Recognize the Economy Section
Most people understand how physics is classified as science, however, there may be some confusion when putting economics in the same category. In fact, economics is social science, because it shares the same qualitative and quantitative elements with all social sciences.
The economy focuses on the manufacture, distribution and consumption of goods and services, and how people, organizations, governments and countries choose to allocate resources to obtain these goods and services.
As with the study of all science, building different parts makes it easy to understand. Economics can be divided into two parts: microeconomics and macroeconomics. Here we study these parts; differences and how they influence each other, and their impact on business.
Also read: Getting to know the various economic systems for business continuity
What’s the Difference between Micro and Macro Economics?
Microeconomics
Microeconomics can be defined as the study of the decision-making behavior of individuals, companies, and households with respect to the allocation of their resources.
Microeconomics seeks to find out what factors contribute to people’s decisions, and what effect these choices have on the public market as far as prices, demand, and supply of goods and services are concerned. This is a ‘bottom-up’ approach with a focus on the basic elements that make up the three economic sectors (agriculture, manufacturing and services / tertiary), such as land, entrepreneurship, and capital.
It aims to understand wage patterns, employment, and income, as well as consumer behavior, spending trends, price-wage behavior, company policies, and how regulations affect companies.
Microeconomics tries to determine decisions and allocation of resources at the individual level, and explains what happens when certain conditions change. Read more You can read about microeconomics here.
To summarize, microeconomics determines to understand the following:
- How people and households spend their budget.
- What combination of products and services best suits their needs and desires, in the context of the available budget.
- How do individuals decide whether to work or not, and whether they choose to work, whether it will be full time or part time.
- How do people decide to save for the future, how much they choose to save, or whether they decide to owe money.
- How a business decides to produce and sell certain products, how it will produce it, how much of each will be sold, and for how many consumers.
- What causes them to decide how many workers will be employed.
- How the company will finance its business.
- When will the business decide to expand, downsize, or even close their business.
For example, microeconomics can use information from a company’s financial statements to determine how an organization can maximize its production capacity and output, to reduce prices and become more competitive.
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Macro economics
Macroeconomics is a holistic study of the structure, performance, behavior and process of economic decision making, at the national level. Basically, macroeconomics is a ‘top-down’ approach. He seeks to understand changes in the country’s Gross Domestic Product (GPD), inflation and inflation expectations, expenditure, revenues and loans at the government level (fiscal policy), unemployment, and monetary policy.
This is done to interpret and know the overall economic situation, so that policies can be formulated at a higher level, and macro research can be carried out for academic purposes. Read more about macroeconomics here.
Macroeconomics analyzes the entire industry and economy, rather than a single company or individual and seeks to answer questions such as, “What should the inflation rate be?” And, “What stimulates economic growth?”.
To summarize, macroeconomics seeks to answer the following:
- Which factor determines how many goods and services a country can produce
- What determines the number of jobs available in an economy
- What determines a country’s standard of living
- What factors cause the economy to accelerate or slow down
- What causes organizations to hire or fire more workers on a national scale
- What causes the economy to grow in the long run
- What are the health conditions of the country’s economy, based on improving living standards, low unemployment, and low inflation
Main Differences in Micro and Macro Economics
Micro and macro economics are exploring the same elements, but from different points of view. The main differences between them are:
- Macroeconomics seeks to find general perspectives, at the national level, while microeconomics focuses on individual perspectives, at the consumer level.
- Although supply and demand apply to both fields of economics, microeconomics is based on buyer and seller trends, where macroeconomics focuses on various economic cycles, such as short and long term debt cycles, and business cycles.
The Linkage of Micro and Macro Economics
It is clear that macroeconomics does not stand alone, but is intertwined with microeconomics, and works together to be efficient.
Choices based on micro-economic factors, whether from individuals or businesses, can have an impact on the macro economy in the long run. Likewise, national policies involving microeconomics can influence how households and companies interact with their economies.
For example, if the government raises taxes on certain products (macroeconomics), individual shop owners must raise prices, which will have an impact on consumers and their decisions on or to products at that price (microeconomics).
Micro and Macro Economics Affect each other
If national policy is passed, such as when the country’s central bank cuts interest rates (macro impact) by 100 basis points (100 bps = 1%), this will reduce the cost of commercial bank loans. This, in turn, helped reduce their deposit interest rates, which provided room for lowering lending rates, and for individuals and businesses.
This leads to increased lending and creates a greater investment climate, which helps businesses invest in new assets, projects and expansion plans (micro impact).
Micro effect on macro
Micro-economic conditions are one of the many factors that determine macroeconomic policy. To continue the example, the central bank looks at business, individual and household lending and investment trends, now interest rates have been lowered, to determine whether they should make additional deductions or not. If the prospect is weak, keep the rate as it is, or increase if the prospect is increasing.
How Does the Micro and Macro Economy Affect Business?
- Law of supply and demand
Businesses use microeconomic principles to better understand their consumer behavior patterns, in order to be successful and make a profit.
- Decision-making
Large-scale external factors that cannot be controlled, such as competitors, changes in interest rates, changes in cultural preferences, weather phenomena, and changes in government regulations, all play a role in influencing and influencing company decisions, performance and business strategies.
Other macroeconomic factors such as the legal, political and social climate, technological progress, and climate change all have an impact on individual, household and organizational decisions about resources.
- Start-up
When starting a business, it is important to do extensive research into the industry that interests you. Know where customer demand is, to better provide and develop products and services that best suit the needs of your target market. Investing in microeconomic research can help you achieve competitive advantage to attract customers.
Macroeconomics is a cycle; just as positive influences and changes promote progress, higher levels of demand can trigger price increases, which in turn, can affect the economy, because households adopt leaner budgets.
Then, when supply starts to exceed demand, prices may fall again, which leads to further prosperity, until the next cycle of economic supply and demand.
Cost of goods and services
Regardless of what the business produces, the goal is usually to reduce costs in order to increase profits.