12th Economics Maharashtra Board | Introduction to Microeconomics and Macroeconomics Chapter-1

12th Economics Maharashtra Board | Introduction to Micro and Macro Economics Chapter- 1

Introduction to Micro Economics

• The word Micro Economics is derived from the Greek word ‘mikros’ which means small or individual.
• So Micro economics deals with a small part of the national economy.
• According to M. Dobb – “Micro economics is in fact a microscopic study of the economy.”
• It studies the economic behavior of individual units of the economy, such as particular households, firms, industries, and markets.

Scope of Micro Economic

1. Theory of Product Pricing: 

• Microeconomics analysis helps to determine the price of a particular product like cotton cloth, rice, car, and thousands of other commodities
• Price of the product depends upon the forces of demand and supply. The demand and supply position analyses determine the product prices.

2. Theory of Factor Pricing:

• Microeconomics analysis helps to determine the price of factors of production such as Wages of labour, Rent for land, Interest for capital, and Profit for the entrepreneur.
• Theory of factor pricing explains how wages (price for the use of labour), rent (payment for use of land), interest(Price for use of capital), and profit (the reward for the entrepreneur are determined).

3. Theory of Economic Welfare:

Theory of Welfare basically deals with efficiency in the allocation of resources. Efficiency in the allocation of resources helps to maximize the satisfaction of people, Economics involves three efficiencies:

• Efficiency in Production: It means maximizing the level of output from a given amount of resources
• Efficiency in consumption: It means the distribution of produced goods & services among the people for consumption, in such a way as to maximize the total satisfaction of society
• Overall economic efficiency: It means the production of those goods which are most desired by the people.

Feature of Micro-economic

1. Study of individual units: – Micro-economic is the study of individual units like individual firms, individual prices, individual households, etc.
2. Price Theory: Micro economics analysis helps determine the prices of goods and services as well as factors of production. Hence, it is known as price theory.
3. Slicing method: – Micro economic analysis uses the slicing method to study economic units in-depth. Micro economics divides the economy into small parts, such as individual households, individual firms, etc. for the depth study.
4. Analysis of Market Structure: Micro economics study about different market structures like Perfect Competition, Monopoly, Monopolistic Competition, Oligopoly, etc.
5. Limited Scope: The scope of micro economics is limited because It focuses on individual economic units. Micro economics does not deal with inflation, poverty, unemployment, population, economic growth, etc.
6. Based on Certain Assumptions: Micro economics begins with the fundamental assumption, “Other things remaining constant” (Ceteris Paribus) such as perfect competition, laissez-faire policy, pure capitalism, full employment, etc. These assumptions make the analysis simple.

Importance of Micro Economic

• Price determination: – Micro economic analysis helps to determine the price of a particular product. The price of the products depends upon the forces of demand and supply. The demand and supply positions are analyses to determine the product prices.
• Useful to Government: Micro economics analysis is useful to the government in framing economic policies such as taxation policy, public expenditure policy, price policy, etc. These policies help the government to the efficient allocation of resources and promote the economic welfare of the society.
• Basis of Welfare Economics: Micro economics theory explains how the best results can be obtained through the optimum utilization of resources and their best allocation. It also studies how taxes affect social welfare.
• Free Market Economy: In a free market economy the decisions are taken at individual levels regarding the production of goods, such as ‘What to produce? How much to produce? How to produce? etc.’ There is no intervention by the Government or any other agency.
• Foreign Trade: Micro economics studies the effects of tariff (Tax) on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a particular country etc.

Introduction to Macro Economics

• The term macro-economic is derived from the Greek word ‘MAKROS’ which means large, or aggregate.
• So macro-economic study of aggregate economic behavior such as employment rate, total consumption, total investment, total output, national income, etc.
• Macroeconomics is the study of aggregate. It studies the economic system as a whole. Therefore, it is also called aggregate economics.

Scope of Macro economics

Theory of Income and Employment:

• Macro-economic is known as Income and Employment Theory because macroeconomics analysis determines the national incomes and employment level of a country and analyses the causes of fluctuation in the level of income, output, and employment.
• This theory also examines the inter-relation between income and employment and suggests policies to solve the problems related to macro economics variables

Theory of General price level and Inflation:

• Macro- Economic analysis explains how the general level of price is determined.
• The study of the general price level is important because of the problems created by inflation and deflation.

Theory of Growth and Development:

• Macro economics analysis the causes of underdevelopment and poverty in poor countries and suggests the best policies for growth and development.
• It also deals with the problems of full utilization of resources to increase production capacity. It explains how a higher rate of growth with stability, can be achieved in countries.

Macro Theory of Distribution:

• Macroeconomics analysis explains, how the National income is distributed among different factors of production, such as rent, wages, interest, and profits in the total national income.
• Theory of distribution focuses on understanding the determinants of income distribution at the aggregate or macroeconomic level.

Features of Macroeconomic

• Study of Aggregates: Macro-economic is the study of aggregates such as aggregate demand and supply, national income, inflation rate, unemployment rate, and total output.
• Income theory: Macro Economics is known as Income theory because It studies the level of national income and employment levels in the country. Macro economics deals with aggregate demand and aggregate supply.
• General Price Level: The general price level means the average price level of all goods and services produced in an economy. Macroeconomics analysis helps to determine the general price level.
• Lumping method: Macro-economic study deals with the lumping method. It studies the whole economy, like national income and the general price of products not the price of individual products.
• General Equilibrium Analysis: Macro economics deals with the behaviour of large aggregates and their functional relationship. General Equilibrium deals with the behaviour of demand, supply and prices in the whole economy.
• Interdependence: Macro-economic study Interdependence of aggregate economic variables, such as income, output, employment, investments, price level, etc. For example, For example, changes in the level of investment will affect the levels of income, levels of output, employment, and eventually the level of economic growth.
• Policy-oriented: Macro economics is a policy-oriented because It suggests suitable economic policies to promote economic growth, generate employment, control of inflation, and depression, etc.

Importance of Macroeconomics:

• Functioning of an Economy: It helps to understand the functioning of the economic system. It describes how the economy as a whole function and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.
• Economic Fluctuations: Macro economics analyzes fluctuations in business activities and aims to understand the causes of fluctuations in income, output, and employment. It also seeks to control or minimize the impact of these fluctuations.
• Economic Development: Advanced studies in macroeconomics help us understand the challenges faced by developing countries, such as poverty, income, and wealth inequalities, and differences in standards of living. It suggests important steps to achieve economic development.
• 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.
• Study of Macro economic Variables: The study of macro economic variables is important to understand the working of the economy. Main economic problems are related to economic variables such as the behaviour of total income, output, employment, and general price level in the economy.
• Level of Employment : Macro economics helps to analyse the general level of employment and output in an economy.

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