Subject: - FUNDAMENTALS OF ECONOMICS

BBA SEM- I

Q.1 What is Micro and Macro Environment? Explain its Merits

and Demerits.

MACRO ECONOMICS

Introduction to Micro Economics

In the present times, the study of economics is done from two viewpoints namely Micro and Macro. From
the first viewpoint, the economic problems of various units, like – individuals, families, firms etc. are
studied individually, whereas; from the second viewpoint, the same units of persons, families, firms etc.,
are studied in a combined form. Micro Economics is concerned with a specific, particular or an individual
whereas; Macro Economics is concerned with a group.

Meaning
The word micro means very small portion. From this point of view, micro economics is the study of specific
economics units of the whole economy. Under this, a commodity, a consumer, a firm or an industry is
studied individually.

Definition

According to Kenneth E. Boulding,

In micro economics, particular firms, particular families, individual prices, wages, incomes, particular
industries and specific commodities are studied.

Advantage and Disadvantage of Microeconomics

Micro-economics has many theoretical and practical niches. Due to this, even the Neo-classical economists
had concentrated on micro-economics. Although Keynes popularized, the importance of micro-economics
has not declined.

The importance of micro-economics can be analyzed on the imports macro-economics basis of the
following headings:

1. Understand the working of the economy

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 1
The knowledge of micro-economics is indispensable to know the working of the economy. The economy
consists of the public and private sectors.

The analysis of individual industries, wages, and salary determination, individual taxes, international trade
all rests on microeconomic foundations.

Similarly, most of the government activities can be analyzed with the same concepts applied to the private
sector.

For example, price determination by the post office, cost of national defense, etc are analyzed by using
micro-economics.

2. Efficient allocation of resources

Micro-economics assumes that consumers and producers act rationally. The producer surveys the possible
courses of action measures the expected benefits and costs of each course of action.

Rational behavior leads to the best use of resources. Microeconomics teaches to make the best use of
resources.

Microeconomics says how resources are allocated in the production of goods and services. It says which
commodity is to produce, how much to produce and why to produce.

3. Useful in business decision-making

Micro-economics is applied to analyses problems faced by business executives. The price theory in the
service of business executives is known as managerial economics.

It contributes to improved decision-making in the area of demand analysis, optimal production decisions,
pricing decisions to maximize profit. It guides businessmen to determine the price of different goods and
factors of production.

The use of microeconomics in business decision-making can be further elaborated as follows:

(a) Optimal resource allocation

Micro-economics is useful in an optimal allocation of resources The resources or factors of production are
always scarce and limited with the business firm.

Hence they will have to make the optimal allocation of resources. Micro-economics tells how productive
resources are allocated to the production of numerous goods and services.

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 2
It, informs - which goods to be produced, how much to d why to produce. Likewise, it informs how to
distribute the produced goods and services among people for consumption.

(b) Optimal production decision

The business firm can produce goods with different alternative techniques. They have to continuously face
the problem of the technique to be chosen. Because the resources like labor and capital are l maximum
profit.

Micro-economics helps to solve these problems. "Micro-economics works as a powerful modern tool of
managerial decision making in the solutions of such problems." limited. O n the contrary. their objective is
to earn.

(c) Pricing Problem

The firms will have to face the problem of pricing their products. The firm should be able to fix the
appropriate price to achieve its objectives. Micro-economics provides the basis for analyzing and solving
pricing problems.

It provides knowledge as to how the price of products is determined. The theory of demand, the elasticity
of demand, and other theories of consumer behavior guide a firm in making production and pricing
decisions.

4. Study of human behavior

Micro-economics studies many forms of human behavior. The law of diminishing utility, equip-marginal
utility, indifference curve theory all study human behavior.

Economic theory can be used simply to describe the economic phenomenon. Such descriptive theory is
called positive economics.

For example, when orange becomes scarce, the price rises. The positive theory says one causes another.
The scarcity of orange is the cause and price rise is the effect.

Economic theory can also be used to say what should happen. When the theory prescribes policy action, it
is called a normative theory.

For example, when orange becomes scarce, the price should increase, so that consumers will use less
orange and switch or to other fruits. (Otherwise, they will have to wait in a queue.) Microeconomics is
both positive and normative science.

5. Examine conditions of economic welfare

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 3
The normative price theory is called welfare economics. Welfare economics studies the welfare of the
people as producers and consumers It suggests possible ways of improving the welfare of people.

It helps to avoid waste and bring more social welfare. It defines and analyses the rules of economic
efficiency.

