EconomicsIntroduction

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 produces various commodities over time and distribute them for consumption , now or in near future , among different people and groups in the society.

OLD Definitions

• Study of wealth- Adam Smith (Father of economics)

• Study of welfare- Alfred Marshall

• Definition of scarcity- Lionel Robbins

• Modern definition- Paul A. Samuelson

Economics

Macroeconomics

Microeconomics

Basic Concepts:

• Scarcity: The fundamental economic problem is that human wants to exceed the availability of resources

• