Microeconomics vs. Macroeconomics

When looking at the difference between supply and demand and Aggregate supply and aggregate demand, regular supply and demand is what households look at, since they are only a small piece of the pie in the overall big picture. Aggregate supply and demand is something that economists look at. A quick explanation could be the total amount of a product that is made, compared to the total of a product is consumed, and how these factors determine the cost. When things sell for high prices, more of it is produced, and when prices are lower, there is not as much money to be made so less is produced. All of this might seem confusing without a proper explanation, so some examples will be used. Since many people enjoy coffee, it can be used as a good product to use in order to explain the idea of aggregate supply and demand.

After hurricane Katrina, the price of fish rose because the area’s supply of fish was damaged. So this is an example of the Microeconomic definition of supply and demand. On a graph the supply curve shifts to the left and demand stays the same, so equilibrium prices rise.

When microchips are invented, the price of computers rise again. This is a microeconopmics concern. When demand increases then so does the price. On a graph, the chart the demand curve would move to the right, and the supply curve moves to the left. The price increases because microchips are new technology, so there are not many on the market, while everybody wants them.

When the government raises tariffs on imported cheese, the price of domestic cheese will raise at the macroeconomic level because the government controlls macroeconomics. If polyester suits have become trendy again. The prices will go up because of the demand increase on the microeconomic level.

The government raising taxes is a Macroeconomic concern. The dollar does not go as far, so this would be a money supply decrease that makes the demand for paper money higher because there is less of it to go around.

As inflation increases, the dollar is worth less. This is another example of Macroeconomics – this is why taxes go up, so we can pay back the interest on the money that our government borrows from us. Make sense? Hardly, but it is like co-signing for a loan and the person getting the loan does not make the payments, so now it is on you. Economists would see this on a chart as demand and supply increasing.

As you can see there are some situations where microeconomic situations will have an effect on macroeconomic situations, just as it works the other way around. The easiest way to remember this may have been mentnioned earlier and that is by simply remembering that micro is small, like your home budget, or a smaller section of an entire industry. Then Macro is big, like governments and entire industries.

Hope you have learned something useful!