Chapter 1

Introduction
 Micro and macro economics concept

Although there is actually only "one" economics, the overall field is divided into two areas which in turn
are very broad: Micro-economics and macro-economics. The word Micro and Macro was introduced by
Ragnar Frisch in 1933. In fact, until the 1930s there was little need to distinguish between the two
branches, economists concentrated their attention almost exclusively on what is now traditionally known
as micro economics. Macro-economics was clearly the junior partner. However, a new interest in macro-
economics arose after 1936, the year John Meynard Keynes published 'The General Theory of
Employment, Interest, and Money'. That year marked the beginning of a change, so momentous that
some choose to call it the "Keynesian revolution." With the ferment begun by the ideas in Keynes' book,
economists' relatively neglected macro-economics ended.

Micro-economics
Micro-economics is the term derived from word 'Mikros' which means small. So, macro-economics is
the economics that deals with small unit of economics. Micro-economics is concentrated with output of
particular goods and services by single firms or industries and with the spending on particular goods and
services by single firms or industries. It studies the determination of price for a particular product, what
amount of output will maximize, its profits, and how it determines the lowest cost combination of
labour, materials, capital equipment, and other inputs needed to produce this output. It is also concerned
with how the individual consumer determines the distribution of his or her total spending among the
many products and services available so as to maximize utility. In its approach, micro-economics
essentially assumes as given the total output, total employment and total spending for all goods and
services, it then proceeds to examine how output and employment are allocated among various
individual industries and firms within industries and how the prices of the various products of these
individual firms are established.
According to K.E. Boulding, "Micro-economics is the study of particular firms, particular households,
individual prices, wages, incomes, individual industries, particular commodities."
Shapiro, "Micro-economics is concerned not with total output, total employment or total spending but
with the output of particular goods and services by single firms or industries and with the spending on
particular goods and services by single households or by households in single markets."
A.P. Lerner, "Micro-economics consists of looking economy through microscope, as it were, to see how
the millions of cells in the body of economic-the individuals or household as consumers ,and the
individuals or firms as producer- play their part in working of the whole economic organism ."
Robert S.Pindycik and Dineal L. Rubinfield “Micro economics is concerned with the decisions made by
small economic units –consumers , workers, investors,owners of resources, and business firms.it is also
concerns with the interaction of consumers and firms to form markets and industries.”
Much micro economics is about limit. For example- consumer has limited income for purchasing
goods and services .Producers has limited budget and technical know-how to produce thingsand so on
Mocro economics has role of prices .
Microeconomics also describes how prices are determined. In market economy,prices are determined
by the interaction of consumers ,workers and firms.
Micro-economics studies the price determination and allocation of resources so it is called Price Theory
also and Theory of Demand and Supply of a Product.
Scope of Micro Economics
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1. Allocation of Resources: - It studies that total amount of resources are considered to be constant and
seeks to analyse what goods shall be produced and how resources (land, labour, capital, organization)
are allocated to produce particular goods.
2. Theory of Product Pricing: - The process of determination of price and output in different market
structure (perfect and imperfect) is subject matter of product pricing theory.
3. Theory of factor pricing (Theory of distribution): - Return to factors of production is provided in
the form of wage, rent, interest, and profit. It studies how the factor prices are determined.

In short scope of Micro-economics can be presented as below:

Theory of Micro-economics

Product Pricing Factor pricing Theory of Economic Welfare

Demand Theory Cost and Production Theory Wage Rent Interest Profit

It is the study of price theory; how the price of a particular commodity determined is studied
It studies equilibrium of individual consumer
It studies equilibrium of individual firms
It studies simultaneous equilibrium
Finally it studies the interrelations between different markets so as to determine all prices
simultaneously.
Though, it is generally said that micro-economics is related to partial equilibrium analysis which is the
study of the equilibrium position of an individual, a form, an industry or group of industries, yet it is also
a study their interrelationships and interdependence within the economy which falls under the general
equilibrium analysis.
Limitation of Micro-economics
1. Depends on unrealistic assumptions such as full employment (according to Keynes to assume
full employment is to assume our difficulties way) and laissez faire economy.
2. Not adequate study and misleads economic policies.
3. focused on small unit (on individualism )
4. emphasis on supply side (assumption of “supply creates its own demand” )
Importance or Use of Micro-economics
1. Optimal Production Decisions: - Firms have limited resources of production and their main
objective is to maximize profit and it helps to choose optional production decisions by cost of production
minimizing.
2. Pricing Policy: - Although the firm is alone it has to face many difficulties, in market there may
have other firms producing substitution goods and it helps to determine price of its product.
3. Optimal Resources Allocation: - It helps why and how much of commodity should be
produced and how the produced goods be distributed to consumer.

