Microeconomics and macroeconomics

MICROECONOMICS ANDMACROECONOMICS:
MEANING, SCOPE ANDIMPORTANCE
PREPARED BY:
BINDU, H A
M.Sc.(Agri.)
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MICROECONOMICS
MEANING:
The term microeconomics is derived from Greek
word mikros, meaning “small”.
Microeconomics deals with the analysis of small
individual units of the economy such as individual
firms, individual and small aggregates or groups of
individual units such as various industries and
markets.
K. E. Boulding, defines microeconomics as the
study of particular firms, particular households,
individual prices, wages, incomes, individual
industries, particular commodities.
In other words, it is the microscopic study of the
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SCOPE
 MICROECONOMICS AND ALLOCATION OF
RESOURCES:
Microeconomics theory takes the total
quantity of resources as given and seeks to
explain how they are allocated to the production of
various goods.
It determines what goods and how they shall
be produced. Microeconomics proceeds to analyze
how relative prices of goods and factors be
determined.
The theory of product pricing explains how
relative prices of products are determined.
The theory of distribution explains how rent,
wages, interest and profits are determined.
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 MICROECONOMICS AND ECONOMIC
EFFICIENCY:
It explains whether allocation of resources
determined is efficient.
Efficiency is defined in three ways:
1. Efficiency in production: Production of various
goods from the given resources.
2. Efficiency in consumption: Distribution of goods
and services among people to maximize the total
satisfaction of the society.
3. Allocative economic efficiency: It implies that the
pattern of production should correspond to the
desired pattern of consumption.
Microeconomic theory shows under what
conditions these efficiencies are achieved and shows
what factors cause departure from these efficiencies.
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MICROECONOMIC THEORY:
1.Product Pricing:
i. Theory of demand.
ii. Theory of production and cost.
2.Factor Pricing(Theory of Distribution):
i. Wages.
ii.Rent.
iii.Interest.
iv. Profit.
3.Theory of Economic Welfare.
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MICROECONOMICS AS A MICROSCOPIC
STUDY OF THE ECONOMY:
It studies the economy as a whole,
microscopically, it analyzes the behaviour of
individual economic units, their interrelationships
and equilibrium adjustment which determine the
allocation of the resources.
It explains how all economic units, money
and capital markets are inter-related and
interdependent on each other.
A. P. Lerner pointed that “actually
microeconomics is more intimately concerned with
the economy as a whole, and can even be said to
examine whole economy microscopically”.
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IMPORTANCE
• It is helpful in the formulation of economic
policies.
• It defines how a free market economy with many
producers and consumers decides to allocate
resources among goods and services.
• It describes the composition and allocation of
total production i.e., why more of things are
produced than of others.
• It explains how goods and services are
distributed among people through price or
market mechanism.
• It suggests policies to eradicate inefficiency in
economic system to maximize the welfare of the
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 It states that economic efficiency is achieved
when perfect competition prevails in product and
factor markets.
 It defines externalities i.e., reveals when does
externalities exist, how free working of the price
mechanism fails to achieve economic efficiency.
 It is applied to various branches like Public
Finance where it indicates the distribution of
incidence and burden of a commodity, effect of
imposition of tax etc.
 Microeconomic analysis applied to show gains
from international trade.
 It also explains other aspects like determination
of foreign exchange rate, disequilibrium in BoP
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MACROECONOMICS
MEANING:
Macroeconomics is derived from Greek word
‘makros’ meaning large.
It studies the behaviour of large aggregates
such as total employment, national product or
income, general price level of the economy.
K.E.Boulding defines it as that part of subject
which deals with large aggregates and averages of
the system rather than with particular items and
attempts to define these aggregates in a useful
manner and to examine their relationships.
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SCOPE
MACROECONOMICS AS A STUDY OF DETERMINATION
OF INCOME AND EMPLOYMENT
It explains determinants of income and
employment and causes for their fluctuations.
It also details about the growth of national
income over a long period of time.
It examines level, fluctuations(cycles) and
trend(growth) in overall economic
activity(national income, output and
employment).
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MACROECONOMICS AND GENERAL PRICE
LEVEL:
 It is concerned with determining general price
level.
 It explains the causes of inflation.
 Keynes also detailed the factors responsible for
deficiency and of excessive aggregate demand.
MACROECONOMICS AND THEORY OF
ECONOMIC GROWTH:
 It explains the causes of under-development and
poverty in developing countries.
 It also suggest strategies for initiating and
accelerating economic growth and development.
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MACROECONOMICS AND RELATIVE INCOME
SHARES:
It determines the relative shares of various classes in
the national income especially workers and
capitalists.
It shows how relative shares of wages and profits
depend on ratio of investment to national income.
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MACROECONOMIC THEORY:
1.Theory of Income and Employment.
a.Theory of Consumption.
b.Theory of Investment.
2.Theory of General Price Level and
Inflation.
3.Theory of Economic Growth.
4.Macro-theory of Distribution.
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IMPORTANCE
MACROECONOMIC ISSUES:
 It is concerned with macroeconomic problems
such as unemployment, inflation, instability of
foreign exchange rate, depreciation of currency
etc.
 It explains causes for these problems and helps
to formulate policies to tackle them.
UNDERSTANDING BUSINESS CYCLES:
 It helps to adopt proper fiscal and monetary
policies to check business cycles.
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FORMULATING GOVERNMENT’S POLICIES:
 It helps to achieve foreign exchange rate stability
by providing information regarding fluctuation in
market economies.
INDIVIDUAL DECISION MAKING:
 Understanding of the working of economy helps
individual to take better decisions.
 It helps to assess the impact of inflation on real
incomes of an individual.
 It helps one to know the impact of Government’s
policies.
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