RAJGURU ACADEMY S.Y.J.C.

[2020-21]

Chapter No. 6 Introduction to Micro and Macro Economics

INTRODUCTION
The study of Economics is divided into two parts viz. Micro Economics & Macro Economics.
The terms Micro Economics & Macro Economics were first coined & used by Norwegian
Economist Ragnar Frisch of Oslo University in 1933 & since then they have been adopted by the
economist all over the world.
The term Micro Economics is derived from the Greek word ‘mikros’ which means a small a
millionth part. Thus in Micro Economics we analyze the economic behavior of small individual
economic units such as individual consumer, individual producers etc.
The term Macro Economics is derived from the Greek word ‘makros’ which means large.

MEANING OF MICRO ECONOMICS

Micro means a small part of a thing. Micro Economics thus deals with a small part of the national
economy. It studies the economic actions & behavior of individual units such as individual consumer,
individual producer or firm, the price of a particular commodity or factor etc.

DEFINITIONS OF MICRO ECONOMICS

Let us discuss some important definitions of Micro Economics to understand it’s meaning,
nature & subject matter.
Prof A. P. Lerner, “Micro economics consists of looking at the economy through a microscope,
as it were, to see how the millions of cells in the body of economy – the individuals or households as
consumers and individuals or firms as producer play their part in the working of the whole economic
organisms.”
Maurice Dobb, “Micro Economics is in fact a microscopic study of the Economy.”

SCOPE OF MICRO ECONOMICS

Micro Economics basically deals with
1. Theory of product pricing:
Price of a commodity depends upon the forces of demand & supply. Therefore, analysis of
demand & supply side is necessary in order to explain the process of determination of price.
Study of demand side covers the analysis of consumer’s behavior & study of supply side, covers
the analysis of conditions of production, cost & behavior of firm & industry.
So, theory of product pricing is subdivided into theory of demand & theory of production &
cost.
2. Theory of factor pricing:

Introduction to Micro and Macro Economics 6.1

RAJGURU ACADEMY S.Y.J.C. [2020-21]

Theory of factor pricing i.e. theory of distribution explains how wages (price for the use of
labour) rent (payment for the use of land), interest (price for the use of Capital), profits (reward
for the entrepreneur are determined).
3. Theory of economic welfare:
Theory of welfare basically deals with efficiency in the allocation of resources. Efficiency in the
allocation of resources is attained when it results in maximization of satisfaction of people.
Economic efficiency involves three efficiencies
i. Efficiency in production:
Efficiency in production means producing maximum possible amount of goods from the given
amount of resources.
ii. Efficiency in consumption:
Efficiency in consumption means distribution of produced goods & services among the people
for consumption, in such a way as to maximize total satisfaction of society.
iii. Overall economic efficiency:
Efficiency in the direction of production means production of those goods which are most
desired by the people.
Micro Economic Theory shows under what conditions these efficiencies are achieved.
The study of Micro Economics is mainly confined to price theory & resource allocation. It does
not study the aggregates relating to whole economy. This approach does not study national economic
problems such as unemployment, poverty, inequality of income etc. Theory of growth, theory of
business fluctuation, monetary & fiscal policies etc. are beyond the limit of Micro Economics, so its
scope is limited, compared to that of Macro Economics.

Scope of Micro Economics

Theory of Theory of Theory of

Product Pricing Factor Pricing Economic Welfare

Demand Efficiency in Production

Rent
Analysis

Efficiency in Consumption
Wages
Supply Analysis

Overall Economic Efficiency

Interest

Profit

Economics – Classwork Book 6.2

RAJGURU ACADEMY S.Y.J.C. [2020-21]

