Micro and Macro Economics

The study of economics is divided into two parts.

Micro Economics

Macro Economics

Micro economics: The word micro means a millionth part. Microeconomics is the study of
the small part or component of the whole economy that we are analyzing. For example we
may be studying an individual firm or in any particular industry. In Microeconomics we study
of the price of the particular product or particular factor of the production.

The Micro Economics theory studies the behavior of individual decision-making units such
as consumers, recourse owners and business firms.

Importance of Micro & Macro Economics

It has both theoretical and practical importance, from the theoretical point of view, it explains
the functioning of a free enterprise economy. It tells us how million of consumers and
producers in an economy take decision about the allocation of productive recourses and
million of goods and services. As for the practical importance Micro economics in the
formulation of economics policies calculate to promote efficiency in production and welfare
of the masses.

The role of Micro economics is both positive and normative; it not only tells how economy
operates but also how it should operate in to improve general welfare.

Macro Economics

Macro economics is the study of behavior of the economy as a whole. It examines the overall
level of nations out put, employment, price and foreign trade.

Macroeconomics is concerned with aggregate and average of entire economy.

e.g. In Macro economics we study about forest not about tree.

In other words in macro economics study how these aggregates and averages of economy as
whole are determined and what causes fluctuation in them. For making of useful economic
policies for the nation macroeconomics is necessary.

We can summarize the objects of macroeconomics as follows.

1. A high and rising level of real output.

2. High employment and low unemployment, providing good jobs at high pay to those
 who want to work.

3. A stable or gently rising price level, with process and wages determined by free

Markets.

4. Foreign economic relations marked by stable foreign exchange rate and exports more

or less balancing imports.

Macro economics involves choice among alternative central objectives.

A nation can’t high consumption and rapid growth. To lower a high inflation rate requires
either a period of high unemployment and low output, or interfering with free markets through
wage-price policies. These difficult choices are among those that must be faced by
macroeconomic policy makes in any nation.

Difference between Micro and Macro Economics

Micro Economics:-

• It deals with an individual's economic behavior.

• It deals with the pricing of a particular commodity in an industry.
• It deals with the income of a particular set of people.
• Study of micro economics is important for resource utilization, public finance, and for
taking business decisions.
• The concepts of micro-economics are independent concepts.
• The concepts were popularized by the famous Alfred Marshall.
• These concepts have more theoretical value.

Macro Economics:-

• It deals with aggregate economic behavior of the people in general.

• It deals with the general price level in the economy, National income accounting, etc.
• Study of macro economics is important for formulation of economic policy of the whole
nation.
• The concept of macro economics are interdependent on one another.
• The concepts were popularized by the famous Lord J.M. Keynes.
• These concepts have more practical value.

Function of managerial economics

There are mainly two functions of managerial economics.
Out of two major managerial functions served by the subject matter under managerial
economics are decision making and forward planning:

1. Decision Making:-

The techniques in this section help you to make the best decisions possible with the
information you have available. With these tools you will be able to map out the likely
consequences of decisions, work out the importance of individual factors, and choose the best
course of action to take.

Kinds of Decisions

There are several basic kinds of decisions.

1. Decisions whether. This is the yes/no, either/or decision that must be made before we
proceed with the selection of an alternative. Should I buy a new TV? Should I travel this
summer? Decisions whether are made by weighing reasons pro and con. The PMI technique
discussed in the next chapter is ideal for this kind of decision.

It is important to be aware of having made a decision whether, since too often we assume that
decision making begins with the identification of alternatives, assuming that the decision to
choose one has already been made.

2. Decisions which. These decisions involve a choice of one or more alternatives from among
a set of possibilities, the choice being based on how well each alternative measures up to a set
of predefined criteria.

3. Contingent decisions. These are decisions that have been made but put on hold until some
condition is met.

2. Forward Planning:- The term 'planning' implies a consciously directed activity with
certain predetermined goals and means to carry them out. It is a deliberate activity. It is a
programmed action. Basically planning is concerned with tackling future situations in a
systematic manner.

Forward planning implies planning in advance for the future. It is associated with
deciding the future course of action of a firm. It is prepared on the basis of past and current
experience of a firm. It is prepared in the background of uncertain and unpredictable
environment and guess work. Future events and happenings cannot be predicted accurately.
The success or failure of the future plan depends on a number of factors and forces which are
unknown in nature. Much of economic activity is forward looking. Every time we build a new
factory, add to the stocks of inputs, trucks, computers or improvements in R&D, our intension
is to enhance the future productivity of the firm. Growing firms devote a significant share of
their current output to net capital formation to bolster future economic output. A business
executive must be sufficiently intelligent enough to think in advance, prepare a sound plan and
take all possible precautionary measures to meet all types of challenges of the future business.
Hence, forward planning has acquired greater significance in business circles.

