ASSIGNMENTOn

Micro & Macro Economics

Subject

Micro Economics

Submitted to

Ms. Irum Khan

Submitted by

Hassan Tahir Sial

Roll no109-11003

BBA (Hons)

3rd Semester

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In the Name of

Most Merciful and Compassionate the Most Gracious and Beneficent whose help and guidance I always

Solicit at every step, at every moment.

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Economics

Definitions of Economics

According to Adam Smith,

“Economics is the Science/study of wealth.”

According to Alfred Marshall,

“Economics is the knowledge of material welfare concerning man.”

According to Robbins,

“Economics is a science which studies human behavior as a relation between unlimited desires and limited resources with alternative uses.”

Study of Economics - Micro & Macro Economics

The study of economics is divided by the modern economists into two parts viz. Micro economics and Macro economics. This division is shown in the figure / chart above. Micro economics and Macro economics, both the terms were used in 1933 by Prof. Ragnar Frisch from Oslo University of Norway.

The word micro has been derived from the Greek word `Mikros' i.e. small and the word macro has been derived from Greek word `Makros' i.e. large.

Micro Economics

Definitions of Microeconomics

According to Prof. K. E. Boulding,

"Micro Economics is the study of particular firm, particular household, individual prices, wages, incomes, individual industries and particular commodities."

According to Prof. Mac Cannel

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“Microeconomics is a study of the specific economic units and a detailed consideration of the behaviour of these individual Units.”

According to Prof. Boulding,

“Microeconomics seeks to explain the working of individuals, firms, households,individual prices, wages and particular industries.”

Subject Matter of Microeconomics

Micro Economics is concerned with the following topics :-

1. Commodity Pricing

Prices of individual commodities are determined by market forces of demand and supply. So micro economics makes demand analysis (individual consumer behaviour) and supply analysis (individual producer behaviour).

2. Factor Pricing

Land, labour, capital and entrepreneur, all factors contribute in production process. So they get rewards in the form of rent, wages, interest and profit respectively. Micro economics deals with determination of such rewards i.e. factor prices. So micro economics is also called as 'Price Theory' or 'Value Theory'.

3. Welfare Theory

Micro economics deals with optimum allocation of available resources and maximization of social welfare. It provides answers for 'What to produce?', 'When to produce?', 'How to produce?'

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and 'For whom it is to be produced?'. In short, Micro economics guides for utilizing scarce resources of economy to maximize public welfare.

Features of Microeconomics

Classical economists always insisted on micro economics because they believed that it is better to understand concept at individual level and then go for general (or macro) level. E.g. first understanding individual consumer behavior and then analyzing the behavior of entire market.

1. Nature of Analysis

In micro economics, the behavior of individual consumers and producers in detail is analyzed. It is study of subject matter from particular to general.

2. Method

Micro economics divides the economy into various small units and every unit is analyzed in detail. It is a slicing method.

3. Scope

Micro economic analysis involves product pricing, factor pricing and theory of welfare.

4. Application

Both theoretically and practically, micro economics is useful in formulating various policies, resource allocation, public finance, international trade, etc.

5. Nature of Assumptions

Assumption of Ceteris Paribus is always made in every micro economic theory. It means theory is applicable only when 'other things being same'.

Advantages of Microeconomics

1. Individual Behavior Analysis

Micro economics studies behavior of individual consumer or producer in a particular situation.

2. Resource Allocation

Resources are already scare i.e. less in quantity. Micro economics helps in proper allocation and utilization of resources to produce various types of goods and services.

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3. Price Mechanization

Micro economics decides prices of various goods and services on the basis of 'Demand-Supply Analysis'.

4. Economic Policy

Micro economics helps in formulating various economic policies and economic plans to promote all round economic development.

5. Free Enterprise Economy

Micro economics explain operating of a free enterprise economy where individual has freedom to take his own economic decisions.

6. Public Finance

It helps the government in fixing the tax rate and the type of tax as well as the amount of tax to be charged to the buyer and the seller.

7. Foreign Trade

It helps in explaining and fixing international trade and tariff rules, causes of disequilibrium in BOP, effects of factors deciding exchange rate, etc.

8. Social Welfare

It not only analyse economic conditions but also studies the social needs under different market conditions like monopoly, oligopoly, etc.

Disadvantages / Limitations of Microeconomics

1. Unrealistic Assumptions

Micro economics is based on unrealistic assumptions, especially in case of full employment assumption which does not exist practically. Even behavior of one individual can not be generalized as the behavior of all.

2. Inadequate Data

Micro economics is based on the information dealing with individual behavior, individual customers. Hence, it is difficult to get correct information. So because of incorrect data Micro Economics may provide inaccurate results.

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3. Ceteris Paribus

It assumes that all other things being equal (same) but actually it is not so.

Macro Economics

Definitions of Macroeconomics

According to Prof. R. G. D. Allen,

“The term macro economics applies to the study of relations between broad economic  aggregates such as total employment, income and production."