6. Formulation of public policies

Micro-economics helps the government to formulate different economic policies for the welfare of the
people. It gives tools and foundations for the analysis of economic policy.

The economic policy influences the economy. It causes changes in the allocation of resources The public
policy relates to tax, loans, subsidy, price, etc.

An important tool is a benefit-cost analysis, which is used widely in public policy decisions. Micro-
economics assists government to make the best use of scarce resources.

7. Solution of contemporary microeconomic problems

Price theory is also used in practical aspects of economics such as public finance, international trade. It
helps to analyses the effect of different taxes, benefits from international trade, the correct balance of
trade, and payments Microeconomics can be used in contemporary microeconomic problems such as
issues facing consumers, the effect of government policy, control of pollution, programs to alleviate
poverty, fair trade pricing, etc.

Limitations / Disadvantages of Microeconomics

Micro-economics has the following Limitations/Disadvantage:

1. Excessive Generalisation
Despite the immense importance of macroeconomics, there is the danger of excessive generalization from
individual experience to the system as a whole.

If an individual withdraws his deposits from the bank, there is no harm in it, but if all the persons rushed to
withdraw deposits, the bank would perhaps collapse.

2. May is not true in aggregates

The use of the conclusions of the equilibrium of small units or the partial equilibrium in the case of the
economy as a whole provides the wrong conclusion.

Because what is true in the case of one unit may not be true in the case of aggregates.

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 4
For example, individual saving is good since it promotes individual economic prosperity.

But if all people save, the effective demand is reduced. This, in turn, reduces the employment opportunity.

3. Assumption of full employment unrealistic

Micro-economics assumes 'ceteris paribus' and 'full employment'. But this is an unrealistic assumption.

According to J.M. Keynes, society has unemployment rather than full employment. He observed, "To
assume full employment is to assume our difficulties away."

4. Concentration on small parts

Micro-economics concentrates on small parts of the total economy. For example, it studies only individual
demand individual price, and so on.

Micro-economics does not give knowledge about the working of the whole economy. The knowledge of
the economy as a whole is also equally important to the men.

5. Heterogeneous Elements

It may, however, be remembered that macroeconomics deals with such aggregates as aggregate
consumption, saving, investment, and income, all composed of heterogeneous quantities.

Money is the only measuring rod. But the value of money itself keeps on changing, rendering economic
aggregates immeasurable and incomparable in real terms.

As such, the sum or average of heterogeneous individual quantities loses their significance for accurate
economic analysis and economic policy.

6. Differences within Aggregates

Under this approach, one is likely to overlook the differences within aggregates.

For example, during the first decade of planning in India (from 1951-1961) the national income increased
by 42%; this, however, does not mean that the income of all the constituents, i.e., the wage earners or
salaried persons increased by as much as that of entrepreneurs or businessmen.

Hence, it takes no account of differences within aggregates.

MACRO ECONOMICS

Meaning of Macro Economics

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 5
The word macro means big. Thus, in Macro Economics, either the whole economy is studied or those big
units which are related to the economy as a whole.

Definition
In the words of Prof. Boulding
Macro Economics deals not with individual quantities as such but aggregates of these quantities, not with
individual incomes but national income, not with individual output but with national output.

Thus, macro economics studies the various groups related to the whole economy, like, national savings,
national income, national consumption, total employment, total production, etc..

Importance and Merits of Macro Economics

1. Importance in Planning
Macro economies has played a very important role in determining the policies of the modern planning era.
It acts as a pathfinder in the determination of economic policies.

2. Importance in Special Areas

The fields of international trade, national income, national investment are such areas where only macro
approach applies not micro economics.

3. Helpful in Understanding Paradoxes

It is necessary-to take the help of macro economics in understanding the situation under paradoxes
because sometimes conclusions drawn-for individual units are not appropriate from the point of view the
whole economy. For example, individual savings is a. blessing, while suppose situation like every person of
that country is saving money, will be a curse.

4. Helpful in Monetary Policies

Many monetary problems, like, inflation and deflation etc. can be analysed with the help of macro
approach and controlled by adopting the appropriate monetary policy.

Limitations and Demerits of Macro Economics

1. No importance to Individual Units

Under macro economics, in comparison to individual units, a group of units is given more importance. But
it is not necessary that what is right for individual person, would also right for a group. For example, an
individual can withdraw the amount saved in a bank at a time but if all individuals do the same, the banks
will have to close down.

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 6
 2. Difficulty in Measuring Aggregates
Under macro economics, measurement of aggregates becomes very difficult. The reason is that there are
numerous items in a group, which are sometimes not possible to measure separately.

