Introduction to Micro and
Macro Economics
Exercise | Q 1.1 | Page 7
Choose the correct option:
The branch of economics that deals with the allocation of resources.
a) Micro economics
b) Macro economics
c) Econometrics
d) None of these
1. a, b and c
2. a and b
3. only a
4. None of these
Solution: only a
Exercise | Q 1.2 | Page 7
Choose the correct option:
Concepts studied under Micro economics.
a) National income
b) General price level
c) Factor pricing
d) Product pricing
1. b and c
2. b, c and d
3. a, b and c
4. c and d
Solution: c and d
Exercise | Q 1.3 | Page 7
Choose the correct option:
Method adopted in micro economic analysis.
a) Lumping method
b) Aggregative method
c) Slicing method
d) Inclusive method
1. a, c and d
2. a, b and d
3. only c
4. only a
Solution: only c
The method adopted in micro economic analysis is Slicing method. Microeconomics is
the study of behaviour of individual units in the economy. For this purpose, the entire
economy is sliced, i.e. divided into several smaller/individual units, and each unit is then
analyzed in detail.
Exercise | Q 1.4 | Page 7
Choose the correct option:
Concepts studied under Macro economics.
a) Whole economy
b) Economic development
c) Aggregate supply
d) Product pricing
1. a, b and c
2. b, c and d
3. only d
4. a, b, c and d
Solution: a, b and c
Exercise | Q 2.1 | Page 7
Complete the correlation:
Micro economics : Slicing method : : Macro economics : ____________.
Solution: Micro economics : Slicing method : : Macro economics : Lumping Method
Exercise | Q 2.2 | Page 7
Complete the correlation:
Micro economics : Tree : : Macro economics : ______
Solution: Micro economics : Tree : : Macro economics : Forest
Exercise | Q 2.3 | Page 7
Complete the correlation:
Macro economic theory : Income and employment : : Micro economics : ________
Solution: Macro economic theory : Income and employment : : Micro economics : Price
theory
Exercise | Q 2.4 | Page 7
Complete the correlation:
Makros : Macro economics : : Mikros : ______
Solution: Makros : Macro economics : : Mikros : Micro economics
Exercise | Q 2.5 | Page 7
Complete the correlation:
General equilibrium : Macro economics :: ______ : Micro economics
Solution: General equilibrium : Macro economics :: Partial equilibrium : Micro
economics
Exercise | Q 3.1 | Page 7
Identify and explain the concept from the given illustration:
Gauri collected the information about the income of a particular firm.
Solution: Micro economics (study of individual units)
Explanation:
Micro economics is the study of the behaviour of small individual economic units, like
individual firm, individual price, individual household etc.
Exercise | Q 3.2 | Page 7
Identify and explain the concept from the given illustration:
Ramesh decided to take all decisions related to production, such as what and how to
produce?
Solution: Concept: Free market Economic
A free market economy where the economic decisions regarding the production of
goods, such as 'What to produce? How much to produce? How to produce? ect.,' are
taken at individual levels. There is no intervention by the Government or any other
agency.
Exercise | Q 3.3 | Page 7
Identify and explain the concept from the given illustration:
Shabana paid wages to workers in her factory and interest in her bank loan.
Solution: Concept: Theory of factor pricing
In micro economics land, labour, capital, entrepreneur are the factors that contribute to
the production process, micro economics helps in determining the factors rewards for
land, labour, capital and entrepreneur in the form of rent, wages, interest, and profit
respectively.
Exercise | Q 4.1 | Page 7
Answer in detail:
Explain the features of Micro Economics.
Solution: The following are the features of microeconomics.
i. Individual units - Microeconomics is a study that basically focuses on the behaviour
of individual units such as individual consumers and producer.
ii. Price theory - Microeconomics is also called the price theory, as it helps in
determining the prices of both the commodities and factors of production in their
respective markets.
iii. Slicing method - Microeconomic analysis adopts the slicing method. Under this
method, the entire economy is divided into smaller units and then each unit is analyzed
individually in detail.
iv. Partial equilibrium - Microeconomics uses a partial equilibrium approach. The
equilibrium points are identified assuming “other things remain constant” (ceteris
paribus). It ignores the interdependence of economic variables.
v. Microscopic approach - Just as a microscope enables us to see a larger view of
smaller things, microeconomics shows a magnified view of an individual unit. It analyses
small units in detail. It examines how these individual units perform economic activities
and reach equilibrium.
vi. Marginalism principle - Marginal means change in the total due to an additional
unit. The additional unit is known as the marginal unit. Microeconomics is based on the
principle of marginalism as important economic decisions are based on the marginal
unit.
vii. Analysis of market - Microeconomic studies deals in the study of different market
structure namely, perfect competition, monopoly, monopolistic competition, oligopoly. It
analyses how prices and output are determined in the market.
viii. Based on assumptions - Microeconomic analysis is based on certain assumptions
such as laissez-faire, full employment, perfect competition, ceteris paribus, etc. Such
assumptions although make the analysis simple, but may not exists in reality.
