MICRO AND MACRO ECONOMICS

Micro Economics: 1. Micro Economics studies the problems of individual economic units such as a firm, an industry, a consumer etc. 2. Micro Economic studies the problems of price determination, resource allocation etc. 3. While formulating economic theories, Micro Economics assumes that other things remain constant. 4. The main determinant of Micro Economics is price. Macro Economics: 1. Macro Economics studies economic problems relating to an economy viz., National Income, Total Savings etc. 2. Macro Economics studies the problems of economic growth, employment and income determination etc. 3. In Micro Economics economic variables are mutually inter-related independently. 4. In Micro Economics economic variables are mutually inter-related independently.

Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast; here is a brief summary of what each covers: Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry. (Find out more about microeconomics in Understanding Microeconomics.) Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. (To keep reading on this subject, see Macroeconomic Analysis.) While these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public. The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. Regardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained.

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 individualdecision-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 Microeconomics 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 cant 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 Macroeconomics (from Greek prefix "macr(o)-" meaning "large" + "economics") is a branch of economics dealing with the performance, structure, behavior, and decision-making of the entire economy. This includes a national, regional, or global economy.[1][2] With microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output,consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomicsis primarily focused on the actions of individual agents, such as firms and consumers, and how their

behavior determines prices and quantities in specific markets. While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of shortrun fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation ofeconomic policy and business strategy.

Basic macroeconomic concept

Macroeconomics encompasses a variety of concepts and variables, but three are central topics for macroeconomic research.[3] Macroeconomic theories usually relate the phenomena of output, unemployment, and inflation. Outside of macroeconomic theory, these topics are also extremely important to all economic agents including workers, consumers, and producers. [edit]Output and income National output is the total value of everything a country produces in a given time period. Since everything that is produced and sold produces income, output and income are usually considered to be equivalent and the two terms are often used interchangeably. Output can be measured as total income, or, it can be viewed from the production side and measured as the total value of final goods and services or the sum of all value added in the economy.[4] Macroeconomic output is usually measured by Gross Domestic Product (GDP) or one of the other national accounts. Economists interested in long-run increases in output study economic growth. Advances in technology, increases in machinery and other capital, and better education and human capital all lead to increased economic output overtime. However, output does not always increase consistently. Business cycles can cause short-term drops in output called recessions. Economists look for macroeconomic policies that prevent economies from slipping into recessions and that lead to faster long-term growth. [edit]Unemployment The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labor force. The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force. Unemployment can be generally broken down into several types based related to different causes. Classical unemployment occurs when wages are too high for employers to be willing to hire more workers. Wages may be too high because of minimum wage laws or union activity. Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment.[5] Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs.[6] Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just the short term search process. [7] While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and economic growth. [8] The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.[9] [edit]Inflation and deflation A general price increase across the entire economy is called inflation. When prices decrease, there is deflation. Economists measure these changes in prices with price indexes. Inflation can occur when an economy becomes overheated and grows too quickly. Similarly, a declining economy can lead to deflation. Central bankers, who control a country's money supply, try to avoid changes in price level by using monetary policy. Raising interest rates or reducing the supply of money in an economy will reduce inflation. Inflation can lead to increased uncertainty and other negative consequences. Deflation can lower economic output. Central bankers try to stabilize prices to protect economies from the negative consequences of price changes. [edit]Macroeconomic policies

To try to avoid major economic shocks, such as The Great Depression, governments make adjustments through policy changes they hope will stabilize the economy. Governments believe the success of these adjustments is necessary to maintain stability and continue growth. This economic management is achieved through two types of governmental strategies:

Fiscal policy Monetary policy

Macroeconomic policy instruments refer to macroeconomic quantities that can be directly controlled by an economic policy maker.[1][2] Instruments can be divided into two subsets: a) Monetary policy instruments and b) Fiscal policy instruments. Monetary policy is conducted by the Federal Reserve or the central bank of a country or supranational region (Euro zone). Fiscal policy is conducted by the Executive and Legislative Branches of the Government and deals with managing a nations Budget.]

Monetary policy
Monetary policy instruments consists in managing short-term rates (Fed Funds and Discount rates in the U.S.), and changing reserve requirements for commercial banks. Monetary policy can be either expansive for the economy (short-term rates low relative to inflation rate) or restrictive for the economy (short-term rates high relative to inflation rate). Historically, the major objective of monetary policy had been to manage or curb domestic inflation. More recently, central bankers have often focused on a second objective: managing economic growth as both inflation and economic growth are highly interrelated.

Fiscal policy
Fiscal policy consists in managing the national Budget and its financing so as to influence economic activity. This entails the expansion or contraction of government expenditures related to specific government programs such as building roads or infrastructure, military expenditures and social welfare programs. It also includes the raising of taxes to finance government expenditures and the raising of debt (Treasuries in the U.S.) to bridge the gap (Budget deficit) between revenues (tax receipts) and expenditures related to the implementation of government programs. Raising taxes and reducing the Budget Deficit is deemed to be a restrictive fiscal policy as it would reduce aggregate demand and slow down GDP growth. Lowering taxes and increasing the Budget Deficit is considered an expansive fiscal policy that would increase aggregate demand and stimulate the economy.

