Micro and Macro Economics PDF

Introduction toMicro Economicsand Macro Economics Let's recall : likely the first person to have referred to the You have already studied in Class XI, study of individual firm and producer as the meaning and definitions of economics "Microecon...

Introduction toMicro Economicsand Macro Economics Let's recall : likely the first person to have referred to the You have already studied in Class XI, study of individual firm and producer as the meaning and definitions of economics "Microeconomics." Moreover, he referred given by different economists. to the study of the aggregate economy as "Macrocconomics. You should know :X Historical review of Micro Economics : Micro Economic analysis was developed first. It is atraditional approach. Origin of this approach can be traced back to the era of Classical Economists- Adam Smith, David Ricardo, J. S. Mill etc. Fig. 1.1 It was popularized by Neo-Classical Economist, Prof. Alfred Marshall in his Introduction : Micro economics and Macro economics are book, 'Principles of Economics', published the two main branches of modern economics. in 1890. Other economists 1like Prof. Pigou, The term 'micro is derived from the Greek word, J. R. Hicks, Prof. Samuelson, Mrs. Joan Robinson, etc. have also contributed to the 'Mikros which means small or a millionth part. The term 'macro' is derived from the Greek development of Micro Economics. word. Makros' which means large. These terms Historical Review of Macro Economics : were coined by Norwegian Economist Ragnar Macro Economics did exist in the past Frisch of Oslo University in 1933. before the evolution of Micro Economics. Main Branches of Economics In the l6th and 17th century, followers of Mercantilists (a group of English merchants) advocated policies to the Micro Economics Macro Economics government which were based on macro Do you know? approach. In the l8th century, Physiocrats Ragnar Anton Kittil Frisch (1895-1973), (French Thinkers) tried to analyse the a Norwegian econometrician concept of national inconme and wealth. and economist was a joint Even the Classical Economic theories winner with Jan Tinbergen of Prof. Adanm Smith, Prof. Ricardo and of the first Nobel Prize for Prof. J. S. Mill discussed the determination Economics in 1969. He was of national income and wealth. But their a pioneer of econometrics macro analysis was combined with micro the application of mathematical models and analysis. Thus, micro analysis ruled the world ofeconomics till the Great Depression statistical techniques to economic data and theories. He coined many economic terms. of 1930s. In an article on business cycles, Frisch was After the Great Depression, Lord John  (a) Theory of Product Pricing : The price of Maynard Keynes published his famous an individual commodity is determined by book the "General Theory of Employment, the market forces of demand and supply Interest and Money" in 1936. Keynes Micro economics is concerned with demand used macro economic approch to analyse analysis i.e. individual consumer behaviour. economic problems. The credit for the development of macro cconomic approach and supply analysis i.e. individual producer behaviour. goes to Lord Keynes. Besides Keynes, In Micro Malthus, Wicksell, Walras, Irving Fisher (b) Theory of Factor Pricing : are other economists who have contributed economics, land, labour, capital and to the development of macro economics. entrepreneur are the factors that contribute to the production process. Micro economics Meaning of Micro Economics : helps in determining the factor rewards for Micro means a small part of a thing. Micro land, labour, capital, and entrepreneur in economics thus deals with asmall part of the the form of rent, wages, interest, and profit national economy. It studies the economic respectively. actions and behaviour of individual units such as an individual consumer, individual producer (c) Theory of Economic Welfare : Theory of Welfare basically deals with efficiency in or a fim, the price of a particular commodity or a factor etc. the allocation of resources. Efficiency in the allocation of resources is attained when it Definitions of Micro Economics : results in maximization of satisfaction of You have aready studied some important the people. Economic efficiency involves definitions of micro economics, let us review Some mnore definitions : three efficiencies: 1) Maurice Dobb - "Micro economics is in Efficiency in production : Efficiency in fact a microscopic study of the economy. production means producing maximum 2) Prof A. P. Lerner "Micro economics possible amount of goods and services from the given amount of resources. consists of looking at the economy through a micrOScope, as it were, to see how the Efficiency in consumption : Efficiency millions of cells in the body of economy - the in consumption means distribution of individuals or households as consumers and produced goods and services among the individuals or firms as producers play their people for consumption in such a way as to part in the working of the whole economic maximize total satisfaction of the society. organism." The following chart gives an Overall economic efficiency : It means the idea of the scope of micro economics. production of those goods which are most Scope of MicroEconomics desired by the people. Micro economic theory shows under what Theory of Theory of Theory of conditions these efficiencies are achieved. Product Pricing Factor Pricing Economic Rent Welfare Thus, the focus of micro economics Demand Supply Wages is mainly confined to price theory and Analysis Analysis Interest resource allocation. It does not study the Profit aggregates relating to the whole economy Efficiency in Efficiency in OverallEconomic This approach does not study nationdl Production Consumption Efficiency economic problems such as unemploymen.  