Exercise | Q 4.2 | Page 7
Answer the following:
Explain the importance of Macro economics.
Solution: The importance of Macro economics is explained follows:
1. Functioning of an Economy: Macro economic analysis gives us an idea of the
functioning of an economic system. It helps us to understand the behaviour pattern of
aggregative variables in a large and complex economic system.
2. 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.
3. 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.
4. Economic Development: Advanced studies in macro economics help to understand
the problems of developing countries such as poverty, inequalities of income and
wealth, differences in the standards of living of the people etc. It suggests important
steps to achieve economic development.
5. Performance of an Economy: Macro economics helps us to analyse the performance
of an economy. National Income (NI) estimates are used to measure the performance of
an economy over time by comparing the production of goods and services in one period
with that of the other period.
6. Study of Macro economic Variables: To understand the working of the economy, a
study of macro economic variables is important. Main economic problems are related to
the economic variables such as behaviour of total income, output, employment, and
general price level in the economy.
7. Level of Employment: Macro economics helps to analyse the general level of
employment and output in an economy.
Exercise | Q 4.3 | Page 7
Answer the following:
Explain the scope of Macro economics.
Solution: The scope of Macro economics is explained follows:
1. 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.
2. 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.
3. 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.
4. Macro Theory of Distribution - Macro theory of distribution deals with the relative
shares of rent, wages, interest, and profit in the total national income.
Exercise | Q 5.1 | Page 7
State with reason whether you agree or disagree with the following statement:
The scope of micro economics is unlimited.
1. Agree
2. Disagree
Solution:
I disagree with the above statement.
Explanation:
The scope of micro economics is limited.
The scope of micro economics is limited to only individual units. It doesn't deal with
nationwide economic problems such as inflation, deflation, the balance of payments,
poverty, unemployment, population, etc.
micro economics 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 economic problems such as unemployment, poverty, inequality of income, etc.
Theory of growth, the theory of business cycles, monetary and fiscal policies etc. are
beyond the limits of micro economics.
Exercise | Q 5.2 | Page 7
State with reason whether you agree or disagree with the following statement:
Macro economics deals with the study of individual behaviour.
1. Agree
2. Disagree
Solution:
I Disagree with the above statement.
Explanation:
Macro economics does not deals with the study of individual behaviour it deals with
the whole economy.
Macro economic analysis gives us an idea of the functioning of an economic system. It
helps us to understand the behaviour pattern of aggregative variables in a large and
complex economic system.
Exercise | Q 5.3 | Page 7
State with reason whether you agree or disagree with the following statement:
Macro economics is different from micro economics.
1. Agree
2. Disagree
Solution:
Yes, I agree to it. Reasons :
(i) Macroeconomics is the study of entire economy whereas on the other hand,
microeconomics is a study of the particular segment of an economy.
(ii) Macroeconomics studies aggregate demand, aggregate supply, national income,
general price level, etc. On the other hand, micro economics studies individual demand,
individual supply, individual income, price determination of particular product, etc.
(iii) Macroeconomics follows general equilibrium analysis. On the other hand,
microeconomics follows partial equilibrium analysis.
(iv) Macroeconomics uses lumping method. On the other hand, microeconomics uses
slicing method. Therefore, macroeconomics is different from microeconomics.
Exercise | Q 5.4 | Page 7
State with reason whether you agree or disagree with the following statement:
Micro economics uses slicing method.
1. Agree
2. Disagree
Solution:
Yes, I agree with the statements.
Microeconomics: It is that part of economics that deals with the individual units of the
economy. It takes into account the demand and supply of individual units. It uses a
slicing method because it divides the economy into slices, parts or individual units for
the purpose of in-depth study.
Exercise | Q 5.5 | Page 7
Do you agree with the following statement? Give reason.
Micro Economics is known as income theory.
