Chapter 1 - Introduction To Micro And Macro Economics PDF

ECONOMICS CLASS XII  CHAPTER 1 INTRODUCTION TO MICRO AND MACRO ECONOMICS *Q.1. A) CHOOSE THE CORRECT OPTION(S): (1 mark each) 1) The branch of economics that deals with the allocation of resources a) Micro economics b) Macro ec...

ECONOMICS CLASS XII  CHAPTER 1 INTRODUCTION TO MICRO AND MACRO ECONOMICS *Q.1. A) CHOOSE THE CORRECT OPTION(S): (1 mark each) 1) The branch of economics that deals with the allocation of resources a) Micro economics b) Macro economics c) Econometrics d) None of these Options: 1) a, b, c 2) a and b 3) Only a 4) None of these 2) Concepts studied under Micro economics. a) National income b) General price level c) Factor pricing d) Product pricing Options: 1) b and c 2) b,c and d 3) a, b, c 4) c and d 3) Method adopted in micro economic analysis. a) Lumping method b) Aggregative method c) Slicing method d) Inclusive method Options: 1) a, c, d 2) a, b and d 3) Only c 4) Only a 4) Concepts studied under Macro economics. a) Whole economy b) Economic development c) Aggregate supply d) Product pricing Options: 1) a, b, c 2) b, c, d 3) Only d 4) a, b, c, d B) COMPLETE THE CORRELATION :( 1 mark each) 1. Micro economics : Slicing method :: Macro economics: Lumping method 2. Micro economics : Tree : : Macro economics :Forest 3. Macro economic theory : Income and employment :: Micro economics : Price theory (Mar.’22, Mar.’23) 4. Makros : Macro economics : : Mikros :Micro economics 5. General equilibrium : Macro economics ::Partial equilibrium: Micro economics *Q.2 A) IDENTIFY AND EXPLAIN THE CONCEPTS FROM THE GIVEN ILLUSTRATIONS: (2 marks each) 1. Gauri collected the information about the income of a particular firm. (Mar.’22) Ans: Micro economics - Micro economics uses slicing method wherein it divides the whole economy into small individual units and then studies each unit separately in detail. For example, study of individual income out of national income, study of individual demand out of aggregate demand etc. 2. Ramesh decided to take all decisions related to production, such as what and how to produce? Ans: Free market economy - A free market economy is that economy where the economic decisions regarding production of goods, such as „What to produce?, How much to produce?, How to produce? etc.‟ are taken at individual levels. There is no intervention by the Government or any other agency. 3. Shabana paid wages to workers in her factory and interest on her bank loan. Ans:Factor pricing - Micro economics helps in determining the factor rewards for land, labour, capital, and entrepreneur in the form of rent, wages, interest, and profit respectively. Q.2 B) DISTINGUISH BETWEEN :( 2 mark each) 1. Marco-Economics and Macro-Economics Basis of Microeconomics Macroeconomics Difference It is a branch of economics that It is a branch of economics studies economic variables at an that studies economic 1. Meaning individual level like a variables of an economy as household, a firm and consumer. whole. It uses Lumping Method It uses Slicing Method for for 2. Method analysing variable analysing variable It deals with how consumers or It deals with how different economic sectors producers make decisions (household, 2. Scope depending on the budget given to industrial, government and foreign) make their them and other variables. decisions. It is based on general It is based on partial equilibrium approach (i.e.,  equilibrium 3.Equilibriu approach (i.e., equilibrium in m one equilibrium in all markets market) simultaneously) Microeconomics is also called as Macroeconomics is also 5.Theory price theory called as Income and 2. Slicing method and Lumping method (Mar.’22) Basis of Lumping Difference Slicing Method Method 1. Process It splits up the entire economy It splits up the into small individual units. entire economy into big lumps (sectors). 2. Used in It is used in microeconomics It is used in for intensive study. macroeconomics for intensive study. 3. Variables It uses micro variables, for It uses macro used in the example, individual income variables, for method and individual output. example, aggregate output and national income. 3. Partial equilibrium and general equilibrium Basis of General Difference Partial Equilibrium Equilibrium General equilibrium is the method of studying Partial equilibrium refers to equilibrium in equilibrium in one market, different assuming that there is no markets 1. Definition change in other markets simultaneously. It is used in 2. Uses It is used in microeconomics. macroeconomics. 