Types and Branches of Economics

Types of Economics

• There are two types of economics: positive and normative
• Positive economics focuses on "what is" or the current state of the economy, describing facts of life as they are
• Normative economics focuses on "what should be" and suggests how economic problems should be solved, and involves value judgments
• A positive economic statement is that India is an overpopulated country with consistently rising prices
• A normative economic statement is that India should not be an overpopulated country, and prices should not rise
• Positive economics is neutral, avoids economic value judgment, and describes facts, such as the manufacturing and sale of cigarettes being harmful, but does not provide policy suggestions
• Normative economics is suggestive and provides suggestions on what actions should be taken, like quitting smoking
• Positive economics studies facts, while normative economics provides suggestions and is suggestive

Branches of Economics

• Microeconomics studies the behavior of individual units
• Macroeconomics studies the behavior of aggregates
• Microeconomics examines individual's income, output, and commodity prices using demand and supply as its tools
• Macroeconomics examines nation's income, output, and consumption using aggregate demand and aggregate supply as its tools

Origin of the Terms

• "Micro" comes from the Greek word "Micros," which means small
• "Macro" comes from the Greek word "Macros," which means large

Key Differences Between Micro and Macroeconomics

• Microeconomics studies individual economic units, while macroeconomics studies the economy as a whole or aggregates
• The main tools of microeconomics are demand and supply, while the main tools of macroeconomics are aggregate demand and aggregate supply
• Microeconomics focuses on individual income and output, while macroeconomics focuses on national income and output
• Microeconomics is also known as price theory, while macroeconomics is also known as income and employment theory
• Microeconomics involves a limited degree of aggregation, focusing on individual units
• Macroeconomics involves a higher degree of aggregation, combining many factors to study the economy

Assumptions

• When studying microeconomics, macro factors are assumed to be constant
• When studying macroeconomics, micro factors are assumed to be constant

Objectives

• Microeconomics mainly studies about price
• Macroeconomics mainly studies about income and employment

Central Problems of an Economy

• Central economic problems arise due to limited resources and unlimited wants
• These problems force economies to decide what to produce, how to produce, and for whom to produce

Allocation of Resources

• Allocation of resources involves assigning limited resources to fulfill the maximum wants of society
• The three central problems are related to this allocation

What to Produce?

• Involves selecting which goods and services to produce and in what quantity
• Limited resources mean producing more of one good often means producing less of another
• Every economy has limited resources and thus cannot produce all the goods

How to Produce?

• It is about selecting the technique of production
• Techniques can be labor intensive (LIT), requiring more labor, or capital intensive (CIT), requiring more machines
• Labor intensive technique requires more labor and less money
• Capital intensive technique require more capital and less labor.
• The decision involves determining the appropriate mix of labor and capital

For Whom to Produce?

• Addresses the distribution of produced goods and services among individuals within the economy
• It involves deciding who will receive the goods and services
• Production can be categorized based on consumers like those who are poor, rich, or middle class

Opportunity Cost

• Occurs because one must lose something to get something
• Opportunity cost is the cost of the next best alternative forgone
• If working in a bank at a salary of 40,000 and forgoing 35,000 as a journalist
• Then their opportunity cost is foregoing 35,000