FEATURES OF MICRO ECONOMICS

1. Study of individual units:
Micro Economics is the study of behavior of small individual economic units, like particular
households, individual firms, individual prices etc.
2. Price theory:
Micro Economics is called price theory because it is primarily concerned with determination of
prices of
goods & factors of production.
3. Partial equilibrium:
Micro Economic analysis is a partial equilibrium analysis. Partial equilibrium analyses
equilibrium position of individual consumer, individual firm, individual industry etc. Partial
equilibrium analysis isolates an individual unit from other forces & proceeds with the
assumption. “Other things remaining the same” (Ceteris paribus). This approach neglects the
interdependence between economic variables.
4. Based on certain assumptions:
Micro Economics assumes laissez fair policy, pure capitalism, full employment, perfect
competition etc. Which do not exist in reality. Also, most of the theories are based on the
‘ceteris paribus’ assumption i.e., other things being constant. The assumption makes the
analysis simple, but at the same time, it neglects the interdependence between economic
variables. The assumption makes the theories static and neglects changing economic world.
5. Slicing method:
Micro Economics splits the economy into small individual unit & then studies each unit
separately in detail. Thus, it is said that Micro Economics uses slicing method.
6. Use of marginalism principle:
Micro economics uses marginalism principle as a tool of analysis. Marginal means change
brought about in total by an additional unit i.e., marginal unit. All important micro economic
decisions are taken at the margin. So, this concept is of crucial importance in all areas of Micro
Economics.
7. Analysis of market structures:
Micro economics analyses different market structures i.e., perfect competition, monopoly,
oligopoly, monopolistic competition, etc. and describes how prices & quantities are determined
in different market
8. Limited scope:
Micro economics studies individual economic units and not the whole economy. It does not
deal with
the nation –wide problems like unemployment, inflation, deflation, poverty, balance of
payment situation, economic growth etc. So its scope is limited.

Introduction to Micro and Macro Economics 6.3

RAJGURU ACADEMY S.Y.J.C. [2020-21]

INTRODUCTION
The word Macro is derived from the Greek word 'Makros', meaning large or aggregate (total).
Macro-Economics, therefore, is the study of aggregates covering the entire economy such as total
employment, national income, national output, total investment, total savings, total consumption
aggregate supply, aggregate demand, general price level etc. It is therefore aggregative economics. It
deals with the study of economy as a whole. Macro Economics is also known as theory of income and
employment or simply as income analysis.

DEFINITIONS OF MACRO-ECONOMICS
Prof. Carl Shapiro, “Macro economics deals with the functioning of the economy as a whole.”
Prof. J. L. Hansen, "Macro-Economics is that branch of economics which considers the
relationship between large aggregates such as volume of employment, total amount of savings,
Investment, national income, etc.
The following chart gives an idea about the scope of macro-economics

Scope of
Macro Economics

Theory of Theory of Theory of Economy

Macro Theory of
Income and General Price Level Growth and
Distribution
Employment and Inflation Development

Theory of Consumption
Function

Theory of
Investment Function

1. Theory of income and employment

Macro-economic analysis explains what determines the level of national income and
employment, and what causes fluctuations in the level of income, output and employment.
To understand how the level of income and employment is determined, we have to study the
determinants of aggregate supply and aggregate demand and further we have to study
consumption function and investment function. The analysis of consumption function and
investment function are the important subjects to Macro-Economic Theory. Theory of
Business Cycles is also a part and parcel of the theory of income. This theory also examines

Economics – Classwork Book 6.4

RAJGURU ACADEMY S.Y.J.C. [2020-21]

inter-relation between income and employment, and suggests policies to solve the problems
related to these variables.
2. Theory of general price level and inflation:
Macro-Economic analysis shows how the general level of prices is determined and further
explains what causes fluctuations in it. The study of general level of prices is significant of
account of the problems created by inflation and deflation.
3. Theory of growth and development:
Another important subject matter of Macro-Economics is the theory of economic growth and
development. It studies the causes of under development and poverty in poor countries and
suggests strategies for accelerating growth and development in them.
4. Macro theory of distribution:
Macro theory of distribution thus deals with the relative shares of rent, wages, interest and
profits in the national income.

FEATURES OF MACRO ECONOMICS

1. Study of aggregates
Macro-Economics deals with study of nation economy as a whole. It is a study of very large,
economy wide aggregates such as national output or income, total employment, aggregate
demand, aggregate supply, total investment, total consumption, general price level etc
2. Income analysis
Macro-Economics is also known as the theory of income and employment or simply income
analysis. Because, basic subject matter of Macro-Economic analysis is to explain what
determines the level of national income and employment and what causes fluctuations in them.
Further, it explains the growth of national income over a long period of time.
3. A general equilibrium analysis
Macro-economic deals with the behavior of large aggregate and their functional relationship.
General Equilibrium deals with the behavior of demand, supply and prices in the whole
economy.
4. Interdependence
Macro analysis takes accounts of interdependence between aggregate economic variables, such
as income, output, employment, investment, price level etc. E.g., it explains how change in
level of investment will finally change the level of national income, output and employment,
and eventually the level of economic growth.
5. Lumping method
Lumping method is the study of the whole economy rather than its part. According to Prof.
Boulding, “Forest is an aggregation of trees but it does not reveal the properties of an
individual tree.” This reveals the difference between micro and macro economics.”