3. It assumes that other things It assumes that the Assumption remain constant. variables  are dependent on each other. It explains the inter relationship and interdependence between aggregate It isolates an individual unit economic 4. Process from other forces. variables. *Q.3) ANSWER THE FOLLOWING. (4 marks each) 1) Explain the features of Micro economics. Answer: Microeconomics studies the economic actions and behavior of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor etc. Features: i) Study of Individual Units: Micro economics deals with the analysis of single unit separately and studies the whole economy in the small individual units. Like individual commodity, individual price, wages , industries etc. ii) Price theory: Micro economics is said the price theory as the theory of product pricing and factor pricing falls under the domain of micro economics. Product pricing is based on the study of market forces of demand and supply. iii) Partial equilibrium: Micro – economics is strongly based on „ceteris paribus‟ i.e other things being constant and measures relation only between two variables of the economy. For e.g. Law of demand assumes relation between only price and demand and assumes other factors being constant. iv) Based on certain assumptions: Micro economics is based on certain unrealistic assumptions such as full employment, other factors remaining constant, laissez faire policy, pure capitalism, perfect competition. v) Slicing method: It divides whole economy in small units and studies then small parts and in depth. For e.g. Study of a mango tree in depth in the whole forest. vi) Limited Scope: The scope of micro economics is limited to only individual units. It doesn‟t deal with the nationwide economic problems such as inflation, deflation, balance of payments, poverty, unemployment, population, economic growth etc. 2) Explain the importance of Macro economics. Answer: Macroeconomics is the branch of economics which analyses the entire economy. It deals with the total employment, national income, total investment, total  consumption, inflation, trade cycles, business fluctuations etc. Thus, macro economics is the study of aggregates. Importance: i) Functioning of an Economy: Macro economic analysis gives us an idea of the functioning of an economic system. It helps us to understand the behavior pattern of aggregative variables in a large and complex economic system. ii) Economic Fluctuations: Macro economics helps to analyse the causes of fluctuations in income, output and employment and makes an attempt to control them or reduce their severity. iii) National Income: Study of macro economics has brought forward the immense importance of the study of national income and social accounts. Without a study of national income, it is not possible to formulate correct economic policies. iv) Level of Employment : Macro economics helps to analyse the general level of employment and output in an economy v) Economic Development: Advanced studies in macro economics help to understand the problems of developing countries such as poverty, inequalities of income and wealth etc. It suggests important steps to achieve economic development. 3) Explain the scope of macro economics. (Mar.’22) Answer: According to Prof Carl Shapiro - “Macro economics deals with the functioning of the economy as a whole.” It is that part of the economy that studies the relationship between large aggregates. Scope of macro economics: i) Theory of Income and Employment: Macro economic analysis explains which factors determine the level of national income and employment and what causes fluctuations in the level of income, output and employment. To understand, how the level of employment is determined, we have to study the consumption function and investment function. Theory of Business Cycles is also a part and parcel of the Theory of Income and Employment. ii) Theory of General Price Level and Inflation : Macro economic analysis shows how the general price level is determined and further explains what causes fluctuations in it. The study of general price level is significant on account of the problems created by inflation and deflation. iii) Theory of Growth and Development :Macro economics consists of the theory of economic growth and development. It explains the causes of underdevelopment and poverty. It also suggests strategies for accelerating growth and development iv) Macro Theory of Distribution: Macro theory of distribution deals with the relative shares of rent, wages, interest and profit in the total national income *Q.4 State with reason whether with you are agree or disagree with the statements (4 marks each) 1) Micro economics studies the behaviour of aggregate economic. Ans. No, I don‟t agree to this statement. i) The term „Micro‟ is derived from the Greek word “Mikros” which means small – a millionth part. In other words, micro means individualistic. ii) Micro economics is concerned with the microscopic study of the economy. In other words of Prof. McConell, “In micro economics we examine the tree, not the forest.” iii) Micro economics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources. iv) Individual unit implies splitting of economy into small parts. Micro economics studies only individual units like particular consumer, demand for particular commodity, supply of one commodity, individual firm, price of a commodity or factor, welfare of an individual etc. v) According to Prof. K.E. Boulding, “Micro economics is the study of individual unit” Thus it studies only part of the economy and not the whole. vi) According to Maurice Dobb, “Micro economics takes a microscopic view of the economy.” This approach is known as the slicing method as it splits the whole economy into small units. 