Micro and Macro Economics, Slides of Economics

Download Micro and Macro Economics and more Slides Economics in PDF only on Docsity! E -CONTENT-SERIES I N MICRO ECONOMICS by PROF. MADHURIMA LALL DEPTT. OF APPLIED ECONOMICS, UNIVERSITY OF LUCKNOW MICRO AND MACRO ECONOMICS Economics is studied under two heads_ 1) Micro economics analysis 2) Macro economics analysis Micro economics was the basis of study in ancient times because they had never thought of approaching the macro aspect with the changing conditions, the economic problems took a new turn resulting in the change in approach of economic analysis. Thus more importance was now given to Microanalysis than Macro analysis. Now a days both macro and microanalysis are quite popular. But the credit of using these words goes to Professor RAGNAR FRISCH of Oslo University. Both of these terms are explained in detail below. MICRO ECONOMICS Classic economists have established and developed micro economics. The word ‘Micro’ has been derived from a Greek word ‘Mikros’. It means micro or small. As the name suggests Micro Economics studies theories related with individual produces, individual firms and individual industries. Classical economists have been important decision or Micro Economics. Adam smith himself has accepted the fact that an individual works only by inducing the feeling of selfishness. This is an example of his recognition of micro economics .Even the neo classical economist Marshal has made an individual material welfare as the basis of subject matter of economics. In fact classical economists had studied macro economics and not separately. The fundamental tendencies of Micro Economics can be classified by following definitions. 1) Professor Boulding _: Micro Economics is the study of particular economic organisms and their interaction and of particular economic quantities and their determination. 2) Henderson and Quandt_: Micro Economics is the study of economics actions of individuals and well- defined group of individuals. The definitions of the above economists clearly indicate that in Micro Economics is a study of behavior of some particular economic units .For example _with the rise in price of a commodity , the economics decreases its consumption but the producer increases its production. The study of these types of private or personal events are possible only in Micro Economics we also study an industry with E -CONTENT-SERIES I N MICRO ECONOMICS by PROF. MADHURIMA LALL DEPTT. OF APPLIED ECONOMICS, UNIVERSITY OF LUCKNOW innumerable firms in Micro Economics. This is because a single unit is represented by an industry for the whole economy. Countless economics work in a nations economy. In this condition it is essential to study industries under Micro Economics. CHARACTERISTICS OF MICRO ECONOMICS Following are the characteristics of economics: 1) Study of individual units. Micro economics helps in the analysis of individual incomes, individual production with group or macro events. Thus micro economics helps in the analysis of whole economy along with study of personal problems. 2) Study of small variable: Small variables form part of study of Micro Economics. The effect of these variables is so insignificant that the changes in them do not affect the economy. For example: the demand and supply of the whole economy can never ed by one consumers consumption and one produces production. 3) Study of disseminations of individual price: Micro Economics is also known as ‘Price Theory’. Thus, individual prices of various commodities are influenced by demand and supply are determined under it we also study the events of demand and supply of the commodity in this reference. USE AND NEED OF MICRO ECONOMICS Micro Economics has been used since ancient times. Although at present Macro Economics is being used largely yet the uses of Micro Economics is as follows: 1) Essential for whole economy: Markets demand and supply is the aggregate of individual demand and supply, thus for knowing the details for the whole economy we must have knowledge of individual unit. If we want information regarding the position of jute industries in the national economy, we must know about various firms with in the jute industry. Thus Micro Economics helps to understand Macro Economics. 2) Helpful for whole economy: Price determination and distribution are some important problems in an Economy. Each factors of production demands a greater share for itself. Like wise the problem of price determination also exists Micro Economics has been quite competent in providing a solution for these problems. Since ancient time Micro Economics has been used for price determination in Micro Economics the modes of price and demand are utilized. Thus model presents with the fact that price is determined through the relative forces of demand and supply. The equilibrium E -CONTENT-SERIES I N MICRO ECONOMICS by PROF. MADHURIMA LALL DEPTT. OF APPLIED ECONOMICS, UNIVERSITY OF LUCKNOW There are certain problems that cannot be dealt in micro economics, e.g. Monetary policy, public finance, industrial policy, exile policy, etc. that is why the importance and scope of macro economics has increase greatly. 4) Certain conclusions of micro economics analysis are not suited from the point of view of whole economy: - Micro economics major decisions are based on the study of individual units or take up individual approach applicable for macro aspects as well, but practically these approaches do not hold good, e.g. It could be said that savings are good for an individual but not for the economy as a whole, because it adversely affects consumption, production and employment. MACRO ECONOMICS Macro Economics was practiced due to various defects and content changing form of Micro economics. Due to 1930’s worldwide theory of full employment. Prof. Keynes came up with a new employment theory. He said that national and global problem should be approached from macro economist’s point of view. They also have accepted the importance of micro economics. The nature of macro economics is completely different from micro economics. The problems of the whole economy are studied under macro economics like National income, total production, employment, total supply. Definition of macro economics: - It is essential to understand the following definition for understanding the concept of macro economics. 1) Prof. Boulding-“Macro-Economics deals not with the individual quantities as such but with aggregate of these quantities not with individual incomes but with national income not with individual output but with national output. ” 2) Gardner Ackley-“It looks at the size and shape and functioning of the “elephant” of economic experience, rather than working of articulation or dimension of individual parts. It studies the character of the forest, independently of the trees.