How microeconomics and macroeconomics affect your business
Franco Brutti
If you have a business, you probably know how the economy works, there are basic concepts such as supply and demand.
However, if you decide to delve a little deeper into other areas of economics, you may be able to make better decisions for the growth of your business.
I'm sure you've heard of microeconomics and macroeconomics, but you've never asked yourself how they differ from each other and how they can influence your business.
It's time to stop for a moment and ask yourself that question, but the best part is that today at thePower we bring you the answer:
What are microeconomics and macroeconomics?
Before we dive right into how these areas affect your business, perhaps we should define the terms precisely.
After all, you may have heard them, but you don't know the concepts. Now, if you already understand them, why not give them a review? Here we go:
Definition of microeconomics
This area of economics in general is developed with a focus on the different individual economic agents that can be seen within the economy. Let's look at some examples:
Consumers.
The family.
The industry.
Businesses.
Have you noticed anything in common? If you look closer, you’ll see you could be in any of them, but how is this possible? Simple, it depends on the approach taken when performing the study and analysis, but we will talk about that later.
Back to the subject, microeconomics determines how certain limited resources are allocated to a number of individuals in order to meet their needs.
It also relates to the best way to use resources to obtain the best return.
Microeconomics analyzes how individuals use their income, so let's look at some examples:
How much will they save for tomorrow?
What services and/or products do they need?
What investment plans do they have?
Definition of macroeconomics
On the other hand we have macroeconomics, which you may have already guessed, is the opposite, but generally speaking it deals with the entire economic phenomenon as a whole.
We talk about behaviors, performance of aggregate variables and all those aspects that influence the economy.
This includes the regional, national and international economy, in addition to covering areas such as:
Unemployment.
Poverty.
General price level.
Total consumption.
Total savings.
GDP.
Economic growth.
Globalization.
Monetary/fiscal control.
When we talk about macroeconomics we must refer to all those variables we have mentioned before since they influence the analysis.
What characteristics do they have?
Being two different but complementary areas we need to look at the characteristics of each to see how they can help each other during an analysis.
Characteristics of macroeconomics
Its economic study is carried out in a global and general way.
It explains relationships between different variables of the economy.
It can help prevent crises in companies through the study of variables.
It studies the behavior of markets as a whole.
Characteristics of microeconomics
It studies the behavior of economic agents.
It is based on the classical law of supply and demand.
Performs individual analysis of the behavior of companies and/or families.
Seeks to understand the behavior of markets of interest to the company.
Seeks and studies relationships between different economic agents.
Objectives of each of them
Are we going to sound repetitive? It’s clear that each of them has different objectives, but looking at them more closely helps us to see the contributions they can give us individually and, above all, when working both as a whole.
Objectives of macroeconomics
Stabilizing GDP or a company's economy.
Raising capital for investment.
Reducing gross expenditures.
Increasing purchasing power.
Reducing the financial deficit.
Objectives of microeconomics
Establishing the relationships between companies, consumers and organizations.
Identifying, understanding and analyzing the processes that take place in the market.
Analyzing the different variants that affect market demand and supply demand.
Describing anomalies in the market through analysis.
How important are they?
Each of them has a fundamental role in the economic analysis you are looking for to make the best decisions in your company. Let's see what they are, shall we?
Importance of macroeconomics
This area of economics is relevant because it can help you establish a good development of your company's growth, through the analysis of market variables.
In addition, its objectives will help the proper functioning of the internal economy of the business. On the other hand, not having a proper study and analysis of macroeconomics can lead to a financial problem.
Importance of microeconomics
Understanding how the individual markets of the different products and/or services offered by your company work will help you make better decisions to deal with these economic variables, which will also allow you to have a better economic performance in the markets compared to your competition.
Let's suppose that you are not performing a correct analysis of microeconomics.
You are facing the possibility of finding, sooner or later, failures within the economic growth of your company, besides it could cause a major inconvenience in financial decision making.