2) Micro economics is known as Income theory. Ans: No, I do not agree with this statement. i) Micro economics is not known as income theory. Income theory is included in macro economics. ii) Micro economics is called as price theory. iii) This is because; price mechanism is the most important part of micro economics. All production and consumption decisions are guided by price mechanism. iv) Price mechanism is the process of price determination through the interaction between demand and price in a free economy. v) Thus, prices of goods and services are determined in the market with the help of demand and supply forces of market. Similarly, prices of all factors of production i.e. land; labour, capital and entrepreneur are also guided by the market forces of demand and supply. vi) Further this price mechanism proves to be helpful in finding solution to various problems faced by: i) Consumer: With the intention of getting maximum satisfaction, consumer takes decisions about what to buy, how much to buy, at what price to buy, from where to buy?  ii) Producer: Every producer tries to maximize profits through finding solutions to the problems what, where, when, how, and how much to produce? The problem of resources allocation also gets solved through price mechanism. Thus, the price theory is the most important part of micro economics and therefore, it is also called as price theory. 3) Microeconomic theories are based on certain assumptions. Ans. Yes, I agree with this statement, i) Micro Economics makes partial equilibrium analysis. Micro economics is based on the assumption „Ceteris paribus‟ (which means „other things being constant). ii) Microeconomics also assumes conditions of full employment, pure capitalism, perfect competition, etc. in an economy, iii) E.g. Law of demand is based on assumption that other things being constant, higher the price of commodities less the quantity demanded and vice-versa. iv) Thus, we can conclude that the Microeconomics theories are based on certain assumptions. 4) Macroeconomic is different from micro economics. (Mar.’23) Ans. Yes, I agree with this statement, i) Macroeconomics is quite different from microeconomics. ii) Macroeconomics is concerned with large sections of the economy or the economy as a whole. iii) It is that branch of economics which deals with the economics activities by all the economic spheres, varying economic situations and economic problems of the economy as a whole. iv) Microeconomics, on the other hand, studies only one individual consumer or one individual producer like the households, firms, consumers etc. v) Hence, Macroeconomics is different from microeconomics. 5) Macro-Economics is a partial equilibrium analysis. Ans. No, I don‟t agree with this statement, i) Macroeconomics is a general equilibrium analysis. ii) It studies all the economic variables simultaneously and also takes into account the functional relationship of these variables. iii) This approach assumes “everything depends on everything else”. iv) On the other hand, partial equilibrium is the method of study in microeconomics. 6) The scope of micro economics is unlimited. Ans. No, I don‟t agree with this statement, i) The scope of microeconomics is limited to individual units.  ii) It doesn‟t deal with nationwide economics problems such as inflation, deflation, Balance of payment, Poverty, Unemployment, Population etc. iii) Microeconomics is mainly confined to price theory and resource allocation. It does not study the aggregates relating to the whole economy. This approach does not study national problem such as Unemployment, Poverty, Inequality in income etc. iv) Theory of growth , the theory of business cycle , Monetary and fiscal policies etc are beyond the limits of Microeconomics. v) Hence microeconomics has limited scope. 7) Microeconomics uses slicing method. Ans. Yes, I do agree with this statement, i) Microeconomics uses slicing method for in-debt study of economics unit. ii) In slicing method the entire economy is cut into small individual parts iii) It divides the economy into smaller units such as individual household, individual etc for the purpose of in-depth study. iv) Hence microeconomics uses slicing method for study. 