Problems of Macro & Micro Economics

Microeconomics
o Microeconomics addresses problems that face companies and the governments
that deal with them. These problems include questions of how much firms should
charge for a particular good, how much of that good a firm should produce and
what compromise between revenue and production costs businesses should make
to stay competitive. It also addresses questions of what tax burdens governments
should levy on firms and individuals to maximize income while not dampening
individual productivity.

Macroeconomics

o Macroeconomics takes a broader view of the workings of markets by looking at

the functioning of large economic systems. These problems include questions of
how fiat currency is valued and managed, how national income is tabulated and
how to calculate the consequences of different balances of trade. It also addresses
questions of barriers to trade and the costs of retaliation, and which economic
metrics give the best indicators of the performance of an economy.

Ethical Problems

o Economics concerns itself with numbers. It evaluates the costs to a firm of paying
employees, safety measures and how much money items like these could save the
company. Issues of ethics lie outside the boundaries of economic reason. One
example of public backlash against such a steely cost benefit analysis were the
Ford papers, which came to light during a lawsuit involving a design defect in the
Pinto, in which Ford calculated that the costs of making safety improvements to
cars would cost more than they would lose in lawsuits over safety defects.

Methodological Problems

o Some critics of micro- and macroeconomics find fault with economics for
academic, not moral, reasons. Much of the work done in both micro- and
macroeconomics centers around creating mathematical models to simulate the
workings of the real world. However, equations can only take so many factors
into consideration. Those factors not included in a model consequently have no
effect on the model's outcome. These models, when they are used in public
policy, cannot be proven or disproven until real world events test the model in
ways that economists cannot when they construct models.
Importance of Microeconomics:

Before Keynesian revolution, the body of economics mainly consisted of micro

economics. The classical economics as well as the neo-classical
economics belonged to the domain of micro economics. The importance and uses of
micro economics in brief are as under.
i. Helpful in understanding the working of private enterprise economy. The
micro economics helps us to understand the working of free market economy. It
tells us as to how the prices of the products and the factors of production are
determined.
ii. Helps in knowing the conditions of efficiency. Micro economics help in
explaining the conditions of efficiency in consumption, production and in
distribution of the rewards of factors of production.
iii. Working economy without central control. The micro economics reveals
how a free enterprise economy functions without any central control.
iv. Study of welfare economy. Micro economic involves the study of welfare
economics.
Limitations of Microeconomics:

Microeconomics despite its many advantages is not free from limitations. They in brief
are (1) Assumption of full employment in the economy which is unrealistic (2)
Assumption of liaises fair policy which is no longer in practice in any country of the
world (3) It studies part of the economy and not the whole.

Summing up, microeconomics is the study of the decisions people and businesses
and the interaction of those decisions in the market. It analyses the ‘trees’ of the
economy as distinct from the ‘forest’.

Explanation of Macroeconomics:

The main issues which are addressed in macro economics are in brief as under:
i. It helps understanding determination of income and employment. Late
J.M. Keynes laid great stress on macro-economic analysis. 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.
ii. Determination of general level of prices. Macro economic analysis answers
questions as to how the general price level is determined and what is the
importance of various factors which influence general price level.
iii. Economic growth. The macro-economic models help us to formulate
economic policies for achieving long run economic growth with stability. The
new developed growth theories explain the causes of poverty in under
developed countries and suggest remedies to overcome them.
 iv. Macro economics and business cycles. It is in terms of macroeconomics that
causes of fluctuations in the national income are analyzed. It has also been
possible now to formulate policies for controlling business cycles i.e. inflation
and deflation.
v. International trade. Another important subject of macro-economics is to
analyze the various aspects of international trade in goods, services and
balance of payment problems, the effect of exchange rate on balance of
payment etc.
vi. Income shares from the national income. Mr. M. Kalecki and Nicholas
Kelder, by making departure from Ricarde theory, have presented a macro
theory of distribution of income. According to these economists, the relative
shares of wages and profits depend upon the ratio of investment to national
income.
vii. Unemployment: Another macro economic 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 of cyclical unemployment and high
unemployment coupled with inflation and suggesting remedies to counteract
them.
viii. Macro Economic Policies: Fiscal and monetary policies affect the
performance of the economy. These two major types’ policies are central in
macro economic analysis of the economy.
Global Economic System: In macro economic analysis, it is emphasized that
a nation’s economy is a part of a global economic system. A good or weak
performance of a nation’s economy can affect the performance of the world
economy as a whole.

Limitations of Macroeconomics:

The main limitations of macro economics are as follows:

(1) The macro economies ignore the welfare of the individual. For instance, if national
saving is increased at the cost of individual welfare, it is not considered a wise policy.
(2) The macro economics analysis regards aggregates as homogeneous but does not
look into its internal composition. For instance, if the wages of the clerks fall and the
wages of the teachers rise, the average wage may remain the same.
(3) It is not necessary that all aggregate variables are important. For instance,
national income is the total of individual incomes. If national income in the country
goes up, it is not necessary that the income of all the individuals in the country will
also rise. There is a possibility that the rise in national income may be due to the
increase in the incomes of a few rich families of the country.