Introduction to Micro and Macro Economics 6.5

RAJGURU ACADEMY S.Y.J.C. [2020-21]

6. Growth Models
Macro economics studies various factors that contribute to economic growth and development.
It is useful in developing growth models. These growth models are used for studying economic
development. For example, Mahalanobis growth model emphasized on basic heavy industries.
7. General price level
Determination and changes in general price level are studied in macro-economics. General
price level is the average of all prices of goods and services currently being produced in the
economy.
8. Policy-oriented
Macro-Economics, according to Keynes' is a policy-oriented science. Macro-Economic
analysis helps in formulating suitable economic policies to promote economic growth, to
generate employment, to control inflation, to pull the economy out of depression etc.

DISTINGUSH BETWEEN

MICRO ECONOMICS MACRO ECONOMICS

i. Origin
It is originated from the Greek word ‘mikros’ It is originated from the Greek word ‘Makros’
means ‘small or in part’. means’ large; or as a ‘whole’.
ii. Meaning
Micro economics deals with small part of Macro-economics deals with the study of
national economy. It studies the economics aggregates covering the entire economy. It is
action & behaviour of individual units such as concerned with the total employment, national
behaviour of a consumer, a firm, price of income, national output, aggregate demand supply
commodity etc. etc
iii. Scope
Its scope as limited. Its scope is much wider.
iv. Method
It uses slicing methods to deal with problem. It uses lumping method to deal with its problem.
v. Theory
Unit is called as price theory as it deals with the It is called as income theory as it deals with
pricing in the product and factor markets. national income, economic growth and general
price level.
vi. Equilibrium Analysis
It uses partial equilibrium analysis as it deals It uses general equilibrium as it deals with
with independent units with a microscopic view. aggregates which are interdependent.

Economics – Classwork Book 6.6

RAJGURU ACADEMY S.Y.J.C. [2020-21]

vii. Popularity
These concepts are studied in detail and These concepts are studied in general and
popularized by Alfred Marshall. popularized by J.M. Keynes.
viii. Importance
It is importance for efficient resources utilization It is importance for formulation of economics and
and for taking business decision. fiscal policies for the development of the economy
as a whole.

Introduction to Micro and Macro Economics 6.7

RAJGURU ACADEMY S.Y.J.C. [2020-21]

Q.1.A. Choose the correct option:

1. The branch of economics that deals with the allocation of resources.
i. Micro-economics ii. Macro-economics
iii. Econometrics iv. None of these
a. i, ii and iii b. i and ii c. only i d. None of these
2. Concepts studied under Micro-economics.
i. National income ii. General price level
iii. Factor pricing iv. Product pricing
a. ii and iii b. ii, iii and iv c. i, ii and iii d. iii and iv
3. Method adopted in micro-economics analysis.
i. Lumping method ii. Aggregative method
iii. Slicing method iv. Inclusive method
a. i, iii and iv b. i, ii and iv c. only iii d. only i
4. The theories which fall under scope of Micro-economics.
i. Theory of Product Pricing ii. Theory of Factor Pricing
iii. Theory of Economic Welfare iv. Theory of Growth and Development
a. i, iii and iv b. i, ii and iv c. i, ii and iii d. only iv
5. This is not a feature of Micro-economics.
i. Income theory ii. Study of aggregates
iii. Lumping Method iv. Policy oriented
a. i, ii, iii and iv b. i, ii and iv c. i, ii and iii d. ii and iv
6. These points explain the importance of Micro-economics.
i. Price determination ii. Economic model building
iii. Useful to government iv. Performance of an economy
a. i, ii, iii and iv b. i, ii and iii c. i, ii and iv d. only i
7. Concepts studied under Macro-economics.
i. Whole economy ii. Economic development
iii. Aggregate supply iv. Product pricing
a. i, ii and iii b. ii, iii and iv c. only iv d. i, ii, iii and iv
8. The theories which fall under the scope of Macro-economics.
i. Theory of Income and Employment ii. Theory of Factor Pricing
iii. Theory of Economic Welfare iv. Theory of Growth and Development
a. i, iii and iv b. i, ii and iv c. i, ii and iii d. i and iv
9. This is feature of Macro-economics.
i. Income theory ii. Study of aggregates
iii. Lumping Method iv. Policy oriented
a. i, ii, iii and iv b. i, ii and iv c. i, ii and iii d. ii and iv

