founding macroeconomics, when he initiated the use of monetary aggregates to study broad phenomena. Some economists reject his theory and many of those who use it disagree on how to interpret it.

Micro and Macro

While these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public.

Microeconomics takes what is referred to as a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. In other words, microeconomics tries to understand human choices and resource allocation, while macroeconomics tries to answer such questions as "What should the rate of inflation be?" or "What stimulates economic growth?"

Regardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained.

What Should Individual Investors Look At?

Individual investors are probably better off focusing on microeconomics than macroeconomics. There may be some disagreement between fundamental (particularly value) investors and technical investors about the proper role of economic analysis, but it is more likely that microeconomics will affect an individual investment proposal.

Warren Buffett has famously stated that macroeconomic forecasts don't influence his investing decisions. When asked about how he and Charlie Munger, his business partner, choose investments, Buffett responded, "Charlie and I don't pay attention to macro forecasts. We've worked together for 50+ years, and I can't think of a time when they influenced a decision about stock or a company." Buffett has also referred to macroeconomic literature as "the funny papers."

John Templeton, another famously successful value investor, shared a similar sentiment. "I never ask if the market is going to go up or down, because I don't know. It doesn't matter. I search nation after nation for stocks, asking: 'where is the one that is lowest priced in relation to what I believe it's worth?'" said Templeton.

The Divide Between Microeconomics and Macroeconomics

Microeconomics concerns itself with the small details that make a difference when evaluating individual companies. This includes production costs and market prices for goods and services. A lot of microeconomic information can be gleaned from the financial statements.

Macroeconomics focuses on aggregates and econometric correlations. Investors of mutual funds or interest rate-sensitive securities should keep an eye toward monetary and fiscal policy. Outside of a few meaningful and measurable impacts, macroeconomics doesn't offer much for specific investments.

Moreover, economists generally agree on the principles of microeconomics. As the International Monetary Fund (IMF) website states, "There are no competing schools of thought in microeconomics." This is not true with macroeconomics. Macroeconomic forecasting has a very poor track record, and the accepted version of macroeconomics has changed several times since its inception.

If you are interested in learning more about economics, take a look at What is "marginalism" in microeconomics and why is it important? and What kinds of topics does microeconomics cover?

RELATED FAQS
  1. What is the difference between accounting and economics?

    Discover the difference between accounting and economics by comparing and contrasting the financial discipline of accounting ... Read Answer >>
  2. Why are price and quantity inversely related according to the law of demand?

    Discover why the cost of a good is inversely correlated to its quantity demanded according to the law of demand in microeconomic ... Read Answer >>
  3. How does economics study human action and behavior?

    Find out why economics can be considered a deductive social science, like sociology, and how human action and behavior informs ... Read Answer >>
  4. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
  5. What should I study in school to prepare for a career in corporate finance?

    Find out which classes to take in college to prepare for a career in corporate finance, including management, accounting ... Read Answer >>
  6. How did John Maynard Keynes influence business cycle theory?

    Read about the impact of John Maynard Keynes on business cycle theory and the development of macroeconomics to study aggregate ... Read Answer >>
Related Articles
  1. Managing Wealth

    Microeconomics vs. Macroeconomics: Which Is More Useful for Investment?

    Find out why investors are better off ignoring macroeconomic forecasts, and should instead focus on the lessons that microeconomics can teach them.
  2. Insights

    Microeconomics

    This tutorial teaches the basics of one of the most important economic topics. A must for all investors.
  3. Insights

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
  4. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Insights

    What is Microeconomics?

    Microeconomics deals with individual and small business economic decisions.
RELATED TERMS
  1. Microeconomics

    Microeconomics is the branch of economics that analyzes market ...
  2. Macroeconomic Factor

    A factor that is pertinent to a broad economy at the regional ...
  3. Economics

    Economics is a social science concerned with the production, ...
  4. Economy

    An economy is the large set of interrelated economic production ...
  5. Specialization

    Specialization is a method of production where a business or ...
  6. Microeconomic Pricing Model

    A microeconomic pricing model is a model of the way prices are ...
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center