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4. Helpful to formulate economic policies: - In micro-economics merits and demerits of perfect
competition, monopoly market etc, are analyzed and this helps government to determine public policy. It
is helpful what type of market should be encouraged and what to prohibit.
5. Practical Importance: - It can be used in practical aspects of economics such as public finance
and international trade. It is helpful to study and analyze the effect of tax on public welfare, merits of
international trade, exchange rate determination of foreign currency.

Types of micro and macro economics

Types of micro economics
There are three types of micro economics (in which basis)-
1. Microstatic analysis
2. Comparative microstatic analysis
3. Dynamic analysis
Microstatic analysis –
In general sense static means no change like hanging calendar on the wall, curtail
on the window and so on but in economics static means economy is operating as
usual like there is no change in demand and supply, prices of the commodities and
so on. It means economy is functioning without any change in economic situation.
It is a still picture of economic activity of a point of time.
With the help of figure we can explain it very clearly.
Figure no 1.1
In given figure there is interaction between demand and supply that determines
equilibrium price and quantity. It shows the relationship between variables with a
single equilibrium position.
Comparative micro static analysis
Comparative micro static analysis shows the comparison between two static
equilibrium positions. It is a comparison of two still picture of economic activities
of two different points or period of time.
Figure no 1.2
In given figure there are two equilibrium positions. Initial equilibrium position at
e1 .when there is increment in demand that sifts in demand curve from dd1 to dd2.
It compares two points of time.it compares economic variables in two equilibrium
positions but it does not analyse how there is change in equilibrium position or the
processes to attain the new equilibrium position from initial equilibrium positon.
Dynamic analysis
It is the movie picture of economic activities. It does not only deals with why
there is change in initial equilibrium position but also deals with the processes of

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change in equilibrium positions. It means it also deals with various disequilibrium
positions as well. So it analyses period of time.
Figure 1.3
Types of macro economics
There are three types of macro economics (in which basis)-
1. Macrostatic analysis
2. Comparative macrostatic analysis
3. Dynamic analysis
Microstatic analysis –
In general sense static means no change like hanging calendar on the wall, curtail
on the window and so on but in economics static means economy is operating as
usual like there is no change in demand and supply, prices of the commodities and
so on. It means economy is functioning without any change in economic situation.
It is a still picture of economy of a point of time.
With the help of figure we can explain it very clearly.
Figure no 1.1
In given figure there is interaction between aggregate demand and aggregate
supply that determines equilibrium level income. It shows the relationship
between macro economic variables with a single equilibrium position.
Comparative macro static analysis
Comparative micro static analysis shows the comparison between two static
equilibrium positions. It is a comparison of two still picture of economy of two
different points or period of time.
Figure no 1.2
In given figure there are two equilibrium positions. Initial equilibrium position at
e1 .when there is increment in aggriage demand that sifts in demand curve from
dd1 to dd2. It compares two points of time.it compares macro economic variables
in two equilibrium positions but it does not analyse how there is change in
equilibrium position or the processes to attain the new equilibrium position from
initial equilibrium positon.
Dynamic analysis
It is the movie picture of economic as whole. It does not only deals with why
there is change in initial equilibrium position but also deals with the processes of
change in equilibrium positions. It means it also deals with various disequilibrium
positions as well. So it analyses period of time.
Figure 1.3
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 Macro-economics

The term macro is derived from the Greek word 'Makros' which means large. Hence macro-
economics is the study of economic phenomena in it’s totally. It is junior partner of micro-economics.
The subject of macro-economics would be of secondary importance in an economy that operated almost
continuously with full utilization of its resource. It becomes a subject of supreme importance in an
economy that operates as so nary economies did during 1930s.
In the early years following the appearance of Keynes, 'General Theory', macro-economic theory
could be neatly divided into two parts - Classical and Keynesian. Keynes chase to contrast the ideas he
presented in the General Theory with the prevailing ideas by labeling those prevailing ideas as classical.
In economic theory, the term "Classical" had been termed by Karl Marx who used it to cover the theories
of David Ricardo, James Mill, and their predecessors. Keynes extended the term to include "the
followers of Ricardo, those that is to say, who adopted and perfected the theory of the Ricardian
economics, including J.S. Mill, Marshall, Edgeworth and Prof. Pigou." This is now the generally
accepted meaning of "Classical" in its application to macro economic theory.
According to R.G.D. Allen, The term 'macro-economics' applies to the study of relation between broad
economic aggregates."

