macro and micro economics

7/31/2019 Macro and Micro Economics

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Assignment No:-1

Subject:-Managerial Economics

Topic: -

Microeconomics and Macroeconomics

Submitted by:-

Badhe suraj - 13

Badjate Ankur -14

Dhanawate Sheetal - 30

Patil Megha - 61


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Managerial Economics:-

Economics is the study of men as they live, behave, move and thinking ordinary business

of life. Economics as a social science studies human behavior as a relationship between

numerous wants and scares means having alternative uses.

According to Prof. Spencer Siegelman, Managerial economics deals with integration of

economic theory with business practice for the purpose of facilitating decision making and

forward planning.

According to Prof. Joel Dean, The purpose of Managerial Economics is to show how

economic analysis can be used in formulating business policies.

According to Prof. Hague, Managerial economics is concerned with using logic of

economics, mathematics and statistics to provide effective ways of thinking about business

decision problems.

Classification of Economics:-

Economics

Microeconomics Macroeconomics

Microeconomics and macroeconomics are the two major branches of modern economic

theory. The terms macroeconomics and microeconomics were originated by Ragnar Frisch in

1933.The worlds macro and micro are derived from the Greek world Micros and Makros which

mean small and large respectively.


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Meaning of Microeconomics:-

Microeconomics is the branch of economics which is concerned with the analysis of

behavior of the individual economic units or variables such as individual consumer or a

producer. It is the study of particular firms, households, individual prices wages, incomes,

particular commodities. Essentially, microeconomics is the study of particular economic

organisms and their interactions and particular economic quantities and their determination.

Microeconomics basically deals with individual decision making and the problem of

resource allocation, it examines, in particular, as to how individual consumers and producers

behave and how their behaviors interact.

Microeconomics theory is often called price theory or value theory because it is

primarily concern with determination of relative prices of different goods. The subject matter of

Microeconomics fundamentally covers the following areas:

1) Theory of value i.e.product pricing and factor pricing.

2) Theory of economic welfare.

The subject matter and the Scope of microeconomics.

Microeconomics is basically concerned with market behavior and allocation of resources. The

subjectmatter of microeconomics is thus, confined to the following major fields:

Pricing Distribution Welfare

Pricing:-

A major part of microeconomic theory is confined to the price theory. Microeconomics

assumes the total quantity of recourse available in the economic society as given and seeks to

explain how these shall be allocated to the production of particular goods for the satisfaction of

chosen wants. In a free market economy, the allocation of recourses is based on the relative

prices and profibility of different goods. As such, to explain the allocation of recourses,

microeconomics seeks to explain the pricing phenomenon.

Price theory explains how the price of a particular commodity is determined in the

commodity market. For in depth analysis of price determination it contains:


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Theory of demand of the analysis of consumer behavior. Theory of production and cost or the analysis of producer behavior. Theory of product pricing or price determination under different market structures.

Distribution:-

Distribution is an equally important branch of microeconomics. The theory of distribution

basically deals with the factor pricing. It seeks to explain how rewards of the individual factors

of production such as land, labour, capital and enterprise are determined for their productive

contribution. In other words, it is concerned with the phenomenon of rent, wages, interest and

profits, as the respective rewards of these four categories of factors viz. land, labour, capital and

enterprises.

Since demand and supply of each these factors are characteristically different, there are

separate theories to explain rent, wages interest and profits. Thus, distribution field includes

general theory of distribution, theories of rent, theories of wages, theories of interest and theories

of profits.

Welfare:-

Welfare economic is an important branch of microeconomics as it seeks to explain how

efficient is the allocation of recourses so determined. It seeks to explain under what conditions

the efficiency in production, efficiency in distribution and overall economic efficiency, i.e. theefficiency in the direction of production are attainable.

The theory of economic welfare explains how an individual consumer maximizes his

satisfaction when production efficiency is achieved by allocation of resources or reallocation of

resources in a such a way as to maximize output from a limited set of input.

Along with individual economic welfare ,welfare economics is also confined to the social

welfare .social welfare is based on overall economic efficiency of the system .when maximum

individual wants are satisfied at the best possible or optimum level by the production patterns

through efficient allocation of recourses ,overall economic efficiency or pareto optimality

condition is reached .conditions of overall economic efficiency ,i.e. Pareto optimality conditions

,are of great help in raising the standard of living of the population and maximization of social

welfare. The subject matter and the scope of microeconomics may be thus pinpointed as in

chart given below:


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Microeconomics

Pricing Distribution Welfare

(Theory of value) (Factor Pricing) (Welfare Economics)

Theory Theory Theory General Theories

of of of Theory of of

Demand Production Pricing Distribution

Rent Wages Interest Profits

IMPORTANCE AND USES OF MICROECONOMICS:

Microeconomics has great theoretical and practical significance.

