Basically, a microcontoller (µC) contains not only processing unit but small amount of memory (ROM, RAM etc.), few IO ports for peripherals, timer etc. We can think of microcontoller as a mini computer. But a microprocessor (µP) contains only processing unit which is quite powerful in terms of computing. To make use of microprocessor (µP), one needs extra hardware chips such as memory (RAM), peripheral boards, system bus etc. It means that µP cannot be used stand alone.
In that sense, microcontoller can be called a SoC (System on Chip) that is built typically for embedded system use. One way to look at µC is a complete ‘Chip‘ which contains other necessary chips to perform few specialized tasks which are characteristics of a typical embedded system. While µP is a processing unit ‘Chip‘ which is quite powerful and complex that is typically used for general purpose computing. Due to limited processing characteristics, µC is typically cheaper than µP. Besides, µC is typically quite compact when compared with µP. Examples of µC are ARM Cortex-M series, Intel 8051 etc. Examples of µP are ARM Cortex-A series, Intel Pentium series etc.
We can find the use of µC in home appliances such as Washing Machine, Ovens etc. while we can find the use of µP in desktop computers, laptops etc. It’s not the question of which one is better. Instead, it’s question of what’s the need of a system. If someone is devising an embedded system where specific and customized tasks need to be done, picking µC is a typical choice. On the contrary, if someone is devising a general purpose computing device, picking µP is a typical choice.
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