poverty, inequality of income ctc. Theory of an additional unit. Marginal analysis helps growth,theory of busincss cycles, monctary to study a variable through the changes. and fiscal policics etc. are beyond the limits Producers and consumers take economic of micro cconomics. decisions using this principle. Features of Micro Economics : 7) Analysis of Market Structure : Micro 1) Study of Individual Units : Micro economics analyses different market structures such as Perfect Competition, economics is the study of the behaviour of small individual economic units, like Monopoly, Monopolistic Competition, individual fim, individual price, individual Oligopoly etc. household etc. 8) Limited Scope : The scope of micro 2) Price Theory : Micro economics deals with economics is limited to only individual units. It doesn't deal with the nationwide determination of the prices of goods and services as well as factors of production. economic problems such as inflation, Hence, it is known as price theory. deflation, balance of payments, poverty, 3) Partial Equilibrium : Equilibrium is unemployment, population, economic the balance between two factors., Micro growth etc. economic analysis deals with partial Importance of Micro Economics : equilibrium,which analyses equilibrium 1) Price Determination : Micro economics position of an individual economic unit, explains how the prices of different i.e. individual consumer, individual firm, products and various factors of production individual industry etc. It isolates an are determined. individual unit from other forces and studies 2) Free Market Economy :Micro economics its equilibrium independently. helps in understanding the working of a free 4) Based on Certain Assumptions : Micro market economy. A free market economy economics begins with the fundamental is that economy where the economic assumption, "Other things remaining decisions regarding production of goods, constant" (Ceteris Paribus) such as perfect such as What to produce?, How much to competition, laissez-faire policy, pure produce?, How to produce? etc.' are taken capitalism, full employment etc. These at individual levels. There is no intervention assumptions make the nalysis simple. by the Government or any other agency. 5) Slicing Method : Micro economics uses slicing method. It splits or divides the whole 3) Foreign Trade : Micro economics helps economy into small individual units and in explaining various aspects of foreign then studies each unit separately in detail. trade like effects of tariff on a particular For example, study of individual income commodity, deternmination of currency out of national income, study of individual exchange rates of any two countries, gains demand out of aggregate demand etc. from international trade to a particular country etc. 6) Use of Marginalism Principle : The concept of Marginalism is the key tool 4) Economie Model Building Micro of micro economic analysis. The term economics helps in understanding various 'marginal' means change brought in totalby complex economic situations with the help  of cconomic models. It has made a valuable 2) Prof Carl Shapiro - "Macro economic contribution to cconomics by developing deals with the functioning of the economy various terms,concepts, terminologies, tools as a whole." of economic analysis etc. Economic models The following chart gives an idea abou are built using various economic variables. the scope of macro economics. 5) Business Decisions : Scope of Macro Economics Micro economic theories are helpful to businessmen for taking crucial business decisions. These Theory of Theory of Theory of Macro Income and General Economic Theory of decisions are related to the determination Employment Price Growth and Distribution of cost of production, determination of Level and Development Inflation prices of goods, maximization of output and profit, ete. Theory of Theory of 6) Useful to Consumption Investment Government : It is useful to Function Funcion government in framing economic policies Theory of such as taxation policy, public expenditure Business Cycles policy, price policy etc. These policies i) Theory of Income and Employment help the government to attain its goals of efficient allocation of resources and Macro economic analysis explains which factors determine the level of national promoting economic welfare of the society. income and employment and what causes 7) Basis of Welfare Economics : Micro fluctuations in the level of income, output and economics explains how best results can employment. To understand, how the level of be obtained through optimum utilization employment is determined, we have to study of resources and its best allocation. It also the consumption function and investment studies how taxes affect social welfare. function. Theory of Business Cycles is also a Meaning of Macro Economics : part and parcel of the Theory of Income and Macro economics is the branch of Employment. economics which analyses the entire economy. ii) Theory of General Price Level and It deals with the total employment, nationl Inflation: Macro economic analysis shows income, national output, total investment, total how the general price level is determined and consumption, total savings, general price level further explains what causes fluctuations interest rates, inflation, trade