According to Prof. Edward Shapiro,

"The major task of macro economics is the explanation of what determines the economy's aggregate output of goods and services. It deals with the functioning of the economy as a whole."

According to Prof. K. E. Boulding,

“Macro economics is that part of economics which studies the overall averages and aggregates of the economic system. It does not deal with individual incomes but with the I national income, not with individual prices but with the price level, not  with individual output, but with national output.”

Subject Matter of Macroeconomics

Macroeconomics is the branch of economics. The subject matter of Macroeconomics deals with three aspects of national aggregates including, measurement, stability and growth. Most of the variables of macroeconomics are related with employment/unemployment, price/inflation and national income. By analyzing these indicators the movement of economy is controlled therefore, macroeconomics play a very important role in monitoring an economy.

Features of Microeconomics

Macro-economics studies a aggregates of a complete economy. The inlet of macro-economics can be accepted with a assistance of a following aspects:

1.Determination of national income and employment

Macro-economics deals with sum approach as good as sum supply which determines a balance turn of income as good as practice in a economy.

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The turn of sum approach determines a turn of income as good as employment.

Macroeconomics additionally deals with a complaint of stagnation due to miss of sum demand. Moreover, it studies a mercantile fluctuations as good as commercial operation cycles.

2. Determination of general price level

Macroeconomics studies a ubiquitous turn of cost in an economy.

It additionally studies a complaint of acceleration as good as deflation.

3. Economic growth and development

Macroeconomics deals with mercantile expansion as good as development.

It studies assorted factors which minister to mercantile expansion as good as development.

4. Distribution of factors of production

Macroeconomics additionally deals with assorted factors of prolongation as good as their relations share in a sum prolongation or sum inhabitant income.

Advantages of Microeconomics

The importance/issues/scope, which are addressed in macro economics are in brief as under: 

1. It helps in understanding the determination of income and employment

Late J.M. Keynes laid great stress on macro economic analysis. He, in his revolutionary book, "General Theory, Employment interest and Money", brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy. 

2. Determination of general level of prices

Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.   

3. Economic growth The macro economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them. 

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4. Macro economics and business cycles

It is in terms of macro economics that causes of fluctuations in the national income are analyzed. It has also been possible now to formulate policies for controlling business cycles i.e., inflation and deflation. 

5. International trade

Another important subject of macro economics is to analyze the various aspects of international trade in goods, services and balance of payment problems, the effect of exchange rate on balance of payment etc. 

6. Income shares from the national income

Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricardo theory, has presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend upon the ratio of investment to national income. 

7. Unemployment

Another macro economic issue is to explain the causes of unemployment in the economy. Stagflation is another important issue of modern economics. The Keynesian and post Keynesian economists are putting lot of efforts in explaining the causes of cyclical unemployment and high unemployment coupled with inflation and suggesting remedies to counteract them. 

8. Macro economic policies

Fiscal and monetary policies affect the performance of the economy. These two major types of macro economic policies are central in macro economic analysis of the economy. 

9. Global economic system

In macro economic analysis, it is emphasized that a nation's economy is a part of a global economic system. A good or weak performance of a nation's economy can affect the performance of the world economy as a whole.

10. Multi-dimensional study

Macroeconomics has a really far-reaching range as good as covers multi-dimensional aspects similar to population, employment, income, production, distribution, consumption, inflation, etc.

This is really beneficial in determining fluctuations in these factors.

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Disadvantages / Limitations of Microeconomics

1. Individual ignorance

The macro economies ignores the welfare of the individual. For instance, if national saving is increased at the cost of individual welfare, it is not considered a wise policy.

2. Unrealistic assumptions

Macroeconomics assumes which a aggregates have been homogeneous. Such an arrogance is, however, unrealistic.

3. General economic welfare

Macroeconomics understanding with ubiquitous gratification as good as disregards a gratification during particular levels yet particular gratification forms an critical partial of mercantile study.

4. Model for Developed Countries

The macro economic models are designed mostly to suit the developed  countries of the world. The developing countries face different economic  realities, so they do not benefit much from them.

Interdependence of Micro and Macro Economics

The micro and macro economics are interdependent. We cannot draw  any precise line of separation between micro and macro economics. We cannot put them in water light compartments. Both these approaches help us  in analyzing the working of the economy. If we study one approach and  neglect the other, we are considered to be only half educated. We should integrate the two approaches for the successful analysis of the working of  economic system. The macro approach should be applied when aggregate entities are involved and micro approach when individual parts of the economy are examined. If we ignore one and lay emphasis on the other, it I may lead to wrong or inadequate conclusions. In the words of Gardner  Ackley:

"Actually, the line between macro economics and micro economics theory cannot be precisely drawn. A true general theory of the economy  would clearly embrace both. It would explain individual behavior, individual I outputs, incomes and prices and the sums or averages of individual results I would constitute the aggregates which macro economics is concerned."

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