What are their similarities and differences of microeconomics and macroeconomics?
So far we have mentioned many differences, but these are not the most relevant, not to mention that they also have similarities.
Similarities between microeconomics and macroeconomics
Each of them will carry out studies of variables that you can find within the economy, but from their respective perspectives.
Both branches are used to conduct studies, analysis and make decisions to satisfy needs.
Each of these areas are essential to ensure the proper functioning of the economy and prevent potential problems.
Differences between microeconomics and macroeconomics
While macroeconomics focuses on a more general area of study of economic concepts, microeconomics takes a more detailed approach to each of the variables.
The objects of analysis are different, while in macroeconomics they can be a city, state or country, in microeconomics they can be companies.
The variables to perform the analyses are also different, since the macro uses GDP, while the other may use a company's production or consumer preference.
Macroeconomic variables that can influence your business
Not everything depends on you, macroeconomic aspects are external to your company, but they influence it directly, however, if you take them into consideration they can help you make better decisions to face problems, improve growth expectations and make internal improvements for your company.
1. GDP growth
It’s the most important variable of the macroeconomic framework, since the Gross Domestic Product (GDP) integrates most of the relevant information of an economy at a general level.
You should consider that GDP is the sum of all the monetary value that a country can have based on the production of its goods and services. Therefore, if you think that the country where your company is located has a good GDP growth and expectation for the coming years, it’s likely that you can take advantage of such growth as well.
2. Inflation
Another important and, for many, the 2nd most important aspect of the macroeconomic spectrum for a company is inflation.
Its impact can be detrimental to a company's growth as it directly influences the price to be charged for a product and/or service, but also the cost of sale to the consumer.
If inflation is low, but also stable, users have a more predictable behavior regarding the purchase of goods and services offered by your company, thus generating stability. In the opposite case, it can lead to large losses.
3. Interest rates
The payment for the financing a company receives is the last of these 3 aspects of macroeconomics that can directly influence your company.
Let's start with the assumption that all companies have a different financing rate, and therefore, their risk varies depending on their financial position. If interest rates move, so will financial costs.
Microeconomic variables that can influence your business
You may not have time to take an economics course or classes to delve deeper into these areas, although if you are interested, you can always do so with The Power MBA; but in any case, we are going to mention some of them.
1. Labor decisions
All companies have staff and workers, which is directly related to the salaries of each employee, however, this is not the only thing included. We have to talk about additional benefits such as vacations, insurance, career development, etc.
However, there is something you should keep in mind, one of the microeconomic principles states that as the salary increases, the number of staff should be reduced.
2 Productivity decisions
When we talk about productivity you have to take into account the time it has taken to produce a good or service for a given "dwell time", where the number of output in specific working time is considered.
The whole aspect of proactivity is related to the relationship function that exists between outputs and inputs.
Another of the principles of microeconomics establishes that companies will have better productivity thanks to economic efficiency, since the production of one good and/or service cannot occur without improving the production of another.
3. Types of goods and services
How willing do you think your consumers, i.e., your target audience, will be to pay for the goods and services based on the benefits and solutions you offer?
As the price of your product or service increases, so will the production model, which will end up decreasing the cost as you eliminate less profitable services and products.
One of the microeconomic principles states that, no matter what happens, the product and/or service that increases in price due to demand and generates greater profitability will have priority over others that do not generate the same income.
4. Supply and demand decisions
You may think that the decisions to supply a product and/or service are subject to your decisions for your company, but this is unrealistic, since the real tycoon is your target customer.
They are subject to the increase or decrease in demand by consumers, because if they are willing to pay more, your company will be forced to satisfy that need by increasing production.
One of the last microeconomic principles we will talk about today is perhaps one of the most important: the more the price of the product and/or service increases, the more companies will increase production of that product and/or service.
So, the question is: is your company ready to face the demand of your consumers?
Tell us your opinion and remember that macro and microeconomics can give you clues to get ahead of these questions.
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