3. Danger in Ignorance of Individual Units

When we study a group under macro economics, there is always a danger that we may ignore the
numerous individual units which form the group.

Q.2 Difference between Microeconomics and Macroeconomics

Let us look at some of the points of difference between Microeconomics and Macroeconomics

Microeconomics Macroeconomics

Meaning

Macroeconomics is the branch of Economics that

Microeconomics is the branch of Economics that is
deals with the study of the behaviour and
related to the study of individual, household and
performance of the economy in total. The most
firm’s behaviour in decision making and allocation
important factors studied in macroeconomics involve
of the resources. It comprises markets of goods
gross domestic product (GDP), unemployment,
and services and deals with economic issues.
inflation and growth rate etc.

Area of study

Microeconomics studies the particular market Macroeconomics studies the whole economy, that
segment of the economy covers several market segments

Deals with

Microeconomics deals with various issues like

Macroeconomics deals with various issues like
demand, supply, factor pricing, product pricing,
national income, distribution, employment,
economic welfare, production, consumption, and
general price level, money, and more.
more.

Business Application

It is applied to internal issues. It is applied to environmental and external issues.

Scope

It covers several issues like demand, supply, factor It covers several issues like distribution, national
pricing, product pricing, economic welfare, income, employment, money, general price level, and
production, consumption, and more. more.

Significance

It is useful in regulating the prices of a product It perpetuates firmness in the broad price level,
alongside the prices of factors of production and solves the major issues of the economy like
(labour, land, entrepreneur, capital, and more) deflation, inflation, rising prices (reflation),

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 7
 within the economy. unemployment, and poverty as a whole.

Limitations

It has been scrutinised that the misconception of

It is based on impractical presuppositions, i.e.,
composition’ incorporates, which sometimes fails
in microeconomics, it is presumed that there is
to prove accurate because it is feasible that what
full employment in the community, which is
is true for aggregate (comprehensive) may not be
not at all feasible.
true for individuals as well.

Extra
Q.1 Examples of Microeconomics and Macroeconomics( Component of
Micro and Macro Economics)

Examples of Microeconomics

 Price determination of a particular commodity.

 Consumer equilibrium.

 Output generated by an individual organization.

 Individual income and savings.

Examples of Macroeconomics

 National income and savings.

 General price level.

 Aggregate demand and Aggregate Supply

 Poverty.

 Rate of unemployment
Q.2 Effect of Micro and Macro Economics

Any changes in these categories have a direct impact on a country’s economy. Several factors affect it; let’s
take a look
Decision Making

Uncontrollable external factors such as changes in interest rate, regulations, number of competitors
present in the market, cultural preferences, etc. play a key role in influencing an organization’s strategies
and performance. These can have a cumulative effect on a nation’s economy as well.
Economic Cycles

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 8
Experts consider macroeconomics as a cyclic design. Higher demand levels, personal income, etc. can
influence price levels, which in turn can affect a nation’s economy. Contrarily, when supply outweighs
demand, the cost of daily goods reduces. This pattern continues until the next cycle of supply and demand.
Price of Products and Services

The primary goal of an organization is to keep costs at the minimum and increase the profit margin. The
cost of labor is one of the highest expenses incurring factors in microeconomics, thereby directly affecting
the overall cost of production and retail.
Q.3 Characteristics Of Robbins Definition
Following are the main characteristics of Robbins’ definition
1. Unlimited Wants
According to Prof Robbins definition, human wants are unlimited. On satisfaction of one wants, another
want arises immediately, and this sequence continues forever.
2. Scarce Means
Robbin’s definition stated that on one side human needs are unlimited yet on the other side, the means to
satisfy these wants, like- time, power, money, etc. are also limited. Due to this, many of man’s needs
remain unsatisfied.
3. Alternative Use of Scarce Means
In Robbins’s view though the to ‘satisfy man’s needs are scarce, yet he has alternative uses. In other
words, he can use every resource in various objectives and activities. For example – such a resource like
land can be use in many ways, such as it can be used for agriculture or for building a house or to establish a
factory etc.

4. Variation in the Intensity of wants

Robbins definition states that the intensity of man’s needs is different. Some wants are more intense than
the others. Since our means are limited and all wants cannot be satisfied with the limited means; as a
result, we have to select some more intense wants from our unlimited wants and the less intense wants
have to be either dropped or postponed to a future date.

Prof. Snehal Sunil Darji, Sheth Shree K. J. Patel BBA College ,Kadi Page 9