Economics – Classwork Book 6.8

RAJGURU ACADEMY S.Y.J.C. [2020-21]

10. These points explain the importance of Macro-economics.

i. Functioning of an economy ii. Economic model building
iii. Basis of Welfare Economics iv. Performance of an economy
a. i, ii, iii and iv b. i and iv c. i, ii and iii d. ii and iv

Q.1.B. Assertion (A) and Reasoning (R) – Choose the correct answer from the following:
Options:
a. (A) is True but (R)is False.
b. (A) is False but (R) is True.
c. Both (A) and (R) are True and (R) is the correct explanation of (A).
d. Both (A) and (R) are True and (R) is not the correct explanation of (A).

1. Assertion (A): Micro – economics and Macro-economics are two branches of modern
economics.
Reasoning (R): The terms ‘Micro-economics’ and ‘Macro- economics’ were coined by Prof.
Alfred Marshall.

2. Assertion (A): Micro – economics is known as price theory.

Reasoning (R): Micro – economics deals with the determination of prices of goods & services
as well as prices of factors of production.

3. Assertion (A): Micro – economics begins with certain assumptions like pure capitalism, full
employment, perfect competition etc.
Reasoning (R): The assumptions make micro – economics analysis simpler.

4. Assertion (A): Micro – economics uses lumping method.

Reasoning (R): Micro – economics splits or divides the whole economy into small individual
units for study.

5. Assertion (A): Marginal analysis helps to study a variable through the changes.
Reasoning (R): Producers and consumers take economic decisions using marginal principle.

6. Assertion (A): Micro – economics helps in understanding the working of a free market
economy.
Reasoning (R): There is limited intervention by the government in a free market economy.

Introduction to Micro and Macro Economics 6.9

RAJGURU ACADEMY S.Y.J.C. [2020-21]

7. Assertion (A): General price level is the average of all prices of goods and services in the
economy.
Reasoning (R): Determination and change in general price level are studied in Macro –
economics.

8. Assertion (A): Micro –economics helps us to analyse the performance of an economy.

Reasoning (R): National Income estimates are used to measure performance of an economy
over time.

Q.1.C. Complete the following statements by choosing the correct alternative:

1. The terms Micro – economics & Macro – economics were first used by _____.
a. Adam Smith b. Robbins c. Ragnar Frisch d. Marshall
2. The term “micro” is derived from Greek word ________.
a. Micros b. Mikros c. Makros d. Mykros
3. Micro-economics was popularized by Neo-Classical Economist, _________ in his books
‘Principles of Economics’
a. Adam Smith b. Lord Keynes c. Ragnar Frisch d. Alfred Marshall
4. The credit for development of macro – economic approach goes to _________.
a. Adam Smith b. Lord Keynes c. Ragnar Frisch d. Alfred Marshall
5. The theory of factor pricing explains how ________ are determined.
a. output prices b. costs
c. demand and supply d. factor rewards
6. Theory of ________ deals with the efficiency in allocation of resources.
a. Product Pricing b. Factor Pricing
c. Economics Welfare d. Growth & Development
7. A study of _______ is micro-economics.
a. aggregate demand b. firm
c. national income d. whole economy
8. Micro Economics is called as _______.
a. Income theory b. Price theory c. Growth theory d. Employment theory
9. The term “Micro” is derived from the Greek word _______.
a. Micros b. Mikros c. Makros d. Mykros
10. To understand how the level of ________ is determined, we must study the consumption
function and investment function.
a. income b. output c. price d. employment
11. Macro economics is a study of _________.
a. aggregates b. firm c. individual unit d. factor prices

Economics – Classwork Book 6.10

RAJGURU ACADEMY S.Y.J.C. [2020-21]

12. The study of ________ is important on account of the problems created by inflation and
deflation.
a. general price level b. national income
c. national output d. employment
13. According to Keynes, Macro economics is a _________ oriented science.
a. welfare b. policy c. price d. aggregate
14. __________ estimated are used to measure the performance of economy over time.
a. Regional Employment b. National Income
c. Aggregate Demand d. Aggregate Supply

Q.1.D. Choose the correct pair.