It Explains Price Determination and Allocation of Resources. It provides anunderstanding of the working of market mechanism in capitalist/free enterprise economy.

It has Direct Relevance in Business Decision-making. The knowledge of price theoryhas its own significance in practical business decision making. It is useful to a

businessman in determining the price policy. It guides him in attainment of maximum

productivity through optimum allocation of his given resources. It teaches him in analysis

of the costs of production and estimation of the demand for his product.

It serves as a Guide for Business/Production Planning. Tools of microeconomics areuseful in preparing the expansion of business. It is also helpful in investment decision

taking by the firm.

It serves as a basis for prediction. Microeconomics theory is useful to make conditionalpredictions. Demand forecasting, for instance, rests on microeconomic principles of

demand. It Teaches the Art of Economizing. Microeconomic principles deal with economizing

of scares resources and show how to use them efficiently so as to gain maximum out of

minimum. Microeconomic law, like the law of substitution, shows how a consumer can

maximize his satisfaction by equating the ratios of marginal utilities to prices of different

goods which he buys. Likewise, there is optimum utilization of the factors of production

when their marginal products become unequal.


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It is useful in Determination of Economic Policies of the Government. For instance,in determining a tax policy the government can know the effect and incidence of

particular tax through micro-economic tools and then judge its rationality and

desirability. It also provides the principle for determining the price policy for the public

enterprise. Similarly, the nature of price control administered prices, and such other

policy issues can be determined on the basis of relevant micro-economic analysis.

It serves as the Basis for WelfareEconomics. Microeconomics examines the subjectivesatisfaction that individuals drive from consuming goods and services and from enjoying

leisure. It also suggests how to eliminate wastages and have optimization of resources so

as to fetch maximum social welfare which is the underlying goal of welfare economics.

It Explains the Phenomena of International Trade. Microeconomics theories explainmany aspects of international trades such as emergence, nature and gains of international

trade. Determination of exchange rate, impact of tariffs on prices etc.

Limitations Of microeconomics:-

Despite being a significant major branch of economic science and its immense usefulness

in explaining economic behavior of the individual economic units, microeconomics has inherent

limitations as follows:

Concept Marginalism:-Microeconomics theories are based on the principle of marginalism.Marginal changes are

assumed in the relevant phenomena. A marginal change refers to the addition of just a

single unit more. Thus, these are concepts like marginal utility, marginal cost, marginalproduct, marginal revenue, etc.It thus refer to a bit change in the total variation. The

theories thus imply equilibrium conditions in terms of margin, such as a consumer

equating marginal utility with price for the maximization of total satisfaction, a producer

equating marginal cost with marginal revenue for maximization of profits, etc.In practice,

however,it is very difficult to realize this marginal approach.

Unrealistic Assumption of full Employment and other simplification:-The entire microeconomics is based on the assumption of full employment even in

a short-term analysis, which is unrealistic. By assuming full microeconomics theories

have over simplified the conditions of reality.

Pure capitalist model:-Microeconomics theories assume laissez faire policy and pure capitalism in there

behaviurristic models today there is no pure capitalism,, so most of micro economic

theories have no significant relevance to practice.


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Incomplete expiation and misleading generalization.Micro-economic studies specific economic units separately from the rest of whole

economy. It thus explains only a part and not the whole of working of an economic

system. Microeconomics thus doesnt furnish a complete explanation of the whole

phenenomenon. Again application of deductive method in generalization from particular

behavior is often misleading. What is true for and individual may not be true for the

entire system.

In fact, the classical economy had made the same mistake in stating that when each

individual saves every one of them, would become wealthy so the society tends to be, reach

and wealthy. Here they failed to realize the paradox of thrift caused by deficiency of

aggregate demand and consequently falling level of income. To recapulite in a nutshell,

microeconomics certain inheritance limitations

Most of the micro economics theories are abstract. Most of the micro economics theories are static based on ceteri paribusi.e. assuming

other things being equal.

Microeconomics unrealistically assume laissez faire policy and pure capitalism Micro economic study only part and not the whole economic thus it cannot explain the

functioning of the economy at large

By assuming the independence of wants and production system micro economics hasfailed to consider dependent effects on economic welfare

Microeconomics misleads when one tries to generalize from the individual behavior ofaggregate ,simply by generalizing from character and behavior of the individual

components Microeconomic in dealing with macroeconomic system unrealistically assumes full

employment

Meaning of Macroeconomics

Macro means large or aggregate (total). It is a branch of economics which deals with

the aggregate behavior of the economy as a whole. Macroeconomics is essentially an aggregate

economics. It makes a study of the economic system in general. It looks at the total size, shape

and functioning of the economy as whole, rather than working of articulation or dimensions of

the individual parts.

