MICRO-ECONOMICS

Defination
Microeconomics examines the behavior of individual

decision-making unitsbusiness firms and households. - Micro economics consist of looking at the economy through a microscope
Macroeconomics deals with the economy as a whole;

it examines the behavior of economic aggregates such as aggregate income, consumption, investment, and the overall level of prices.
Aggregate behavior refers to the behavior of all

households and firms together

Micro-Economics
Micro economics consist of looking at the economy

through a microscope
It is the study of particular firm, particular household,

individual price , wage , income, industry and particular commodity

Introduction
It studies the equilibrium of an individual consumer

from the point of view of maximizing his satisfaction

Also studies the market demand for the product of an

individual producer
Similarly, from production side, it studies the

equilibrium of a firm and of industry

Contd
It studies the process of determination of prices of

different goods and services and also the payment of the different factors of production
This means micro-economics studies the ways in

which rent, wages, interest and profits are determined

Contd
It also explains the allocation of resources to study the

optimum utilization of resources. It studies the way in which the best use of available factors of production is made and how the goods and services that are produced are utilized by consumers in the best . In short it studies the structure of production and distribution in an economy

Scope of Microeconomics

Micro Economic Analysis

Theory of Commodit y Pricing Theory Of Factor Pricing

Economics of Welfare

Theory Of Demand

Theory Of Supply

Rent

Wages

Interest

Profits

Importance of Microeconomics
Allocation of resources Distribution of National Income Consideration of welfare

International Trade
Terminologies and Tools

Limitations of Microeconomics
Microeconomics always thinks of individual factor of

production or Individual consumer or Producer

Eg: Saving , Wage rate Thus the conclusions should be accepted only after

putting them to Macroeconomics test

Contd
Microeconomic conclusions are always based on

certain assumptions
It studies the economy in part and not as a whole, but

the economy always function as a whole

Macroeconomics

Microeconomics V/s Macroeconomics

Microeconomics
The study of decision making undertaken by individuals

(or households) and by firms

Like looking though a microscope to focus on the

smaller parts of the economy

Decision of a worker to work overtime or not An individual firm advertising

 Macroeconomics
The study of the behavior of the economy as a whole Deals with economy wide phenomena

The national unemployment rate

The rate of growth in the money supply The national governments budget deficit

Introduction
Macro economics is of a comparatively recent origin
Real development took place after 1935-1936 Since macro economics gives a complete picture of a

economy as a whole, this makes it more important and handy in the context of the economic policy This approach to economic problems is more useful in determining the policy regarding business cycles, inflation and deflation, public finances and international trade

Meaning
Deals with the economy as a whole
Macroeconomics focuses on the determinants of total

national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices.
Aggregate behavior The behavior of all households

and firms together

Macroeconomics Concerns
Inflation is an increase in the overall price level.
Aggregate output is the total quantity of goods and

services produced in an economy in a given period.

The unemployment rate is the percentage of the

labor force that is unemployed.

Government in the Macroeconomy

There are three kinds of policy

that the government has used to influence the macroeconomy:

Fiscal policy 2. Monetary policy 3. Growth or supply-side policies
1.

18 of 31

Government in the Macroeconomy

Fiscal policy refers to government policies

concerning taxes and spending.

Monetary policy consists of tools used by

Reserve Bank of India to control the quantity of money in the economy.

Growth policies are government policies

that focus on stimulating aggregate supply instead of aggregate demand.

19 of 31

 In Micro economic analysis, the demand schedule is

prepared by taking into account the alternative levels of prices In Macro economic analysis, the demand schedule is prepared by taking into account the alternative levels of income

Households receive income from firms and the government, purchase goods and services from firms, and pay taxes to the government. They also purchase foreign-made goods and services (imports). Firms receive payments from households and the government for goods and services; they pay wages, dividends, interest, and rents to households and taxes to the government. The government receives taxes from firms and households, pays firms and households for goods and servicesincluding wages to government workersand pays interest and transfers to households. Finally, people in other countries purchase goods and services produced domestically (exports). Note: Although not shown in this diagram, firms and governments also purchase imports.

The Circular Flow of Payments

Scope

Limitations
Conclusions are always expressed in terms of aggregate aggregate individual experience, so individual experience are neglected
It is always necessary to add and find aggregates of

individual units. But this can be done when all the units are similar
6 Apples + 7 Apples = 13 Apples (Meaningful)
6 Apples + 7 Berries = 13 Fruits ( Some meaning) 6 Apples + 7 Buildings = (No Meaning)

Contd
All trends do not have a similar influence on all

economic fields
Increase in price level affects different groups differently Some are adversely affected, while others are benefited

Variables are important from the point of policy , but

their analysis and classification is more important