G.S.

College Of Commerce, Wardha

Std. : XII
SUB. : ECONOMICS

CHAPTER 1 : Introduction to Micro and Macro Economics

 Meaning of Micro Economics:

 Micro Economics is that branch of economics which studies individualistic behaviour.
 It concentrates on individual consumer, individual producer, individual industry, individual
commodity, individual price, etc.
 The word ‘micro’ has been derived from a Greek word ‘micros’ which means a small or a
millionth part.
 It deals with small part of a national economy.
 It studies the economic actions and behaviour of individual unit such as individual consumer,
producer, etc.
 The concept of micro economics was introduced by Prof. Ragnar Frisch and was developed by
Dr Alfred Marshall
 Micro Economics mainly concentrates on commodity pricing, factor pricing and economic
welfare.
Definition:
According to Kenneth Boulding, “Micro economics is the study of a particular firm,
particular household, individual consumer, producer ,industry, commodity, price, etc.”

Scope and Subject Matter of Micro Economics:

 Theory of Product pricing:
 The theory of Product pricing explains how the prices of variety of goods and services
are determined.
 The prices of commodities are determined by the equilibrium of their demand and
supply forces.
 Analysis of demand and supply is necessary to explain the process of determination of
price.
 Study of demand side covers the analysis of consumer behaviour.
 Study of supply side studies the conditions of production, cost of production, behaviour
of the firm and industry.
 Theory of factor pricing:
 Theory of factor pricing is known as the theory of distribution.
 Micro economics explains how the prices factors of production viz., land labour, capital,
entrepreneur are determined.
 The prices of factors of production are determined by the equilibrium of their demand
and supply
 Therefore, theories of Rent, Wages, Interest and Profit lies within the scope of Micro
Economics.
 Theory of Welfare:
 Theory of Welfare deals with efficiency and allocation of resources.
 Efficiency in allocation of resources is attained when it results in maximum satisfaction
of people in an economy.
  Economic efficiency involves three efficiencies:

 Efficiency in production: To produce maximum possible amount of goods

from the given amount of resources.
 Efficiency in consumption : To distribute the produced goods and services
among the people in such a way as to maximise total satisfaction of society
 Efficiency in direction of production : This means overall economic efficiency
i.e. producing those goods.
Features of Micro Economics :
1. Study of individual unit :
 Micro economics studies the economic behaviour of small individual economic
units of an economy.
 It deals with the analysis of small individual units of the economy such as individual
consumer, individual firm, individual industry, individual market , etc.
2. Price Theory:
 Micro economics is primarily concerned with price determination of goods and
services on the basis of equilibrium of demand and supply.
 It also determines the prices of factors of production namely land, labour, capital
and entrepreneur.
3. Slicing Method :
 Micro Economics slices or splits the economy into small units.
 It studies the economic behaviour of individual units separately, eg. study of a
particular household or demand of goods of a particular industry.
4. Partial Equilibrium :
 Partial equilibrium is the condition of economic equilibrium which takes into
consideration only a part of the market.
 Micro Economics isolates individual economic unit such as individual consumer,
individual firm, etc. separately from the economy.
 It is based on certain assumptions ‘ceteris paribus’ i.e. other things remaining
constant. For eg. Law of demand is based on the assumption that factors other than
price remain constant.
 Therefore, it neglects the interdependence between economic variables.
5. Microscopic approach:
 According to Prof. A.P.Lerner, “Micro Economics is looking at the economy through
a microscope i.e. how the individual producer, consumer ,household, firm, etc. play
their part in the working of the whole economy.
 As micro economics is individualist in approach it attempts to study national
economy in a microscopic way
 Hence, it does not study the national economy in totality.
6. Based on certain assumptions:
 Micro economics is based on certain assumptions such as full employment, Laissez
faire policy, perfect competition, etc. which do not exist in reality.
 Due to the assumptions its analysis is simple but because of this interdependence
between variables is neglected.
7. Use of Marginalism Principle
 Marginalism principle means change brought in total by an additional unit i.e.
marginal unit
 All important micro economic decisions are taken at the margin therefore this
concept is of crucial importance.
8. Analysis of market structure:
  Micro Economics analyses different market structures such as perfect competition,
monopoly, Monopolistic Competition, Oligoply,etc. and describes as to how the
prices and quantities are determined in these markets.
9. Limited Scope :
 It studies individual economic units.
 It doesn’t deal with nation wide problems like unemployment, inflation,poverty,
etc.
IMPORTANCE OF MICRO ECONOMICS:
1. Price Determination and allocation of resources:
 It explains how price of products and factors of production is determined.
2. Free Market Economy:
 Help in understanding the working of a free market economy.
 Free market economy is that economy in which decisions regarding production of
good are taken at individual levels without government intervention or any other
agency.
3. Foreign Trade :
 Helps to explain the various aspects of foreign trade like determination of currency
exchange rates, effects of tarrif rates, etc.
4. Model building :
 Helps to understand various complex economic situations with the help of
economic models built using various economic variables.
 Micro Economics has made a valuable contribution to economics by developing
various terms, concepts, terminologies, etc.
5. Business Decisions :
 Decisions related to determination of prices of goods, cost of production,
maximization of profit, etc. can be taken.
 Knowledge of price theory helps businessmen in decision making.
 With its help a businessman can estimate demand of his product.
6. Useful to Government:
 Helps the government in framing economic policies such as taxation policy, public
expenditure policy, price policy, etc.
 These policies help the government to attain its goal of efficient allocation of
resources and promoting economic welfare of the society.
7. Basis of welfare Economics:
Micro Economics promotes economic and social welfare by making optimum utilization of
the resources thereby avoiding wastages.
 Shiksha Mandal's

