CHAPTER 2

Macro vs Micro Economics

 What is Economics?
• Economics is omnipresent and form an integral part of our lives.
• Economics influences the prices of the goods and services we
buy, as well as the income we earn at our jobs. The economic
condition of the country whether mat it be inflation or
unemployment directly our finances, growth and many other
areas that permit us to be self-sufficient in our lives.
• Econimics is derived from a Greek word ‘Oikonomikos’. Where
‘oikos’ means ‘Home’ and ‘Nomos’ means ‘Management’.
• Hence economics is the study of how the available resources
are managed and organized to deal with the needs and wants of
the society.
 Comparison
Micro-Economics Macro-Economics
• Micro economics studies the • Macro economics, studies the behavior
decisions made by individual and of not only particular company or
business concerning the distribution industries but whole economy.
of resources and prices of goods and
services. • It includes understanding how
• It deals with a specific industry or a unemployment, price levels, growth
sector, the connections of firms and rate affects the economy wide aspects
households in the market. such as the Gross National Product
(GNP).
• For example, macroeconomics would
• For example, microeconomics would
look at how an increase/decrease in
study how a company could lower its net imports would affect a nation’s
prices to increase its product demand capital account.
in the market.
 Micro Economics Macro Economics
• It deals with the decision making of • It deals with averages and
single economic variables such as aggregates of the entire economy
the demand, price, consumer etc. such as national income , aggregate
• It is narrow in scope and interprets output, aggregate savings etc.
the small constituents of the entire • It has a wide scope and interprets
economy. the economy of a country as a
• It is also known as the price theory whole.
because it explains the process of • It is also known as the income theory
economic resources allocation on because it explains the changing
the foundation of relative prices of levels of national income of an
several goods and services. economy during a period of time.
• It deals with the flow of various • It deals with the circular flow of
factors of production from a single income and expenditure between
owner to a single user of those different sectors of the economy.
resources. • It helps in developing policies
• It helps in developing policies appropriate resource distribution at
appropriate resource distribution at economy level such as inflation,
firm level. unemployment level etc.
Micro and Macro economics Interaction
• Looking at the above mentioned differences it appears that these two
studies of economics are different but in reality they are inter-related
and complement each other since the issues that they address are
overlapping.
– For example, increased inflation (a macroeconomics effect) would increase the
prices of raw materials required by the companies to manufacture products
which would in turn also affect the price for the final product charged to the
public.
• When we talk about macroeconomics while studying the constituents
of output in nations economy we also have to understand the demand
of single households and firms , which are micro economics concepts.
• Similarly, when we cannot do it without learning about the effect of
macroeconomics trends in economic growth, taxation policies etc.
Economic variables affecting equity investors

Inflation Interest Rates

• Inflation signifies a rise in general • Interest rates as established by the
level of prices over a period of one Central Bank and individual banks can
year. have an effect on the stock market.
• When inflation is at a low rate, the • Higher interest rates indicate that
stock market reacts with a rush to money has become more expensive to
sell shares. borrow. In order to recompense for
the increased interest costs, business
• High inflation influences the
would have to cut down on costs
investors to think that companies leading to lay off workers and this
would hold back on spending; this affects the company’s earnings
leads to a decrease in revenue. Now, adversely.
the higher cost of goods coupled • All of this supplements to a drop in
with the drop in revenue pushes the the stock market.
stock market to drop.
Fiscal Policy Foreign Market

• They are the government • Foreign market is a market in

spending policies that influence which participants are able to
macroeconomic conditions. buy, sell, exchange and
• The most direct influence of fiscal speculate on currencies.
policies on the financial market is • When the worldwide economy
through taxation.
is down, goods and services
• The government can try to cannot be sold abroad as they
change the tax rates; it can
used to be. This eventually
impose new taxes or abolish
leads to decrease in the
existing ones or can use measures
to broaden the tax base. In each revenue and as a consequent
of these cases, it will affect the effect cause the decline in the
income and consumption pattern stock market.
of a large number of people.