1. Agree
2. Disagree
Solution:
Disagree
No, microeconomics is not known as the income theory, rather, it is known as the price
theory, as it focuses on determining the prices of commodities and factors of production
in the market.
Exercise | Q 6.1 | Page 7
Write short note:
Importance of micro economics ?
Solution:
Importance of micro economics.
Micro economics is a branch of economics that is concerned with the analysis of the
behaviour of an individual economic unit or variable. Micro economics plays a vital role
in the study of modern economic theory. It is important in the following ways as
described below:
Price Determination: It explain how prices of individual commodities are determined
and how rewards of factors of production are determined and distributed.
Business Decision Making: Micro economic theory help businessman to determine
their price policy, a maximum level of output, and achievement of maximum productivity
from factors combination.
Business and Production planning: Micro economic policy helps in preparing and
planning of business policy, expansion of business, and making investment decisions to
achieve maximum output and productivity.
To understand the working of the economy:
It helps us in understanding the working of a free enterprise economy. It gives us an
idea about how major economic decisions are taken in a market economy.
Helpful in the efficient employment of resources:
It suggests economizing, that is how efficiently the scarce available resources can be
utilized in the production process in an economy.
Helps in International Trade:
Micro economics is used to explain gains from internal trade, external trade, foreign
exchange, balance of payment, disequilibrium and in the determination of exchange
rate.
Basis of welfare economics:
The entire structure of micro economics has been built on the basis of price theory
which is an important constituent of micro economics. It suggests the conditions of
efficiency and explains how it can be achieved. It helps in improving the standard of
living of population.
Helpful in understanding the consequences of taxation:
Imposition of tax leads to reallocation of resources from one place to another. Micro
economics explains how imposition of different types of direct and indirect taxes leads
to the attainment of social welfare.
Tool for evaluating economic policies:
It helps the states and central government to frame economic policies like price policy,
taxation policy etc. It also explains the condition of efficiency in production and
consumption.
Construction and use of models:
Micro economics construct and uses simple models in order to understand the actual
economic phenomenon. It uses abstract models to explain the economic phenomenon.
Exercise | Q 6.2 | Page 7
Answer in detail:
Explain the concept of Macro economics and its features.
Solution:
Meaning: -
The term Macro is derived from Greek word “Makros” which means large. It is the
branch of economics, which studies the behaviour of all economics units combined
together. Macroeconomics is a study of aggregates. It is the study of the economic
system as a whole. Therefore, it is also called as Aggregate Economics.
Definition: -
“Macroeconomics deals not with individual quantities as such, but with aggregates of
these quantities; not with individual incomes but with the national incomes; not with
individual prices but with the price level; not with individual outputs but with the national
output’.
Features of Macro-Economics:-
1. Study of aggregates:-
Macro-Economics deals with the study of nations economy as a whole. It is a study of
very large, economy, wide aggregates such as national output or income, total
employment, aggregate demand, aggregate supply, total investment, total consumption,
general price level etc.
2. Lumping method:-
Macro analysis deals with the behaviour of aggregates i.e. total values of economic
variables related to whole economy. It uses method of lumping to deal with macro
variables, such as aggregate demand, aggregate supply, national output etc.
3. A General equilibrium analysis:-
Macro-Economics analysis is based on General Equilibrium Analysis. This analysis
deals with entire economy in the context of equilibrium. It studies the behaviour of
number of economic variables at a time and takes into consideration their functional
relationship and interdependence in doing so.
This approach assumes "Everything depends on everything else."
Since this approach deals with whole economy, it has to explain how aggregate supply
and aggregate demand are brought into equality, and how equilibrium between these
forces determine, not only price level, but also level of income and employment. This
whole analysis involves the study of number of variables and their interactions.
4. Income analysis:-
Macro-Economics is also known as the theory of income and employment or simply
income analysis. Because, basic subject matter of Macro-Economic analysis is to
explain what determines the level of national income and employment and what causes
fluctuations in them. Further, it explains the growth of national income over a long
period of time.
5. Policy-oriented:-
Macro-Economics, according to Keynes is a policy-oriented science. Macro-Economics
analysis helps in formulating suitable economic policies to promote economic growth, to
generate employment, to control inflation, to pull the economy out of depression etc.
6. Dynamic science:-
Macro-Economics studies the changes in aggregate economic variables and analyses
dynamic nature of the economy. It enables us to study progress of an economy over a
period of time.
