Micro-Economics

Branches of Economics and their Work in Different

Economic Conditions

From Shahbaz Ahmad

BB07035

To
Ms. Rabia Tahir

October 23, 2008

PUNJAB UNIVERSITY GUJRANWALA CAMPUS

 Economics

Economics is the social science that studies the production,

distribution, and consumption of goods and services. The term
economics comes from the Ancient Greek oikonomia, "management of
a household, administration” from oikos, "house" + nomos, "custom"
or "law", hence "rules of the house (hold)".

A definition that captures much of modern economics is that of Lionel

Robbins in a 1932 essay: "the science which studies human behavior
as a relationship between ends and scarce means which have
alternative uses." Scarcity means that available resources are
insufficient to satisfy all wants and needs. Absent scarcity and
alternative uses of available resources, there is no economic problem.
The subject thus defined involves the study of choices as they are
affected by incentives and resources.

Following are the two branches of economics

Economics

Micro Economics Macro Economics

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Micro-economics

Microeconomics is a branch of economics that studies how

individuals, households and firms and some states make decisions to
allocate limited resources, typically in markets where goods or services
are being bought and sold. Microeconomics examines how these
decisions and behaviors affect the supply and demand for goods and
services, which determines prices; and how prices, in turn, determine
the supply and demand of goods and services. Following is the working
of this branch in the economy
In a nutshell, microeconomics has to do with SUPPLY and DEMAND, and
with the way they interact in various markets. Labor economics, for
example, is built largely on the analysis of the supply and demand for
labor of different types. The field of industrial organization deals with
the different mechanisms (MONOPOLY, CARTELS, and different types of
competitive behavior) by which goods and services are sold.
International economics worries about the demand and supply of
individual traded commodities, as well as of a country’s exports and
imports taken as a whole and the consequent demand for and supply
of FOREIGN EXCHANGE. Agricultural economics deals with the demand and
supply of agricultural products and of farmland, farm labor, and the
other factors of production involved in agriculture. Public finance (see
PUBLIC CHOICE) looks at how the government enters the scene.
Traditionally, its focus was on taxes, which automatically introduce
“wedges” (differences between the price the buyer pays and the price
the seller receives) and cause inefficiency. More recently, public
finance has reached into the expenditure side as well, attempting to
analyze (and sometimes actually to measure) the costs and benefits of
various government outlays and programs. Applied welfare economics
is the fruition of microeconomics. It deals with the costs and benefits
of just about anything—government projects, taxes on commodities,
taxes on factors of production (corporation income taxes, payroll
taxes), agricultural programs (like price supports and acreage
controls), tariffs on imports, foreign exchange controls, various forms
of industrial organization (like monopoly and oligopoly), and various
aspects of labor market behavior (like MINIMUM WAGES, the monopoly
power of LABOR UNIONS, and so on).

At the root of everything is supply and demand. It is not at all

farfetched to think of these as basically human characteristics. If
human beings are not going to be totally self-sufficient, they will end

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up producing certain things that they trade in order to fulfill their
demands for other things. The specialization of production and the
institutions of trade, commerce, and markets long antedated the
science of economics. Indeed, one can fairly say that from the very
outset the science of economics entailed the study of the market forms
that arose quite naturally (and without any help from economists) out
of human behavior. People specialize in what they think they can do
best—or more existentially, in what heredity, environment, fate, and
their own volition have brought them to do. They trade their services
and/or the products of their specialization for those produced by
others. Markets evolve to organize this sort of trading, and money
evolves to act as a generalized unit of account and to make barter
unnecessary. In this market

process, people try to get the most from what they have to sell, and to
satisfy their desires as much as possible. In microeconomics this is
translated into the notion of people maximizing their personal “utility,”
or welfare. This process helps them to decide what they will supply
and what they will demand.

Nine times out of ten, the excess demand will end up being reflected in
a gray or black market, whose existence is probably the clearest
evidence that the official price is artificially low. In turn, economists
are nearly always right when they predict that pushing prices down via
price controls will end up reducing the amount supplied and generating
black-market prices not only well above the official price, but also
above the market price that would prevail in the absence of controls
represents the artificial restriction of production by an entity having
sufficient “market power” to do so. The economics of monopoly are
most easily seen by thinking of a “monopoly markup” as a privately
imposed, privately collected tax. This was, in fact, a reality a few
centuries ago when feudal rulers sometimes endowed their favorites
with monopoly rights over certain products. The recipients need not
ever “produce” such products themselves. They could contract with
other firms to produce the good at low prices and then charge
consumers what the traffic would bear (so as to maximize monopoly
profit). The difference between these two prices is the “monopoly
markup,” which functions like a tax. In this example it is clear that the
true beneficiary of monopoly power is the one who exercises it; both
producers and consumers end up losing.