cycles, business in it. The study of general price level is fluctuations etc. Thus, macro economics is the significant on account of the problems study of aggregates. created by inflation and deflation. Definitions of Macro Economics: ii) Theory of Growth and Development : Macro economics consists of the theory 1) J. L. Hansen - "Macro economics is that of economic growth and development. branch of economics which considers the explains the causes of underdevelopmen! relationship between large aggregates such and poverty. It als0 suggests strategies tor as the volume of employment,totalamount of savings, investment, national income accelerating growth and development. iv) Macro Theory of Distribution : Macro etc theory of distribution deals with the relative  shares of rent, wages, interest and profit in various factors that contribute to economic the total national income. growth and development. It is useful in developing growth models. These growth Features of Macro Economics : models are used for studying economic 1) Study of AggYegates : Macro economics development. For example, Mahalanobis deals with the study of economy as a whole. growth model emphasized on basic heavy It is concerned with the aggregate,concepts industries. such as national income, national output, national employment, general price level. General Price Level : Determination and business cycles etc. changes in general price level are studied in macroeconomics. General price level is the 2) Income Theory :Macro economics studies average of all prices of goods and services the conceptof national income, its different currently being produced in the economy. elements, methods of measurement and Policy-oriented : According to Keynes. SOCial accounting. Macro economics deals macro economics is a policy oriented with aggregate demand and aggregate science. It suggests suitable economic supply. It explains the causes of fluctuations in the national income that lead to business policies to promote economic growth, generate employment, control of inflation, cycles i.e. inflation and deflation. and depression etc. 3) General Equilibrium Anaiysis : Macro economics deals with the behaviour of Importance of Macroeconomics :X large aggregates and their functional 1) Functioning of an Economy : Macro cconomic analysis gives us an idea of the relationship. General Equilibrium deals functioning of an economic system. It helps with the behaviour of demand, supply and us to understand the behaviour patten prices in the whole economy. of aggregative variables in a large and 4) Interdependence : Macro analysis takes complex economic system. into account interdependence between 2) Economic Fluctuations : Macro economics aggregate economic variables, such as helps to analyse the causes of fluctuations income, output, employment, investments, in income, output and employment and price level etc. For example, changes in makes an attempt to control them or reduce the level of investment will finally result their severity. into changes in the levels of income, levels of output, employment and eventually the 3) National Income : Study of macro levelof economic growth. economics has brought forward the immense importance of the study of national income 5) Lumping Method : Lumping method is the and social accounts. Without a study study of the whole economy rather than its of national inconme, it is not possible to part. According to Prof. Boulding, "Forest formulate correct economic policies. is an aggregation of trees but it does not reveal the properties of an individual tree." 4) Econonmic Development :Advanced studies in macro economics help to understand the This reveals the difference between micro economics and macro economics. problems of developing countries such as poverty, inequalities of income and wealth. 6 Growth Models : Macro economics studies differences in the standards of living of the  people etc. It suggests important steps to Individual Aggregate achieve economic development. Tools Demand and Demand and 5) Performance of an Economy : Macro Individual Aggregate economics helps us to analyse the Supply Supply performance of an economy. National National Scope Demand, Income (NI) estimates are used to measure supply, prod income, the performance of an economy over time general uct pricing. by comparing the production of goods and services in one period with that of the other factor pricing, price level, period. production, employment, consumption, money et. 6) Study of Macro economic Variables : To economic understand the working of the economy, welfare, etc. study of macro economic variables are Importance Price Economic important. Main economic problems are related to the economic variables such determination, fluctuations, as behaviour of total income, output, Model Study of building, national employment and general price level in the Business income, economy. decisions ete. Economic 7) Level of Employment : Macro economics helps to analyse the general level of developmet etc. employment and output in an economy. Theory Price Theory Income and You should know: Employment Micro Economics and Macro Economics Theory at a glance Examples Individual National Basis for Income, income, Micro Macro comparison economics economics Individual National Meaning Micro Macro output etc. output etc. economics economics studies the studies the Try this : behaviour of behaviour of individua! 1)Visit the vegetable market in the aggreqates of nearest unit of an the economy area and try to get information about economy as a whole income and expenditure items of a particular seller