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Economics Introduction - Unit 1

Microeconomics studies individual economic decision-making and the workings of small economic systems. Macroeconomics analyzes entire economic systems, focusing on aggregate output, income, prices, employment, and growth. While microeconomics examines particular markets and industries, macroeconomics considers economy-wide phenomena like inflation, business cycles, and monetary and fiscal policy. Microeconomics provides insight into individual choices, while macroeconomics helps understand overall economic performance and policy impact.

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62 views24 pages

Economics Introduction - Unit 1

Microeconomics studies individual economic decision-making and the workings of small economic systems. Macroeconomics analyzes entire economic systems, focusing on aggregate output, income, prices, employment, and growth. While microeconomics examines particular markets and industries, macroeconomics considers economy-wide phenomena like inflation, business cycles, and monetary and fiscal policy. Microeconomics provides insight into individual choices, while macroeconomics helps understand overall economic performance and policy impact.

Uploaded by

Shivani Mishra
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Choices, Choices, Choices, . . .

• An economy, or economic
system, is the way a nation
makes economic choices
about how the nation will
use its resources to produce
and distribute goods and
services.
• Its basic function is to study how people- individuals,
households, firms and nations – maximize their gains from
their limited resources and opportunities.
• Economics is the science concerned with the problem of
allocation of scarce resources among competing ends.

• Economics provide the tool and concepts which explain the


behaviour pattern of economic variables like demand, supply,
price and competition etc.
• Economics – the study of how individuals and societies make
decisions about ways to use scarce resources to fulfill wants
and needs.
• What does THAT mean?!!??!!
Society (we) must figure out

• WHAT to produce (make)


• HOW MUCH to produce
(quantity)
• HOW to Produce it
(manufacture)
• FOR WHOM to Produce (who
gets what)
• WHO gets to make these
decisions?
• Economics as a science
• Indicates scientific nature of economics

• Problems are solved by adopting a scientific approach which


involves, collecting and analyzing data and making related
laws and theories
• Economics as Social Science
• Studies the behavior pattern of human beings
• How individuals, households, organizations utilize their limited
resources to achieve maximum profit
• Macroeconomics(big)
• The big picture: growth,
employment, etc.
• Choices made by large groups
(like countries)

• Microeconomics(small)
• How do
individuals/households make
economic decisions
• Micro and Macro are the two branches of modern economic
theory.
• The terms were originated by Ragnar Firsch in 1933.
• The prefixes micro and macro are derived from Greek words
Mikros and Makros which mean small and large respectively
• Micro is individualistic and Macro mean aggregative.
• Micro Economics studies man’s economic behavior at the level of
individual such as buyer, a consumer, a producer and a seller.
• Micro Economic Variables such as factor inputs, output, supply
and technology are controllable by the manager of the firm
• The subject matter includes:
• Theory of Value: product pricing ( Theory of demand,
production , pricing)
• factor pricing ( Theory of distribution & Theory of rent , wages,
interest and profits)
• Theory of Economic Welfare.
• Pricing ( Theory of Demand, Theory of Production& Cost ,
Theory of Product Pricing or price determination under
different Market Structures)
• Distribution ( Deals with Factor Pricing – Rewards Individual
Factors of Production such as Land, Labour, Capital and
entrepreneur)
• Welfare (how efficient allocation of resources are determined)
• Explains price determination and allocation of resources
• Direct relevance in decision making
• Serves as a guide for business and production planning
• Basis for prediction
• Useful for determination of economic policies by Government.
• Most Micro theories are abstract
• Most micro theories are static- based on Ceteris paribus( other
things being equal)
• Micro economics unrealistically assumes Laissez Faire policy
• Studies only part not the whole of Economic System
• Macro economics is aggregate economics.
• Perceives the over all dimension of the economy
• Looks at total size, shape and functioning of the economy as a
whole, rather than working of articulation or dimension of
individual parts.
• Macro studies man’s behaviour in the economics society on
economy as a whole.

• To use Marshall’s metaphorical language, macro economics


views the forest as a whole , independently of the individual
trees composing it.
• Working of Economic System as a whole
• Examines aggregate Behavior of Macro Economics entities
like Firms, Households
• Knowledge is indispensable for policy makers ( use in
Monetary policy , Fiscal Policy , industrial policy etc.
• Helpful in international comparison
• Facilitates overall purpose of control and prediction
• Ignores individual behavior
• Not easy to get correct and complete measures of economic
aggregates.
• Macro Economic Predictions are not reliable when they are
based on incomplete information.
• Often macro level policies may not produce the same results at
Micro levels.
MICROECONOMICS MACROECONOMICS
• Meaning The branch of • The branch of economics that
economics that studies the studies the behavior of the
behavior of an individual whole economy, (both
consumer, firm, family is national and international) is
known as Microeconomics. known as Macroeconomics.

• Deals with Individual


economic variables • Aggregate economic variables
MICROECONOMICS MACROECONOMICS

• Business Application Applied to Environment and external


operational or internal issues
issues
• Scope Covers various issues like
demand, supply, product pricing,
factor pricing, production, Covers various issues like,
consumption, economic welfare, national income, general
etc. price level, distribution,
employment, money etc.
MICROECONOMICS MACROECONOMICS
• Importance Helpful in • Maintains stability in the general
determining the prices of a price level and resolves the major
product along with the prices problems of the economy like
of factors of production (land, inflation, deflation, reflation,
unemployment and poverty as a
labor, capital, entrepreneur
whole.
etc.) within the economy.

• •
MICROECONOMICS MACROECONOMICS
• Limitations It is based on • It has been analyzed that 'Fallacy
unrealistic assumptions, i.e. In of Composition' involves, which
microeconomics it is assumed sometimes doesn't proves true
that there is a full employment because it is possible that what is
true for aggregate may not be true
in the society which is not at
for individuals too.
all possible.

• •
• Microeconomics studies the particular market segment of the
economy, whereas Macroeconomics studies the whole economy,
that covers several market segments.

• Micro economics stresses on individual economic units. As against


this, the focus of macro economics is on aggregate economic
variables.

• While microeconomics is applied to operational or internal


issues, environmental and external issues are the concern of macro
economics.
• Microeconomics deals with an individual product, firm,
household, industry, wages, prices, etc., while Macroeconomics
deals with aggregates like national income, national output, price
level, etc.

• Microeconomics covers issues like how the price of a particular


commodity will affect its quantity demanded and quantity
supplied and vice versa while Macroeconomics covers major
issues of an economy like unemployment, monetary/ fiscal
policies, poverty, international trade, etc
• Microeconomics determine the price of a particular commodity
along with the prices of complementary and the substitute
goods, whereas the Macroeconomics is helpful in maintaining
the general price level.

• While analyzing any economy, micro economics takes a


bottom-up approach, whereas the macroeconomics takes a top-
down approach into consideration.
• As microeconomics focuses on the allocation of limited
resources among the individuals, the macro economics
examines that how the distribution of limited resources is to be
done among many people, so that it will make the best possible
use of the scarce resources.

• As micro economics studies about the individual units, at the


same time, macro economics studies about the aggregate
variables. In this way, we can say that they are interdependent.
• Dwivedi, D N(2015), Managerial Economics (8th ed),India:
vikas publishing house pvt. Ltd.
• Mithani, D M (2013), Managerial Economics: Theory &
Application(7th ed.), India: Himalaya Publishing House

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