Maharashtra Board Class 12 Economics Chapter 1 Introduction to Micro Economics and Macro Economics PDF Download

Introduction to Micro Economics and Macro Economics

You have already studied in Class XI, the meaning and definitions of economics given by different economists.

Introduction

Micro economics and Macro economics are the two main branches of modern economics. The term 'micro' is derived from the Greek word, 'Mikros' which means small or a millionth part. The term 'macro' is derived from the Greek word, 'Makros' which means large. These terms were coined by Norwegian Economist Ragnar Frisch of Oslo University in 1933.

Main Branches of Economics

Do You Know

Ragnar Anton Kittil Frisch (1895-1973), a Norwegian econometrician and economist was a joint winner with Jan Tinbergen of the first Nobel Prize for Economics in 1969. He was a pioneer of econometrics - the application of mathematical models and statistical techniques to economic data and theories. He coined many economic terms. In an article on business cycles, Frisch was likely the first person to have referred to the study of individual firm and producer as "Microeconomics." Moreover, he referred to the study of the aggregate economy as "Macroeconomics."

You Should Know

Historical Review of Micro Economics

Micro Economic analysis was developed first. It is a traditional approach. Origin of this approach can be traced back to the era of Classical Economists - Adam Smith, David Ricardo, J. S. Mill etc.

It was popularized by Neo-Classical Economist, Prof. Alfred Marshall in his book, 'Principles of Economics', published in 1890. Other economists like Prof. Pigou, J. R. Hicks, Prof. Samuelson, Mrs. Joan Robinson, etc. have also contributed to the development of Micro Economics.

Historical Review of Macro Economics

Macro Economics did exist in the past before the evolution of Micro Economics. In the 16th and 17th century, followers of Mercantilists (a group of English merchants) advocated policies to the government which were based on macro approach. In the 18th century, Physiocrats (French Thinkers) tried to analyse the concept of national income and wealth. Even the Classical Economic theories of Prof. Adam Smith, Prof. Ricardo and Prof. J. S. Mill discussed the determination of national income and wealth. But their macro analysis was combined with micro analysis. Thus, micro analysis ruled the world of economics till the Great Depression of 1930s.

After the Great Depression, Lord John Maynard Keynes published his famous book the "General Theory of Employment, Interest and Money" in 1936. Keynes used macro economic approach to analyse economic problems. The credit for the development of macro economic approach goes to Lord Keynes. Besides Keynes, Malthus, Wicksell, Walras, Irving Fisher are other economists who have contributed to the development of macro economics.

Teacher's Note

In India, when the government studies how one farmer's income changes, that is micro economics. But when it studies the whole country's income, that is macro economics.

Exam Trick

Remember: Micro = one small shop. Macro = all shops in the whole city.

Points to Remember

Micro means small part of economy.
Macro means big whole economy.
Ragnar Frisch created these terms in 1933.
Micro studies individual things.
Macro studies the whole country.

Meaning of Micro Economics

Micro means a small part of a thing. Micro economics thus deals with a small part of the national economy. It studies the economic actions and behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor etc.

Definitions of Micro Economics

You have already studied some important definitions of micro economics, let us review some more definitions:

1) Maurice Dobb - "Micro economics is in fact a microscopic study of the economy."

2) Prof A. P. Lerner - "Micro economics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body of economy – the individuals or households as consumers and individuals or firms as producers play their part in the working of the whole economic organism."

Scope of Micro Economics

a) Theory of Product Pricing

The price of an individual commodity is determined by the market forces of demand and supply. Micro economics is concerned with demand analysis i.e. individual consumer behaviour, and supply analysis i.e. individual producer behaviour.

b) Theory of Factor Pricing

In Micro economics, land, labour, capital and entrepreneur are the factors that contribute to the production process. Micro economics helps in determining the factor rewards for land, labour, capital, and entrepreneur in the form of rent, wages, interest, and profit respectively.

c) Theory of Economic Welfare

Theory of Welfare basically deals with efficiency in the allocation of resources. Efficiency in the allocation of resources is attained when it results in maximization of satisfaction of the people. Economic efficiency involves three efficiencies:

Efficiency in production: Efficiency in production means producing maximum possible amount of goods and services from the given amount of resources.

Efficiency in consumption: Efficiency in consumption means distribution of produced goods and services among the people for consumption in such a way as to maximize total satisfaction of the society.

Overall economic efficiency: It means the production of those goods which are most desired by the people.

Micro economic theory shows under what conditions these efficiencies are achieved.

Thus, the focus of micro economics is mainly confined to price theory and resource allocation. It does not study the aggregates relating to the whole economy. This approach does not study national economic problems such as unemployment, poverty, inequality of income etc. Theory of growth, theory of business cycles, monetary and fiscal policies etc. are beyond the limits of micro economics.

Teacher's Note

When a vegetable seller decides how much to sell each day, he is using micro economics. He looks at his own shop, not all shops.

Exam Trick

Remember: Micro = Price theory. Always remember micro is about prices of one thing.

Points to Remember

Micro economics studies one small unit only.
It is also called price theory.
It has limited scope and does not study whole economy.
It uses slicing method to split economy into parts.
It helps businessmen make decisions about prices.

Features of Micro Economics

1) Study of Individual Units: Micro economics is the study of the behaviour of small individual economic units, like individual firm, individual price, individual household etc.

