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

Micro- Economics:

• The word Micro-Economic used first time in 1933 by Ragnar Frisch. The word Micro Economics is derived from the Greek word ‘mikros’ which means small.
• ii. It studies the economic behavior of individual units of the economy, such as households, firms, industries, and markets.
• Prof A. P. Lerner – “Microeconomics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body of economy – the individuals or households as consumers and individuals or firms as producers play their part in the working of the whole economic organism.”

Scope of Micro Economic

Theory of Product Pricing:

1. The Theory of Product Pricing Explain or determined the relative price of a particular product like cotton cloth, rice, car, and thousands of other commodities
2. The price of the product/commodity depends upon the forces of demand and supply. The demand and supply position analyses to determine product prices.
3. The Study of Demand helps to the analysis of consumer’s behavior and the study of Supply helps to the analysis of conditions of production, cost, and behavior of firm & Industry
4. So, the theory of product pricing is subdivided into the theory of Demand and theory production and Cost.

Theory of Factor Pricing:

1. Microeconomics studies help to determine the pricing of various factors of production: Wages of labour, Rent for land, Interest for capital
2. Theory of factor pricing i.e. Theory of distribution 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).

Theory of Welfare:

1. The theory of Welfare basically deals with efficiency in the allocation of resources. Efficiency in the allocation of resources is helping to maximization of satisfaction of people, Economic involves three efficiencies:
2. Efficiency in Production: it means to maximize the level of output from a given amount of resources
3. Efficiency in consumption: It means the distribution of produced goods & services among the people for consumption, in such a way to maximize total satisfaction of society
4. Efficiency in direction of production i.e. overall economic efficiency it means the production of those goods which are most desired by the people

Features of Microeconomics

1. Study of individual units: – Micro-economic is concerned with depth study of the economic behavior of individual units such as individual households, particular firms, individual industries, individual prices, etc.
2. Price Theory: – Microeconomic studies help in determining the price of a particular product. The price of the products depends upon the forces of demand and supply. The demand and supply position is analyses to determine product prices.
3. Factor pricing:– Microeconomics studies help to determine the pricing of various factors of production: Wages of labour, Rent for land, Interest for capital.
4. Limited Scope:– The scope of microeconomics 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, economic growth, etc.
5. Slicing method: – Microeconomic uses the slicing method for in-depth study of economic units. It split (divide into part) the economy into smaller units, such as individual households, individual firms, etc. for the depth study.
6. Analysis of Market Structure:– Microeconomics analyses different market structures such as Perfect Competition, Monopoly, Monopolistic Competition, Oligopoly, etc.

Importance of Micro Economic

1. Price determination:  Microeconomic studies help in determined the price of a particular product. The price of the products depends upon the forces of demand and supply. The demand and supply position is analyses to determine product prices.
2. Basis of Welfare Economics: Microeconomics explains how best results can be obtained by optimum utilization of available resources and proper allocation of resources. It also studies how taxes affect social welfare.
3. Business Decisions: Microeconomic theories are helpful to businessmen for taking crucial business decisions. These decisions are related to the determination of cost of production, determination of prices of goods, maximization of output and profit, etc.
4. Free Market Economy: Microeconomics helps in understanding the working of a free market economy. Free market economy means there is no intervention by the Government or any other agency, where the economic decisions regarding the production of goods, such as ‘What to produce? How much to produce? How to produce? etc.’ are taken at individual levels.
5. Business Decisions: Microeconomic theories are helpful to businessmen for taking crucial business decisions. These decisions are related to the determination of cost of production, determination of prices of goods, maximization of output and profit, etc.
6. Useful to Government: It is useful to the government in framing economic policies; Microeconomic analysis is useful in determining tax policy, public expenditure policy, price policy, efficient allocation of resources, etc.

Macro Economics

The term macro-economic is derived from the Greek word ‘MAKROS’ which means large, so macro-economic refers to the study of the economic behavior of total employment, total consumption, total investment, etc. Macroeconomic is the study of aggregate. It is the study of the economic system as a whole. Therefore, it also called aggregate economic.

Definitions of Macro Economics :

J. L. Hansen – “Macroeconomics is that branch of economics which considers the relationship between large aggregates such as the volume of employment, total amount of savings, investment, national income, etc.”

Scope of Macro Economics

Theory of Income and Employment:

• Macroeconomic is known as Theory of Income and Employment because it explains or determines the level of national incomes and employment in an economy 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 these variables

Theory of General price level and Inflation:

• The macro-Economic analysis shows how the general level of price is determined and it also explains what causes fluctuations in it.
• The study if the general level of prices is significant in the account of the problems created by inflation and depression.
• The problem of inflation and depression are serious problems in the worlds these days
• The theory of price level studies the causes and effects of inflation and depression and suggests economic policies to tackle these problems.

Theory of Growth and Development:

• Another important subject matter of Macroeconomics is the theory of economic growth and development.
• It 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 the full utilization of resources to increase production capacity.
• It explains how the higher rate of growth with stability, can be achieved in countries.

Theory of Distribution:

• It explains what determines the relative shares from the total national income of the various classes.
• It deals with the relative shares of rent, wages, interest and profits in the total national income.

Features of Macro Economics

1. Study of Aggregates: Macro-economic is the study of aggregates. It is related to concepts such as aggregate demand and supply, national income, and total output.
2. Income theory: Income theory is a major aspect of macroeconomic theory. A major task of macroeconomic is the determination of national income. Macroeconomics studies the factors determining national income.
3. General Price Level: General Price level is the average of all prices of goods and services currently being produced in the economy. Determination and changes in the general price levels are studied in macroeconomics.
4. Lumping method: Macro-economic study deals with the lumping methods i.e. study of the whole, like national income and the general price of products not the price of individual products.
5. Interdependence: Macro analysis takes into account interdependence between aggregate economic variables, such as income, output, employment, investments, price level, etc. For example, changes in the level of investment will finally result in changes in the levels of income, levels of output, employment, and eventually the level of economic growth.
6. Growth Models: Macroeconomics studies various factors that contribute to economic growth and development. It is useful in developing growth models. These growth models are used for studying economic development. For example, the Mahalanobis growth model emphasized basic heavy industries.

Importance of Macroeconomics :

1. National Income: Macroeconomics analysis helps to measure national income and social accounts.  Without a study of national income, it is not possible to formulate correct economic policies.
2. Economic Development: Study of macroeconomics 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.
3. Level of Employment: Macroeconomics helps to analyse the general level of employment and output in an economy.
4. Study of Macroeconomic Variables: Study of macroeconomic variables are important to understand the working of the economy, Main economic problems are related to the economic variables such as behaviour of total income, output, employment, and general price level in the economy.
5. Functioning of an Economy: Macroeconomic analysis gives us an idea of the functioning of an economic system. It helps us to understand the behavior pattern of aggregative variables in a large and complex economic system.
6. Economic Fluctuations: Macroeconomics helps to analyze the causes of fluctuations in income, output, and employment and makes an attempt to control them or reduce their severity.

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