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Modern monopolies are a bit less transparent, for two reasons. First,
even though governments still grant monopolies, they usually grant
them to the producers. Second, some monopolies just happen without
government creating them, although these are usually short-lived.
Either way, the proceeds of the monopoly markup (or tax) are
commingled with the return to capital of the monopoly firms. Similarly,
labor monopoly is usually exercised by unions, which are able to
charge a monopoly markup (or tax), which then becomes commingled
with the wages of their members. The true effect of labor monopoly on
the competitive wage is seen by looking at the nonunion segment of
the economy. Here, wages end up lower because the union wage
causes fewer workers to be hired in the unionized firms, leaving a
larger labor supply (and a consequent lower wage) in the nonunion
segment.

Artificially high urban wages attract migrants from rural areas. If the
wage does not adjust downward to equate supply and demand, the
rate of urban UNEMPLOYMENT will rise until further migration is deterred.
Still other examples are in banking and drugs. When the “margin” in
banking is set too high, new banks enter and/or branches of old ones
proliferate until further entry is deterred. Artificially maintained drug
prices led, in several Latin American countries (Argentina, Chile, and
Uruguay before their major liberalizations of recent decades), to a
pharmacy on almost every block.

The great unifying principles of microeconomics are, ever and always,

supply and demand. The normative overtone of microeconomics comes
from the fact that competitive supply price represents value as seen by
suppliers, and competitive demand price represents value as seen by
demanders. The motivating force is that of human

Beings, always gravitating toward choices and arrangements that

reflect their tastes. The miracle of it all is that on the basis of such
simple and straightforward underpinnings, a rich tapestry of analysis,
insights, and understanding can be woven. This brief article can only
give its readers a glimpse—hopefully a tempting one—of the richness,
beauty, and promise of that tapestry.

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Macro Economics
Macroeconomics deals not with individual quantities as such but
wit aggregate of these quantities, not with individual incomes but with
the national income, not with the individual prices but with the price
level, not with the individual outputs but with the national outputs.

Main issues in macro economics

The main issues which are addressed in macroeconomics are in brief

as under:

It Helps In Understanding The Determination Of Income And

Employment

Late J.M Keynes laid great stress on macroeconomic analysis. He, in

his revolutionary book, “general theory, employment interest and
money” brought drastic changes in economic thinking. He explained
the forces or factors which determine the level of aggregate
employment and output in the economy.

Determination Of General Level Of Prices

Macroeconomics analysis answers question as to how the general price

level is determined and what is the importance of various factors
which influence general price level

Economic Growth

The macroeconomics models help us to formulate economic polices for

achieving long run economic growth with stability. The new developed
growth theories explained the causes of poverty in under developed
countries and suggest remedies to overcome

Macroeconomics And Business Cycles

It is in terms of macroeconomics that causes of fluctuation I the

national income or analyzed. It has also been possible now to
formulate policies for controlling business cycles i.e. inflation and
deflation

International Trade

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Another important subject of macroeconomics is to analyze the various
aspects of international trade in goods, services and balance of
payments problems, the effect of exchange rates on balance of
payment etc.

Income Shares From The National Income

Mr. M. Kalecki and Nicholas Kelder, by making the departure from

Ricarde theory, have presented a macro theory of distribution of
income. According t these economists, the relative shares of wages
and profits depend upon the ratio of investment to national income.

Unemployment

Another macroeconomics issue is to explain the causes of

unemployment in the economy. Stagflation is another important issue
of modern economics. The Keynesian and post Keynesian economists
are putting lot of efforts in explaining the causes cyclical
unemployment and high unemployment coupled wit inflation and
suggesting remedies to counteract them.

Macroeconomics Polices

Fiscal and monetary policies affect the performance of the economy.

These two major types of macroeconomic policies are central in the
macroeconomic analysis of the economy.

Global Economic System

In macroeconomic analysis, it is emphasized that a nation’s economy

is a part of global economic system. A good or weak performance of a
nation’s economy can affect the performance of the world economy as
a whole.