Economics actually comprises two subjects. First, it's the technical specialism of studying how and why people make certain decisions. Second, it's the broad study of how governments improve growth, tackle inflation, maintain their finances and ensure unemployment does not climb too high. The distinction between microeconomics and macroeconomics is central to understanding economics.

"Micro or macro?" is usually the first question newly introduced economists ask each other, the distinction between the two approaches running to the heart of economics. They are usually regarded by hard-and-fast economists as completely separate fields of study, to the point that many spend their entire life specializing in one or the other, without any sense of missing out.

What's the Difference?

Deriving from mikros, ancient Greek for 'small', microeconomics is the term used for the study of how households and businesses make their decisions and interact with markets. For instance, a micro specialist might focus on how a particular type of arable farming has risen and fallen in recent years.

The term macroeconomics comes from the Greek makros -- 'large' -- and is the study of how economies as a whole function. A macroeconomist is more interested in questions about why a country's growth rate is so strong but inflation low (as with the United States throughout most of the 1990s), or what are the causes of rising inequality (as witnessed for example in both the UK and US over recent decades).

Roots of the Distinction

Why the split? A good question -- indeed, until the mid-20th century no such divide existed. An economist was just an economist. Those who focused on the larger scale called themselves monetary economists, while those who studied the small were called price theorists. In fact, economists tended to think far more on the small scale. Then along came John Maynard Keynes, who transformed perceptions of the subject. In essence, he created macroeconomics, with all its emphasis on the role of states, both at home (in terms of using public money and interest rates to try to keep the economy on track) and internationally (in terms of monitoring trade with other nations).

Microeconomics, on the other hand, has grown to become a massive area of study of its own accord. It is most particularly focused on the way in which supply and demand interact in various circumstances. It examines people's reaction to taxes and regulations, to changes in prices or tastes, but stops short of drawing conclusions about the effect this will have on an entire economy. That is the job of the macroeconomist. The two are interrelated, of course, but what makes them different subjects is that micro focuses on one market in isolation whereas macro looks at all markets collectively.

This necessarily means that macroeconomists often have to make very broad assumptions about the behavior of an economy, including the assumption that it will tend in the long run towards equilibrium between supply and demand -- an assumption that is very much under debate.

A difference of approach Reports about economics in the quality press usually focus on macroeconomics: a change in interest rates or inflation across an economy; the overall output or Gross Domestic Product of a country; news of a recession or a major economic boom; the finance minister's economic message in his latest budget; and so forth. Usually you can tell a macro story since it has a top-down approach.

However, stories that focus on personal finance -- about the effect taxes and other government measures are likely to have on people's day-to-day lives -- are more firmly grounded in micro. They look at matters from the bottom up.

For instance, Gordon Brown, when he was the British Chancellor of the Exchequer, was frequently berated for attempting to micro-manage the economy. What this meant was that he eschewed big changes in income tax and interest rates, preferring to rely instead on smaller measures such as tax credits focused very specifically on particular types of families or on encouraging businesses to invest.

While there are relatively few schools of macroeconomics, micro specialists are lucky enough to have numerous fields of study upon which to focus. In what is called applied economics one can find a great range of specialists: those who look at employment and changes in the job market over time; public finance experts whose job it is to examine a government's accounts; experts on tax in relation to commodities or types of income or business taxes; agricultural and tariff specialists; wage experts; and so on.

Microeconomics is also much more heavily based on statistics than macro, with its practitioners often creating complex computer models to demonstrate how supply and demand will react to a particular change: how, for instance, the cost for car manufacturers will increase if oil prices (and hence energy costs) suddenly leap. A macroeconomist is much more concerned with the effect a rise in the oil price will have on an economy's overall growth rate, and with diagnosing why oil prices have spiked in the first place and how they can be brought back under control.

Nevertheless, although the two subjects are often treated separately, they are underpinned by the same fundamental rules: the interplay of supply and demand, the importance of prices and of properly functioning markets, and the need to determine how people act when faced with scarcity and a whole gamut of incentives.