8) Macro economics deals with the study of individual behavior. Ans. No, I don‟t agree with this statement, i) Micro economics deals with the individual units of economics & make decisions as to how to efficiently allocate their scarce resources. ii) Macro economics study of overall economic phenomena of the economy as a whole rather than in individual parts. iii) A few areas that come under Macroeconomics are: National Income & National Output The general price level & interest rates Balance of trade & Balance of payments External value of money The overall level of savings & investment The level of employment & rate of economic growth. *Q.5 ANSWER IN DETAIL (8 marks each) 1. Explain the importance of Micro economics. (Any four points - Mar.’23) Answer:  Meaning - Micro means a small part of a thing. Micro economics thus deals with a small part of the national economy. It studies the economic actions and behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor etc. According to Maurice Dobb - “Micro economics is in fact a microscopic study of the economy.” Importance of microeconomics- i) Price determination: It explains how prices of goods and factors of production determined in the market with the help of market mechanism demand and supply forces. Thus it is also called as price theory. ii) Free market economy: In such an economy , economic decisions such as what to produce , how to produce , how much to produce , for whom to produce etc. decisions are taken up by the private individuals. These decisions are based on consumer‟s preference or demand for the product. iii) Foreign trade: Micro economics also explains gains from international trade , effects of different tariff rates , factors affecting exchange rate , etc. It helps in framing proper policies for the purpose of effective international trade. iv) Economic Model building: Micro economics builds simple model which helps us in understanding complex economic situations. Decisions taken by the individual agents are the basis for the working of the economy. By the study of micro economics many complex issues of the economy can be solved with simple situations. v) Business decisions: Micro economic theories are helpful to businessmen for taking crucial business decisions. These decisions are related to the determination of cost of production, determination of prices of goods, maximization of output and profit, etc. vi) Useful to government: It is useful in formulating and evaluating economic policies including pricing and distribution policies that promote economic welfare. It is useful in determining tax policy, public expenditure policy etc. vii) Basis of welfare economics: It explains how optimum use of resources can be made to increase the welfare of the society by providing maximum of the good quality products in minimum use of resources. This helps in eliminating unnecessary wastage of resources. 2. Explain the concept of Macroeconomics and its features. Answer: Meaning- Macroeconomics is the branch of economics which analyses the entire economy. It deals with the total employment, national income, national output, total investment, total consumption, total savings, general price level interest rates, inflation, trade cycles, business fluctuations etc. Thus, macroeconomics is the study of aggregates. According to Prof Carl Shapiro - “Macroeconomics deals with the functioning of the economy as a whole.” Features of macroeconomics- i) Study of Aggregates: Macroeconomics deals with the study of economy as a whole. It is concerned with the aggregate concepts such as national income, national output, national employment, general price level, business cycles etc. ii) Income Theory: Macroeconomics studies the concept of national income, its different elements, methods of measurement and social accounting. Macro economics deals with aggregate demand and aggregate supply.It also explains about the inflation and deflation. iii) Interdependence: Macro analysis takes into account interdependence between aggregate economic variables, such as income, output, employment, investments, price level etc. iv) Lumping Method: Lumping method is the study of the whole economy rather than its part. According to Prof. Boulding, “Forest is an aggregation of trees but it does not reveal the properties of an individual tree.” This reveals the difference between micro economics and macroeconomics. v) Growth Models: Macroeconomics studies various factors that contribute to economic growth and development. It is useful in developing growth models. These growth models are used for studying economic development. vi) General Price Level: Determination and changes in general price level are studied in macroeconomics. General price level is the average of all prices of goods and services currently being produced in the economy. vii) Policy-oriented: According to Keynes, macroeconomics is a policy oriented science. It suggests suitable economic policies to promote economic growth, generate employment etc.