MICRO-ECONOMICS
Defination
Microeconomics examines the behavior of individual
decision-making unitsbusiness firms and households. - Micro economics consist of looking at the economy through a microscope
Macroeconomics deals with the economy as a whole;
it examines the behavior of economic aggregates such as aggregate income, consumption, investment, and the overall level of prices.
Aggregate behavior refers to the behavior of all
households and firms together
Micro-Economics
Micro economics consist of looking at the economy
through a microscope
It is the study of particular firm, particular household,
individual price , wage , income, industry and particular commodity
Introduction
It studies the equilibrium of an individual consumer
from the point of view of maximizing his satisfaction
Also studies the market demand for the product of an
individual producer
Similarly, from production side, it studies the
equilibrium of a firm and of industry
Contd
It studies the process of determination of prices of
different goods and services and also the payment of the different factors of production
This means micro-economics studies the ways in
which rent, wages, interest and profits are determined
Contd
It also explains the allocation of resources to study the
optimum utilization of resources. It studies the way in which the best use of available factors of production is made and how the goods and services that are produced are utilized by consumers in the best . In short it studies the structure of production and distribution in an economy
Scope of Microeconomics
Micro Economic Analysis
Theory of Commodit y Pricing Theory Of Factor Pricing
Economics of Welfare
Theory Of Demand
Theory Of Supply
Rent
Wages
Interest
Profits
Importance of Microeconomics
Allocation of resources Distribution of National Income Consideration of welfare
International Trade
Terminologies and Tools
Limitations of Microeconomics
Microeconomics always thinks of individual factor of
production or Individual consumer or Producer
Eg: Saving , Wage rate Thus the conclusions should be accepted only after
putting them to Macroeconomics test
Contd
Microeconomic conclusions are always based on
certain assumptions
It studies the economy in part and not as a whole, but
the economy always function as a whole
Macroeconomics
Microeconomics V/s Macroeconomics
Microeconomics
The study of decision making undertaken by individuals
(or households) and by firms
Like looking though a microscope to focus on the
smaller parts of the economy
Decision of a worker to work overtime or not An individual firm advertising
Macroeconomics
The study of the behavior of the economy as a whole Deals with economy wide phenomena
The national unemployment rate
The rate of growth in the money supply The national governments budget deficit
Introduction
Macro economics is of a comparatively recent origin
Real development took place after 1935-1936 Since macro economics gives a complete picture of a
economy as a whole, this makes it more important and handy in the context of the economic policy This approach to economic problems is more useful in determining the policy regarding business cycles, inflation and deflation, public finances and international trade
Meaning
Deals with the economy as a whole
Macroeconomics focuses on the determinants of total
national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices.
Aggregate behavior The behavior of all households
and firms together
Macroeconomics Concerns
Inflation is an increase in the overall price level.
Aggregate output is the total quantity of goods and
services produced in an economy in a given period.
The unemployment rate is the percentage of the
labor force that is unemployed.
Government in the Macroeconomy
There are three kinds of policy
that the government has used to influence the macroeconomy:
Fiscal policy 2. Monetary policy 3. Growth or supply-side policies
1.
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Government in the Macroeconomy
Fiscal policy refers to government policies
concerning taxes and spending.
Monetary policy consists of tools used by
Reserve Bank of India to control the quantity of money in the economy.
Growth policies are government policies
that focus on stimulating aggregate supply instead of aggregate demand.
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In Micro economic analysis, the demand schedule is
prepared by taking into account the alternative levels of prices In Macro economic analysis, the demand schedule is prepared by taking into account the alternative levels of income
Households receive income from firms and the government, purchase goods and services from firms, and pay taxes to the government. They also purchase foreign-made goods and services (imports). Firms receive payments from households and the government for goods and services; they pay wages, dividends, interest, and rents to households and taxes to the government. The government receives taxes from firms and households, pays firms and households for goods and servicesincluding wages to government workersand pays interest and transfers to households. Finally, people in other countries purchase goods and services produced domestically (exports). Note: Although not shown in this diagram, firms and governments also purchase imports.
The Circular Flow of Payments
Scope
Limitations
Conclusions are always expressed in terms of aggregate aggregate individual experience, so individual experience are neglected
It is always necessary to add and find aggregates of
individual units. But this can be done when all the units are similar
6 Apples + 7 Apples = 13 Apples (Meaningful)
6 Apples + 7 Berries = 13 Fruits ( Some meaning) 6 Apples + 7 Buildings = (No Meaning)
Contd
All trends do not have a similar influence on all
economic fields
Increase in price level affects different groups differently Some are adversely affected, while others are benefited
Variables are important from the point of policy , but
their analysis and classification is more important