Microeconomics (from Greek prefix micro- meaning "small" + "economics") is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. [1] Typically, it applies to markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.[2][3] This is in contrast to macroeconomics, which involves the "sum total of economic activity, dealing with the issues of growth, inflation, andunemployment."[2] Microeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy.[4] Particularly in the wake of the Lucas critique, much

of modern macroeconomic theory has been built upon 'microfoundations' i.e. based upon basic assumptions about micro-level behavior. One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, and describes the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. Also considered is the elasticity of products within the market system. Assumptions and definitions The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many reallife transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations meeting these assumptions. Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where so-called market failures lead to resource allocation that is suboptimal by some standard (defense spending is the classic example, profitable to all for use but not directly profitable for anyone to finance). In such cases, economists may attempt to find policies that will avoid waste, either directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing markets" to enable efficient trading where none had previously existed. This is studied in the field of collective action and public choice theory. It also must be noted that "optimal welfare" usually takes on a Paretian norm, which in its mathematical application of KaldorHicks method. This can diverge from the Utilitarian goal of maximising utility because it does not consider the distribution of goods between people. Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and his or her theory. The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process, with each individual trying to maximise their own utility. The interpretation of this relationship between price and quantity demanded of a given good assumes that, given all the other goods and constraints, the set of choices which emerges is that one which makes the consumer happiest. [edit]Modes of operation It is assumed that all firms are following rational decision-making, and will produce at the profit-maximizing output. Given this assumption, there are four categories in which a firm's profit may be considered to be.

A firm is said to be making an economic profit when its average total cost is less than the price of each additional product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price. A firm is said to be making a normal profit when its economic profit equals zero. This occurs where average total cost equals price at the profit-maximizing output. If the price is between average total cost and average variable cost at the profit-maximizing output, then the firm is said to be in a loss-minimizing condition. The firm should still continue to produce, however, since its loss would be larger if it were to stop producing. By continuing production, the firm can offset its variable cost and at least part of its fixed cost, but by stopping completely it would lose the entirety of its fixed cost. If the price is below average variable cost at the profit-maximizing output, the firm should go into shutdown. Losses are minimized by not producing at all, since any production would not generate returns significant enough to offset any fixed cost and part of the variable cost. By not producing, the firm loses only its fixed cost. By losing this fixed cost the company faces a challenge. It must either exit the market or remain in the market and risk a complete loss.

Opportunity cost
Main article: Opportunity cost Opportunity cost of an activity (or goods) is equal to the best next alternative foregone. Although opportunity cost can be hard to quantify, the effect of opportunity cost is universal and very real on the individual level. In fact, this principle applies to all decisions, not just economic ones. Since the work of the Austrian economist Friedrich von Wieser, opportunity cost has been seen as the foundation of the marginal theory of value[citation needed]. Opportunity cost is one way to measure the cost of something. Rather than merely identifying and adding the costs of a project, one may also identify the next best alternative way to spend the same amount of money. The forgone profit of this next best alternative is the opportunity cost of the original choice. A common example is a farmer that chooses to farm her or his land rather than rent it to neighbors, wherein the opportunity cost is the forgone profit from renting. In this case, the farmer may expect to generate more profit alone. Similarly, the opportunity cost of attending university is the lost wages a student could have earned in the workforce, rather than the cost of tuition, books, and other requisite items (whose sum makes up the total cost of attendance). The opportunity cost of a vacation in the Bahamas might be the down payment for a house. Note that opportunity cost is not the sum of the available alternatives, but rather the benefit of the single, best alternative. Possible opportunity costs of a city's decision to build a hospital on its vacant land are the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses but not all of these in aggregate. The true opportunity cost would be the forgone profit of the most lucrative of those listed. One question that arises here is how to determine a money value for each alternative to facilitate comparison and assess opportunity cost, which may be more or less difficult depending on the things we are trying to compare. For example, many decisions involve environmental impacts whose monetary value is difficult to assess because of scientific uncertainty. Valuing a human life or the economic impact of an Arctic oil spill involves making subjective choices with ethical implications. It is imperative to understand that nothing is free. No matter what one chooses to do, he or she is always giving something up in return. An example of opportunity cost is deciding between going to a concert and doing homework. If one decides to go the concert, then he or she is giving up valuable time to study, but if he or she chooses to do homework then the cost is giving up the concert. Opportunity cost is vital in understanding microeconomics and decisions that are made.

Applied microeconomics
Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields. Industrial organization examines topics such as the entry and exit of firms, innovation, and the role of trademarks. Labor economics examines wages, employment, and labor market dynamics. Public economics examines the design of government tax and expenditure policies and economic effects of these policies (e.g., social insurance programs). Political economy examines the role of political institutions in determining policy outcomes. Health economics examines the organization of health care systems, including the role of the health care workforce and health insurance programs. Urban economics, which examines the challenges faced by cities, such as sprawl, air and water pollution, traffic congestion, and poverty, draws on the fields of urban geography and sociology. Financial economics examines topics such as the structure of optimal portfolios, the rate of return to capital, econometric analysis of security returns, and corporate financial behavior. Law and economics applies microeconomic principles to the selection and enforcement of competing legal regimes and their relative efficiencies. Economic history examines the evolution of the economy and economic institutions, using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science.