1.
A B
i. Micro Economics a. Theory of Income and Employment
ii. Macro Economics b. Alfred Marshall
iii. Theory of Business Cycles c. Feature of Micro Economics
iv. Partial Equilibrium d. Lord Keynes
A. i – b, ii – a, iii – c, iv – d B. i – c, ii – d, iii – a, iv – b
C. i – b, ii – d, iii – a, iv – c D. i – b, ii – c, iii – a, iv – d
2.
A B
i. Micro a. Principles of Economics
ii. Macro b. Makros
iii. Alfred Marshall c. General Theory or Employment,
Interest & Money
iv. Lord Keynes d. Mikros
A. i – d, ii – b, iii – a, iv – c B. i – c, ii – a, iii – b, iv – d
C. i – c, ii – b, iii – a, iv – d D. i – a, ii – c, iii – d, iv – b

Q.1.E. Complete the correlation:

1. Makros : Micro-economics : : Mikros : __________.
2. Micro – economics : Tree : : Macro – economics : ________.
3. Price of individual commodity : Theory of Product Pricing : : Factor rewards : __________.
4. Production maximum amount of goods from given resources : Efficiency in production : :
Production of goods most desired by people : _______.
5. Micro-economics : Slicing method : : Macro –economics : _______.
6. Macro – economic theory : income and employment : : Micro economics: _______.

Introduction to Micro and Macro Economics 6.11

RAJGURU ACADEMY S.Y.J.C. [2020-21]

7. General equilibrium : Macro economics : : ________ : Micro economics

8. Study of individual units : Micro economics : : _________ : Macro economics

Q.1.F. Find the odd word out:

1. Theory of Economic Welfare, Theory of General Price Level, Theory of Product Pricing,
Theory of Factor pricing
2. Marginalism principle, Slicing method, General equilibrium analysis, Study of individual units.
3. Total investment, total consumption, Product pricing, Trade cycles
4. Theory of Income and Employment, Macro Theory of distribution, Theory of Growth and
Development, Theory of Economic Welfare.
5. Price theory, Lumping method, Policy oriented, income theory

Q.1.G. Suggest an economic term for the given statements:

1. The two main branches of modern economics.
2. The Greek word which means small or a millionth part.
3. The book published by Prof. Alfred Marshall in 1890.
4. The book published by Lord Keynes in 1936.
5. The micro – economics theory which deals with the price determination of individual
commodity.
6. This concept is the key tool of micro economic analysis.
7. A type of economy wherein economic decisions regarding the production of goods are taken at
individual level.
8. This branch of economics explains determination of currency exchange rates of any two
countries.
9. This macro economic theory is a part and parcel of the Theory of Income and Employment.
10. This macro economic theory explains the causes of underdevelopment and poverty.
11. The theory which deals with the relative shares of rent, wages, interest and profit in the total
national income.
12. The method which engages in the study of whole economy rather than its part.
13. The average of all prices of goods and services currently being produced in the economy.

Economics – Classwork Book 6.12

RAJGURU ACADEMY S.Y.J.C. [2020-21]

Answer
Q.1.A. 1 – c 2–d 3–c 4–c
5–a 6–b 7–a 8–d
9–a 10 – b

Q.1.B. 1–a 2–c 3–c 4–b

5–d 6–a 7–d 8–b

Q.1.C. 1 – Ragnar Frisch 2 – Mikros 3 – Alfred Marshall 4 – Lord Keynes

5 – factor rewards 6 – Economic Welfare 7 – firm 8 – Price theory
9 – Makros 10 – employment 11 – aggregates 12 – general price level
13 – policy 14 – National Income

Q.1.D. 1 – c 2–a

Q.1.E. 1 – Macro – economics 2 – Forest

3 – Theory of factor pricing 4 – Overall economic efficiency
5 – Lumping method 6 – Price theory
7 – Partial equilibrium 8 – Study of aggregates

Q.1.F. 1 – Theory of General Price Level 2 – General equilibrium analysis

3 – Product pricing 4 – Theory of Economic Welfare
5 – Price theory

Q.1.G. 1 – Micro economics and Macro economics 2 – Mikros

3 – Principles of Economics
4 – General Theory of Employment, Interest and Money
5 – Theory of Product Pricing 6 – Marginalism
7 – Free market economy 8 – Micro – economics
9 – Theory of Business Cycles 10 – Theory of Growth and Development
11 – Macro Theory of Distribution 12 – Lumping method

----RA---RA---RA---RA---RA----

Introduction to Micro and Macro Economics 6.13