Mack Konel, "Here we study forest, not the trees. It gives us a bird's eye view of the economy." -
Prof. Ackley, "Macro-economics deals with economic affairs 'in the large', concerns the overall
dimensions of economic life. It looks at the total size and shape and functioning of the 'elephant' of
economic experience, rather than working of articulation or dimensions of the individual parts. It studies
the character of forest, independently of the trees which compose it." Thus, according to Prof. Ackley,
macro-economics is the study of 'overall dimensions of economic life, it is the study of 'the elephant of
economic experience."
Scope of Macro-economics
K.E. Boulding, "Macro-economics deals not with individual quantities but with aggregate of these
quantities, not with individual incomes but with national income, not with individual prices but with
price level, not with individual output but with national output.”
This is clear definition on scope of macro economics.
(a) Theory of Income and Employment: - It studies the factors influencing the level of income and
employment; these levels are determined by aggregate demand. Aggregate demand means total of
consumption and investment demand. Hence, consumption function, investment function and trade cycle
are part of macro-economics.
(b) Theory of General Price Level: - Inflation is a related subject to general price level. Inflation,
money banking and financing are also included in macro-economics.
(c) Theory of Economic Growth: - Growth economics or theory of economic growth is included in
macro-economics. Concept of economic growth with stability was developed by Harrod-Damodar.
(d) Modern Theory of Distribution: -National income is distributed to factors of production in
different forms. The contribution of factors of production in national income is studied comparatively in
this economics.

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 Macro Economic Theory

Theory of Income Theory of General Theory of Modern Theory

and Employment Price Level and Economic Growth of Distribution
Theory of Inflation

Consumption Investment Function

Function

Trade Cycle
Limitations
1. No equal effect on all sectors – Aggregate tendency cannot affect all sectors of economy equally.
2. Difficult to measure: - To measure huge aggregate is very difficult but now a days, it has made
easy by the use of calculator and computer.
3. Fallacies of Composition: - In macro-economics economic behaviour is considered as the total of
individual activities. It can't be true the fact that is applied to an individual in aggregate form. For
example, individual saving is advantageous and public saving is disadvantages.
4. May misled economic policies.
Importance or Use of Macro-economics
1. Helpful (useful) in policy formation and implementation: - Government main concern is with
public although it controls individual price, firm etc. Mainly it controls price level, production level.
According to Tinbergen “working with macro-economic concepts is a bare necessity in order to
contribute to the solutions of the great problems of our time.
2. To study whole sector: - There are numerous facts that have to be studied and impossible to study
individually. Since economics covers various subjects generalization is necessary and it is possible ē the
help of macro-economics.
3. Helpful to study micro-economics: - For example to formulate law of diminishing return to scale
and consumer's saving collection of public experience is necessary and helpful which is helpful ē the
help of macro-economics.
4. To know the accurate behaviour of group factors: - It is difficult to achieve accurate information
by generalization of individual behaviour. Difficult to know the behaviour of jungle ē the study of a tree.
In complex economic problems, it has following importance -
To know general unemployment: - General unemployment is result of lack of effective demand.
Effective demand can be increased by increasing total investment, production, income, consumption,
etc.
-Calculation of national income.
-To formulate economic growth policy.
-To solve monetary problems (Inflation and deflation / as negative effect in economy can be solved
with the help of monetary and fiscal policy.)
-To know trade cycle
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Distinction between Micro and Macro Economics
As distinguished by Prof. Boulding, micro-economics is concerned with individual outputs,
whereas macro-economics is concerned with aggregates of individual quantities, national income,
general price level and national output.
Macro Micro
1. Literal meaning
- Greek word ‘makros’ means large. -Greek word ‘mikros’ means small.
2. Objective of the study
- Maximize national income through employment, -Maximize demand and supply.
economic growth ,BOP etc
3. Scope
- Concerned aggregates of individual quantities, -Individual outputs.
national income, general price level and national
output.
-Studies aggregates related to entire economic -Studies aggregates related to particular
system commodities, market, industries.
- Studies determination of general price level and -Studies determination of relative prices of
allocation of resources. products and factors and resource allocation on
this basis.
- Studies for the debt of entire economic system. -Concern particular sectors.
4. Assumption
- Rejects full employment assumption and proceeds -Assumes level of full employment.
to analyze how resources can be fully employed

- Deals with various factors creating gap -Based on say's law of market.
between demand and supply.

5. Equilibrium
- General equilibrium of whole economy -Partial equilibrium (based on the assumption of
‘ceteris paribus’)
6. Solving economic problems
- Able to Solve -Unable to solve

Interdependence
1. Macro helpful to micro: - E.g. market of a firm not only depends on the price of its products but
also purchasing power of community. Likewise price of commodity not only depends on the demand
and supply but also on the price of alternate goods. Profit depends on total demand national income,
general price level and role of interest on total stock of money on economy.
1. Micro helpful to macro: - National product and national income is total of firm’s product and total
of individual income. Some theories of macro-economics are developed by the theory of individual
behaviour e.g. total investment function and consumption function depends on the behaviour of
individual entrepreneur and individual consumer.
In this way, these two and interrelated and have equal importance in economics. According to
Samuelson 'There is really no opposition between micro and macro-economics. Both are absolutely vital
you are less than half educated if you understand the one while the one while being ignorant of the other.

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Bibliography
Pindyck , R. S. & Rubinfield ,D. L.(2003) Micro Economics ,Pearson education