MICRO ECONOMICS

The science of economics was born with the publication of Adam Smith’s
magnum opus “An enquiry into the nature and causes of wealth of nations”
in 1776.
 The word economics was derived from the greek words ‘Oikos’ (a house) and
‘nemein’ to manage which in effect means managing a household using the
limited funds available in the most economical manner.
 The early economists define economics as the science of wealth. Economics
was regarded as the science which studied the production and consumption of
wealth.
 J.S. Mill defined economics as “practical science of the production and
distribution of wealth”.
 F.A. walker says “ Economics is the body of knowledge which relates to
wealth.”
Economics as a science of material welfare
Alfred Marshall define economics is a study of mankind in the ordinary
business
life. It examines part of individual and social action.
Lionell Robbins defined economics as a science of scarcity. Economics is a
science which studies human behavior as a relationship between ends and scarce
means which have alternative uses.
The three fundamental propositions involved in the definition are
1. Ends : Refers to human wants which are unlimited.
2. Scarce means : The economic problems arises because most of the goods are
in scarce in relation to their demand.
3. Alternative uses of scarce means: The scarce means are put to alternative
uses Therefore economic problem arise.
Modern definition of economics :
 J.M. Keynes defined economics as the study of the administration of scarce
resources and the determinants of income and employment.
 Professor Samuelson: has given growth oriented definition of economics.
Economics is the study of how men and society choose, with or without the
use of money, to employ scarce productive resources which could have
alternative uses, to produce commodity over time, and distribute them for
consumption now and in the future among various people and groups of
society.
Fundamental problems of an economy
An economy refers to the economic system of an area, region or country. The
central problem of an economy arise because of ‘multiplicity of ends’ and
‘scarcity of means’.
Every economy has four problems:
 What to produce? What goods are to be produced. If the economic resources
are
limited in nature.
 How to produce? There are alternative techniques of producing a commodity.
Which techniques is to be adopted has to be decided by the economic system of
the country.
 For whom to produce? How to distribute the commodities and services among
the different sections of the society.
 How to choose between present and future?
The choice between present and the future has to be made with regard to the use

of economic resources. The country has to decide as to what proportion of these

resources is to be used in the present and what proportion to be reserved for the
future.
Nature and Scope of Economics: Economics is ‘science or an ‘art’.
 The science is defined as systematized body of knowledge which traces the
relationship between cause and effect. Economics is a branch of knowledge
where various facts relevant to it have been systematically collected, classified
and analyzed.
 Economics is an ‘art’ is also a systematized body of knowledge but unlike a
science, it lays down specific solutions for specific problems.
 J.M.Keynes “An art is a system of rules for attainment of given end”.
 J.M. Keynes expressed the distinction between positive and normative science.
 A positive science is defined as a body of systematized knowledge concerning
what is. A normative science is a body of systematized knowledge relating to
the criteria of what ought to be.
In other words, a positive science deals with things as they are. It explains their
causes and effects. A normative science deals with things as they ought to be.
Economic theory is classified into Micro and Macro economics
The term micro economics is derived from Greek word ‘mikros’ means a millionth
part.
Micro economics is defined as branch of economic analysis which studies the
economic behavior of the individual unit, may be a person, a particular household,
or a particular firm.
Micro economics is useful in achieving a bird’s eye view of some very specific
view of our economic system.
Dr. Marshalls ‘Principle of economics’ published in 1890 concerned with ‘micro
economics’
Micro Economics studies (Price theory)
 Theory of product pricing: theory of consumer behavior, theory of production &
costs.
 Theory of factor pricing.
 Theory of economic welfare.
Importance of micro economics:
Microeconomics is an important method of economic analysis.
Acc to J.M. Keynes, Micro economics tells us how a free market economy with it
producers and consumers decide the allocations of productive resources among
thousands of goods and services.
 Micro economics helps in efficient employment of resources: micro economic

theory helps in efficient allocation of scarce resources. It explain the condition of

efficiently in production and consumption

 Helps in understanding the free enterprise economy. There is no agency to plan

and co-ordinate the working of the economic system. The major economic

decisions are taken independently by the producers and consumers.

 Helpful in the development of international trade. Micro economics helps in

understanding the gains from international trade, balance of payments

disequilibrium and determination of foreign exchange rate.

 Helpful in understanding the implications of taxation. Whether the income tax or
excise duty or sales tax leads to diminution of social welfare.
 Basis for welfare economics: The entire structure of a welfare economics has
been
built on price theory which is a constituent part of microeconomics.
 Provides tools for evaluating economic policies: micro economics theory
explains the conditions of efficiency in consumption and production and
highlight
the factors responsible for departure from the efficiency.
 Micro economics helps the state in formulating correct price policies.
 Construction and use of models: microeconomics constructs and uses simple
models for understanding of the actual economics phenomena. The economic
models not only describe the actual economic situation but to suggest policies
that
would most successful.
Types of microeconomics :
Micro statics: deals with relationship between different micro variables at
a given time under condition of equilibrium.
Ex: Prices of a commodity is determined by the equilibrium of demand
and supply at a given time.
Comparative micro statics: It is a comparative study of different
equilibrium at different point of time. Comparative micro statics throws on
light on the transition from one position of equilibrium to that of another.
Micro dynamics: It throws light on the happenings in the transition
from one equilibrium to another. It involves fullest study of the forces
which come into operation between the disturbance of one equilibrium
and the establishment of another.
Macro Economics :
The word macro is derived from Greek word makros means large.
Macro economics is defined as that branch of economic analysis
which studies the behaviors of not one particular unit but all the units
combined together.
Macro economics is a study of aggregates. Hence, it is often called
as aggregative economics. It studies the overall conditions of an
economy which includes production, total consumption, total savings
and total investment.
Macro economics concerned with the economy as a whole.
Alegbra and Graphical Analysis in economics
Graphs are extensively used in economic analysis to
represent the relationships that exist among economic
variables.
Two simple types of relationships that may exist are direct
and inverse relationships.
A direct relationship is said to exist between two variables X and
Y. if an increase in X is always associated with an increase in Y and
a decrease in X is associated with a decrease in Y.
A graph of such a relationship will be upward sloping.
 A direct relationship may be linear or it may be nonlinear

An inverse relationship is said to exist between the variables X and Y

if an increase in X is always associated with a decrease in Y and a
decrease in X is associated with an increase in Y.
A graph of an inverse relationship will be downward sloping.
An inverse relationship may also be either linear or nonlinear.

A linear relationship possesses a constant slope, defined as:

ΔY
If an equation can be
written in the form:
Y = mX + b, then:
m = Slope, and
b = y-intercept.