MICROECONOMICS:

Microeconomics studies the economic actions and behaviour of individual units and small
groups of individual units.

Professor Lerner rightly says, “Microeconomics consists of looking at the economy through a
microscope, as it were, to see how the millions of cells in the body economic–the individuals or
households as consumers, and the individuals or firms as producers—play their part in the
working of the whole economic organism.”

For instance, in microeconomic analysis we study the demand of an individual consumer for a
good and from there go on to derive the market demand for the good

1. Microeconomic Theory Studies Resource Allocation, Product and Factor Pricing.

Microeconomic theory takes the total quantity of resources as given and seeks to explain how
they are allocated to the production of particular goods. It is the allocation of resources that
determines what goods shall be produced and how they shall be produced.

To explain how the allocation of resources is determined, microeconomics proceeds to analyse

how the relative prices of goods and factors are determine.

the theory of product pricing and the theory of factor pricing (or the theory of distribution) fall
within the domain of
microeconomics and explains how the relative prices of cotton cloth, foodgrains, jute, kerosene
oil and thousands of other goods are determined.

The 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) and profits (the reward for the entrepreneur) are
determined.

Thus, the theory of product pricing and the theory of factor pricing are the two important
branches of microeconomic theory.

2. Microeconomics as a Study of Economic Efficiency.

Efficiency in the allocation of resources is attained when the resources are so allocated that
maximises the satisfaction of the people.
Economic efficiency involves three efficiencies:
1. Economic efficiency in production involves minimisation of cost for producing a given
level of output or producing a maximum possible output of various goods from the given
amount of outlay or cost incurred on productive resources

2. Efficiency in consumption consists of distributing the given amount of produced goods

and services among millions of the people for consumption in such a way as to maximize
the total satisfaction of the society.
 3. allocative economic efficiency implies that pattern of production (i.e, amounts of various
goods and services produced) should correspond to the desired pattern of consumption of
the people

The question of economic efficiency is the subject-matter of theoretical welfare economics

which is an important branch of microeconomic theory.
(1) what goods shall be produced and in what quantities,
(2) how they shall be produced,
(3) how the goods and services produced shall be distributed,
(4) whether the production of goods and their distribution for consumption is efficient fall within
the domain of microeconomics

MACROECONOMICS
The prefix 'macro' is derived from the Greek word 'makros' meaning, 'large'. Macro
economics " deals with the functioning of the economy as a whole.
 Why do economies grow or shrink?
 What causes inflation or unemployment?
 How do economic cycles (booms and recessions) occur?

1. Macroeconomics and the General Level of Prices: Besides studying how the level of
income and employment is determined in the economy, macroeconomics also concerns
itself with showing how the general level of prices is determined.

2. Macroeconomics and the economic growth: Economic growth refers to the increase in
the real output (GDP) of an economy over time. It reflects how much more goods and
services an economy is producing from one period to the next. It belongs to
macroeconomics because it deals with entire economy.
It examines long-term trends in income, productivity, and living standards.
Factors influencing the economic growth: Capital accumulation, human capital,
technological progress, natural policies, institutional quality.
3. Theory of Income and Employment
Macroeconomic analysis seeks to explain what determines the level of national income
and employment, and what causes fluctuations in the level of national income, output and
employment. Income and employment levels determine the economic well-being of a
country.
They influence:
 Consumer spending
 Investment
 Government revenue
 Poverty and inequality

4. Open Economy
 An open economy is a key aspect of macroeconomics because it studies how
international trade, capital flows, exchange rates, and global linkages influence the
overall economic performance, income, employment, and policy decisions of a country.

Macroeconomic Policies Must Consider Open Economy Effects

 Monetary and fiscal policies can have different effects due to trade and capital
mobility.
 For example, an interest rate change can attract foreign capital, affecting exchange
rates and inflation.
 Trade policies like tariffs impact aggregate demand and supply.

Why do we need separate study of macroeconomics?

In the economic system what is true of parts is not necessarily true of the whole.
If we generalize the economic laws that govern the microeconomics may lead to false results or
may be misleading results.
One of the example is:
Paradox of thrift: savings are always good at an individual level but not at an aggregate level.
increased individual savings can lead to a decrease in overall economic savings and potentially
harm the economy.
At an individual level
More saving, low expenditure => more investment => higher returns => higher income in future
=> increased welfare and higher living standards => increased personal saving

At an aggregate level
More saving, low expenditure =>fall in aggregate demand => unsold stock & higher inventory
=> production cut => fall in employment and income => fall in aggregate saving

Simple Examples
Situation Microeconomic View Macroeconomic View
Price of bread Looks at supply and demand in the Studies overall inflation in the
increases bread market economy
Examines labor market conditions Analyzes unemployment rate across
A worker loses a job
in a specific industry the entire country
A firm increases Studies the firm’s cost, revenue, Looks at contribution to national
output and profit behavior output (GDP)
Government raises Examines its effect on firm Assesses the effect on inflation and
interest rates investment decisions national income
 Situation Microeconomic View Macroeconomic View
Study of individual economic units Study of the economy as a whole
Meaning
(consumer, firm, market). (national income, employment).
National income, inflation,
Demand & supply, pricing,
Scope unemployment, fiscal & monetary
production, cost, market structures.
policy.
Small-scale decision-making and Large-scale economic aggregates and
Focus
resource allocation. their interactions.
Efficient allocation of limited Economic growth, stability, and full
Main Objective
resources. employment.
Partial equilibrium (one market at a General equilibrium (entire economy
Analysis Type
time). at once).
Price, quantity, individual income, GDP, inflation, interest rate,
Key Variables
consumer behavior. employment, investment.
Key Thinkers Alfred Marshall, Adam Smith. John Maynard Keynes.
Business strategy, pricing, taxation Government policy, inflation control,
Policy Focus
effects. economic planning.