Macroeconomics is a study of very large economy- wide aggregate variables like national

income, total savings, total consumption, total investment, money supply, price levels,

unemployment, economic growth rate etc.


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Macroeconomics covers following areas of economic studies:

Determination of income and employment

Theories of consumption function and investment Monetary demand and supply Money, prices and inflation Theories of business cycles and macroeconomic policy New classical economics based on rational expectations Government budget constraints ,fiscal policy and fiscal deficit Open economy macroeconomics :balance of payments ,foreign exchange rate

,international economic linkages

Theories of economic growth

Importance of macroeconomics:

Macroeconomics has its unique importance

It explains the working of economic system as whole It examines the aggregate behavior of the macroeconomics entities like

firms,households,and the government

Its knowledge is indespencebale for the policies maker for formulating macroeconomicspolices such as monetary policy, fiscal policy industrial policy ,exchange control, incomepolicy etc

It is very useful to the planner for preparing economic plans for the countriesdevelopment

It is helpful in international comparison It explains economic dynamism and intricate inter relationship among macro economic

variables such as price level,income,output, and employment

It studies facilities overall purposes of control and prediction.

Limitation of macroeconomics

It ignores individual behavior all together It has the tendency to excessive generalization. It is not easy to get correct and complete measures of the economic aggregate. Thus it

lacks precision in actual practice


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Macroeconomic predictions are not fully reliable when they are based on incompleteinformation or inaccurate measures. National income, price index no etc are only the

rough indicators

Often macro level policies may not produce the same results at micro levels.Difference between Micro and Macroeconomics:

Difference in nature:

Microeconomics is the study of the behavior of the individual units, in particular,

consumers, firms and resource-owners (factors of production), rather than aggregates.

Macroeconomics, on the other hand, is the study of the behavior of the economy as a whole.

Difference in Methodology:

Microeconomics is individualistic, whereas macroeconomics is aggregative in

methodological approach.

Traditional economic analysis, especially that followed by the neoclassical economists,

was largely confined to the study of individual aspects of economic behavior activities,

problems, experiences- and the equilibrium process of an economic activity, isolated from the

general set-up. Again, the results of such analysis were averaged out and generalized by

traditional economists to explain the aggregative behavior of the system as a whole. Modern

economists, including Keynes, however, realized the inadequacy of such an analysis and argued

that such generalization of individual behavior cannot just be a summation of individual

activities. A communitys economic behavior has its own distinctive modes and courses. It is;

therefore, wrong to extend micro-level aggregative working of the economy as whole.

Obviously, as the overall microeconomic system is highly synchronized and inter

connected in nature, no one part of the system can be considered in isolation from the others. A

separate branch of study was needed to comprehend the aggregative economic relations.

Macroeconomics was consequently developed to describe the typical nature of aggregate

economic behavior as distinct from isolated individual activities. Microeconomics of course did

refer to aggregate like market demand, market supply, industry, etc. but these were not

considered in relation to the economy as a whole. On the other hand, macroeconomics concerns

itself with aggregates relating to the economy as a whole. In macroeconomics, economic

phenomena are studied in their aggregate size, shape and behavior.

Difference in Economic Variables:

Microeconomics is concerned with the behavior of micro variables or micro quantities

such as individual demand, supply, particular commodity prices, wages, and individual

industries. Macroeconomics is however concerned with the behavior of macro variables or

macro quantities such as national income, price level, national output, total investment etc.


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Difference in the field of interest:

Microeconomics primarily deals with the problems of pricing and income distribution.

Macroeconomics on the other hand, pertains to the problems of the size of national income

economic growth and the general price level.

Difference in the outlook and scope:

In Microeconomics, usually, behavioral elements of units with homogenous characteristic

are aggregated. Macro economics on the other hand, uses aggregates which relate to the entire

economy or to a large sector of the economy and when it considers industrial output, it refers to

the whole of output produced by the industrial sector and similarly, agricultural output for the

entire agricultural sector. These are sub aggregates constituting the economys total output.

Demarcation in the areas of study:

Theory of value and theory of economic welfare are the major areas covered in micro

economics. On the other hand, income and employment theory and monetary theory are the core

topics of macroeconomics.

macro and micro economics

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