“ As Marshall during the study of representative firm, imagined a tree in a jungle representing all the other trees of the jungle. Likewise Gardner and Ackley specifically indicated while imagining a jungle that there is the importance of jungle and not of one particular representative tree in Micro Economics. Thus Macro Economics is a study on a broader bias rather than concentrating on Micro elements. CHARACTERICTS OF MACRO ECONOMICS The analysis of the above definitions give the following characteristics of macro economics; - 1) Macro Approach: - E -CONTENT-SERIES I N MICRO ECONOMICS by PROF. MADHURIMA LALL DEPTT. OF APPLIED ECONOMICS, UNIVERSITY OF LUCKNOW Macro Economics having a macro approach does not give importance micro variables. National and International problems are solved with its assistance. Macro Economics stresses on the importance of dynamic economy while Micro analysis on the static economy 2) “It looks at the total size and shape and functioning of the “elephant” of economic experience rather than working of articulation or dimension of individual parts. It studies the character of the forest independently of trees which compose it.”- Gardner Ackley 2) MACRO ANALYSIS- macro analysis is the basis of macroeconomics. For example the subject matter of macro economic includes the effect of monetary and fiscal policy of the government and not its effect on one particular individual or industry. If the composite effect of public in come and expenditure has a positive effect on the society, then it would definitely favorably affect the persons living in the society. 3) GROUP WELFARE RATHER THAN INDIVIDUAL WELFARE- group Welfare is the prime objective of macro economics making it more significant than individual welfare 4) INTERDEPENDENCE- Change in one unit does not affect the level of Equilibrium in the other in micro economics while in macro units are mutually related so much so that the change in equilibrium in one unit is followed by changes in other too. NEED AND USE OF MACRO ECONOMICS Now a days the importance of macro economics has greatly increased due to the limitations and difficulties of micro economics .The need and use of macro economics is made more significant by the following points – 1) HELPS IN THE DETERMINATION OF PUBLIC ECONOMIC POLICY-At Present, the scope of macro economics encircles international trade, national income and employment, theory of economic development, general price level, money and finance etc. Macro approach is quite useful in framing economic policies aimed at removing unemployment, favoring foreign trade and putting a check on inflation. With the use of macro economics the government plans for economic development. Where in increase in national income, production and employment target for saving and investment are determined. Today under developed countries are mainly facing the problem of development, thus the solution of all these problems can easily be found in macro economics. 3) THE SCALE OF ECONOMIC DEVELOPMENT- While comparing the development of two countries the living standard of the two countries is E -CONTENT-SERIES I N MICRO ECONOMICS by PROF. MADHURIMA LALL DEPTT. OF APPLIED ECONOMICS, UNIVERSITY OF LUCKNOW compared. But the true picture is still not represented. Thus macro economics comes handy in drawing the true and complete picture of the whole affair. 4) USEFUL IN STUDING MICRO ECONOMICS – It has been generally believed that macro economics helps in the development of micro economic because for the practical application of its laws and theories, it requires approach. For example law of diminishing utility is formulated after studying the behavior of individual group. 5) USEFUL IN THE STUDY OF COMPLICATED ECONOMY –The economic methods are proving to be too complicated and the interdependence of economic elements have also increased greatly today macro economics give us the real picture of the whole economic organization and working while micro economic gives insight only into an individual unit or firm. LIMITATIONS OF MACRO ECONOMICS The importance of macro economics analysis has been widely recognized and is increasing but there are certain limitations, they are as follows: 1.Impractical conclusions: Sometimes, the policies formulated on the basis of macro units result in failure. For example to conclude that prices of commodities would be stable, if the general price index is stable would be a wrong assumption. This is because the increase in some and decrease in the price of other commodities would lead to general price level. Being stable the prices of individual commodities might keep on fluctuating. 2.Insignificant individual units: The whole economy is significant under macro economics’ analysis and not individual units. As a result it ignores not only the existence but also importance of those units, which are the very foundation of the economic setup, which is unfair. 3.Ignores the importance of group structure: Generally macro economics studies the external appearance of a group and does not look into the internal structure until and unless we do not have the exact information regarding the structure and all its parts any kind of forecast would be futile in this reference. Thus it is appropriate to say that to give suggestion or forecast on the basis of a group would not be right until we do not get the complete information about the structure and the mutual relationship and behavior of various parts of the group. 4.Collective units do not represent the individual units: Here, it could be said that one single group could never influence the various economic fields equally. For example with the increase in total demand, total production would E -CONTENT-SERIES I N MICRO ECONOMICS by PROF. MADHURIMA LALL DEPTT. OF APPLIED ECONOMICS, UNIVERSITY OF LUCKNOW developed countries are mainly facing the problem of development, thus the solution of all these problems can easily be found in macro economics. 6) THE SCALE OF ECONOMIC DEVELOPMENT- While comparing the development of two countries the living standards of the two countries are compared. But the true picture is still not represented. Thus macro economics comes handy in drawing the true and complete picture of the whole affair. 7) USEFUL IN STUDING MICRO ECONOMICS – It has been generally believed that macro economics helps in the development of micro economic because for the practical application of its laws and theories, it requires approach. For example law of diminishing utility is formulated after studying the behavior of individual group. 8) USEFUL IN THE STUDY OF COMPLICATED ECONOMY –The economic methods are proving to be too complicated and the interdependence of economic elements have also increased greatly today macro economics give us the real picture of the whole economic organization and working while micro economic gives insight only into an individual unit or firm. E -CONTENT-SERIES I N MICRO ECONOMICS by PROF. MADHURIMA LALL DEPTT. OF APPLIED ECONOMICS, UNIVERSITY OF LUCKNOW