AN OVERVIEW: CONCEPTS OF MICRO AND MACRO

ECONOMICS

-Banik Gour Sundar

ECONOMICS

• Economics is the study of how society decides what gets produced, how and for whom.

• Economics explain how scarce resources are allocated among competing demands.

• Fisher, Stanley, Economics, 1984, P-I

Scarce ResourceA scarce resource is a resource that is not available in unlimited quantity at a zero price.

Approaches to study economic problems

• Microeconomics• Macroeconomics• Microeconomics: Microeconomics is the study of

the economic action/behavior of individuals and small group of individuals or economic agents. This includes the study of particular households, commodities, firms, markets, individual prices, wages, incomes, and individual industries.

MacroeconomicsMacroeconomics is the study of the problems of aggregates or averages covering the entire economy or economy as a whole, such as national income, GDP, total employment, total unemployment, total investment, total consumption, total saving, aggregate supply, aggregate demand, inflation rate, wage level, total export, total import etc.

Types of economic system

• The Command Economy

• Free Market Economy

• The Mixed Economy

Important Economic Indicators to Understand the Economy of a Country

GNP, GDP, savings, investment, import, export, foreign remittance, foreign liabilities, inflation, unemployment, income distribution, gini coefficient, poverty etc.

Concept of Demand

How much of a good a consumer is willing to buy in a market at a specific price in a given period of time is called demand. Demand is a consumer’s desire, ability and willingness to pay for a good or service.

Law of Demand

If other things held constant, a rise in the price of a commodity is followed by a reduction in demand and a fall in price is followed by an increase in demand.

Limitations of the Law

• Change in taste, fashion or preference • Change in income• Change in other commodity prices

(Substitutes or Complimentary)• Anticipatory change in price• Giffen good

Price Elasticity of Demand

Price elasticity of demand is the rate at which quantity demanded varies with a change in price. To be more specific, the price elasticity of demand is a measure of the relative change in amount purchased in response to a relative change in price.

ProductionThe activity of production involves the transformation of inputs into outputs. These inputs are called factors of production.

Factors of ProductionA factor of production may be defined as that goods or service which is required for production. A factor of production is indispensable for production because without it no production is possible. There are four factors of production: land, labour , capital and organisation.

LandIn economics, land as a factor of production does not refer only to the surface of land but to all gifts of nature, such as rivers, oceans, climate, mountains, fisheries, mines, forests, fertility of land, air, light, heat, etc.

LabourLabour refers to all mental and physical work undertaken for some monetary reward. It includes the services of a factory workers, a doctor, a teacher, a lawyer, an engineer, an officer, etc. But labour does not include any work done for leisure or which does not carry any monetary reward.

CapitalCapital means all man made resources. It comprises all wealth other than land which is used for further production of wealth. In modern usage, capital not only refers to physical capital but also to human capital which is the “process of increasing knowledge, the skills and capacities of all people of the country”.

OrganisationOrganisation refers to the services of an entrepreneur who controls, organise and manage the policy of a firm, innovates and undertakes all risks.

Theory of ProductionThe theory of production is the physical relationship that describes how inputs ( such as labour and capital) are transformed into outputs (such as cars and televisions). Combining the inputs in different ways and different quantities, same quantity of outputs can be produced. The functional relationship between quantities of inputs and outputs is called production function.

Production Function• For simplicity, we assume that there are

two inputs labour L and capital K, we can then write the production function as

• Q = F (K,L)• The production function states the

maximum quantity of output that can be produced from any chosen quantities of various inputs.

The Production Isoquant

An isoquant is a curve that shows all the possible combinations of inputs that yield the same output.

Return to ScaleReturns to scale is an another concept of theory of production. The law or returns to scale describes the relationship between outputs and the scale of inputs in the long run when all the inputs are increased in the same proportion. The measure of increased output associated with increases in all inputs in fundamental to the long-run nature of the firm’s production process.

Return to Scale• Increasing return to scale (Economics of

scale): If output increases more than double when inputs are doubled.

• Constant return to scale: If output is double when all inputs are doubled.

• Decreasing return to scale: If output is less than double when all inputs are doubled.

Production Possibility Frontier

“The production possibility frontier shows for each level of the output of one goods, the maximum amount of the other goods that can be produced in an Economy”.