G. S. College of Commerce,
Wardha

junior college
e-learning classes

SUBJECT SUB : ECONOMICS

Unit –I

By : Mragi Gautam

Prof. PravinThakare Dr. Sahebrao Chavan

Co-ordinator Principal (Officiating)
Answer the following questions: (based on Micro
Economics)

Q I Give reasons for the following statements:

a. The scope of microeconomics is limited.

b. Micro Economics uses slicing method.

c. Micro Economics is known as Price Theory.

 Meaning of Macro Economics :

 Macro Economics is one of the major sub-division in the study of

economics.

 The term ‘’macro’ derived from the Greek word ‘Makros’ meaning large or
aggregate.

 Macro economics is the study of aggregates covering the entire economy

such as total employment, national income, national output, total
investment, total savings, etc.

 Therefore, it is known as aggregative economics.

 Macro Economics is also known as the ‘Theory of Income’ or Income

Analysis

Definition of Macro Economics:

J.L. Hansen,” Macro Economics is that branch of Economics which considers

the relationship between large aggregates such as the volume of employment

Scope and Subject Matter of Macro Economics:

 Macro Economics is a study of wide aggregate variables, such as total

employment, national income, national output, total investment, total
savings, etc.
 Macro economics deals not with individual quantities.
 Macro economics deals with the functioning of the economy as a whole.
 The scope of macro economics can be studied under the following
heads:

1. Theory of Income and Employment:

 Macro economic analysis intends to explain what factors determine

the level of national income and employment and what causes
fluctuations in the level of income, output and employment.
 To understand the level of income and employment , macro economics
studies the determinants of aggregate supply, and aggregate demand,
consumption function and investment function.
 Theory of business cycle is also a part and parcel of theory of income.
  This theory also examines the inter relation between income and
employment and suggests policies to solve the related problems.
2. Theory of General Price level and Inflation:

 The study of Macro Economics helps to understand how general price

level is determined and further explains the reasons behind its
fluctuations.
 The study of general price level is significant on account of the problems
created by inflation and depression.
 Inflation and depression are the major economic problems faced by
most countries in the world. Therefore the theory of price level studies
the causes behind such problems and suggests policies to tackle them.

3. Theory of Growth and Development:

 This theory plays a vital role in examining the policies if the

underdeveloped and developed countries.
 In case of under developed countries the theory studies the causes of
under development and poverty and suggests measures for accelerating
growth and development.
 In case of developed countries, it studies the problems of full utilization
of increasing productive capacity and suggests policies to achieve higher
rate of growth along with stability.

4. Macro Theory of Distribution:

 The study of macro economics helps to understand what factors

determine the relative shares of various classes ( such as workers and
capitalists) in national income.
 Macro Economics deals with the relative shares of rent, wages, interest
and profit in the total national income.
 Features of Macro Economics :

1. Study of aggregates:
 Macro Economics deals with the study of nation’s economy as a whole.
 It is the study of wide aggregate variables like national income, total
employment, general price level, aggregate supply, total consumption, total
investment, etc.

2. Income Theory :

 Macro economics is known as ‘Theory of Income and Employment’ or

simply ‘Income Analysis’ because it explains the factors that determine the
level of national income and employment in an economy and studies the
reasons behind their fluctuating nature.
 It also identifies those factors that can increase the level of national income,
generate output and provide employment over a long period.

3. General Equilibrium Analysis:

 Macro Economic analysis is based on General Equilibrium Analysis.

 Studies the behaviour of number of large aggregates.
 Takes into consideration their functional relationship and their
interdependence in doing so.
 General Equilibrium deals with the behaviour of demand, supply and prices
in the whole economy

4. Interdependence:
 Takes into account the interdependence between aggregate economic
variables.
 Eg.: How change in level of investment brings change in national income,
output, employment.
5. Lumping Method:
 Deals with behaviour of aggregates
 Uses Lumping Method in order to deal with variables such as aggregate
demand, aggregate supply, output
 This helps in studying the economic progress over a period of time.

6. Growth Model:
 Studies factors which contribute to economic growth and development
 Growth models are used for studying economic development.
  For eg. Mahalanobis growth model which emphasized on development of
basic heavy industries.

7. General Price Level :

 Determination and changes in general price level are studied in Macro
Economics.
 General price level is the average of all prices of goods and services
currently being produced in the economy.

8. Policy Oriented :
 Macro Economics is a policy oriented science.
 It analysis economic problems and suggests policies to control them.
 Provides and suggests measures to promote economic growth, generate
employment, control inflation, etc.