2) Price Theory: Micro economics deals with determination of the prices of goods and services as well as factors of production. Hence, it is known as price theory.

3) Partial Equilibrium: Equilibrium is the balance between two factors. Micro economic analysis deals with partial equilibrium which analyses equilibrium position of an individual economic unit i.e. individual consumer, individual firm, individual industry etc. It isolates an individual unit from other forces and studies its equilibrium independently.

4) Based on Certain Assumptions: Micro economics begins with the fundamental assumption, "Other things remaining constant" (Ceteris Paribus) such as perfect competition, laissez-faire policy, pure capitalism, full employment etc. These assumptions make the analysis simple.

5) Slicing Method: Micro economics uses slicing method. It splits or divides the whole economy into small individual units and then studies each unit separately in detail. For example, study of individual income out of national income, study of individual demand out of aggregate demand etc.

6) Use of Marginalism Principle: The concept of Marginalism is the key tool of micro economic analysis. The term 'marginal' means change brought in total by an additional unit. Marginal analysis helps to study a variable through the changes. Producers and consumers take economic decisions using this principle.

7) Analysis of Market Structure: Micro economics analyses different market structures such as Perfect Competition, Monopoly, Monopolistic Competition, Oligopoly etc.

8) Limited Scope: The scope of micro economics is limited to only individual units. It doesn't deal with the nationwide economic problems such as inflation, deflation, balance of payments, poverty, unemployment, population, economic growth etc.

Teacher's Note

Micro economics is like looking at one tree very carefully. In India, a tea seller studies his own business - this is micro economics.

Exam Trick

Remember: Micro has LIMITED scope. It does NOT study whole country problems like inflation or unemployment.

Points to Remember

Micro studies only one small part.
Price theory is another name for micro economics.
It assumes "other things remain same".
It has limited scope and only studies individual units.
Slicing method splits the whole into small parts.

Importance of Micro Economics

1) Price Determination: Micro economics explains how the prices of different products and various factors of production are determined.

2) Free Market Economy: Micro economics helps in understanding the working of a free market economy. A free market economy is that economy where the economic decisions regarding production of goods, such as 'What to produce?, How much to produce?, How to produce? etc.' are taken at individual levels. There is no intervention by the Government or any other agency.

3) Foreign Trade: Micro economics helps in explaining various aspects of foreign trade like effects of tariff on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a particular country etc.

4) Economic Model Building: Micro economics helps in understanding various complex economic situations with the help of economic models. It has made a valuable contribution to economics by developing various terms, concepts, terminologies, tools of economic analysis etc. Economic models are built using various economic variables.

5) Business Decisions: Micro economic theories are helpful to businessmen for taking crucial business decisions. These decisions are related to the determination of cost of production, determination of prices of goods, maximization of output and profit, etc.

6) Useful to Government: It is useful to government in framing economic policies such as taxation policy, public expenditure policy, price policy etc. These policies help the government to attain its goals of efficient allocation of resources and promoting economic welfare of the society.

7) Basis of Welfare Economics: Micro economics explains how best results can be obtained through optimum utilization of resources and its best allocation. It also studies how taxes affect social welfare.

Teacher's Note

A shopkeeper uses micro economics to decide the price of his goods. The government uses it to make rules about business.

Exam Trick

Remember: Micro helps in PRICE FIXING and BUSINESS DECISIONS. Think of a shop deciding its prices.

Points to Remember

Micro economics helps fix prices of goods.
It helps understand free market economy.
It helps businessmen make decisions about profit.
It helps government make policies about taxes.
It is used for studying foreign trade.

Meaning of Macro Economics

Macro economics is the branch of economics which analyses the entire economy. It deals with the total employment, national income, national output, total investment, total consumption, total savings, general price level interest rates, inflation, trade cycles, business fluctuations etc. Thus, macro economics is the study of aggregates.

Definitions of Macro Economics

1) J. L. Hansen - "Macro economics is that branch of economics which considers the relationship between large aggregates such as the volume of employment, total amount of savings, investment, national income etc."

2) Prof Carl Shapiro - "Macro economics deals with the functioning of the economy as a whole."

Scope of Macro Economics

i) Theory of Income and Employment

Macro economic analysis explains which factors determine the level of national income and employment and what causes fluctuations in the level of income, output and employment. To understand, how the level of employment is determined, we have to study the consumption function and investment function. Theory of Business Cycles is also a part and parcel of the Theory of Income and Employment.

ii) Theory of General Price Level and Inflation

Macro economic analysis shows how the general price level is determined and further explains what causes fluctuations in it. The study of general price level is significant on account of the problems created by inflation and deflation.

iii) Theory of Growth and Development

Macro economics consists of the theory of economic growth and development. It explains the causes of underdevelopment and poverty. It also suggests strategies for accelerating growth and development.

iv) Macro Theory of Distribution

Macro theory of distribution deals with the relative shares of rent, wages, interest and profit in the total national income.

Teacher's Note

When India's government studies the whole country's income and jobs, that is macro economics. It looks at all people together, not one person.

Exam Trick

Remember: Macro = whole country. Like studying all students in India together, not one student.

Points to Remember

Macro economics studies the whole economy.
It deals with national income and employment.
It studies inflation and general prices.
It looks at economic growth of whole country.
It is the study of big numbers and totals.

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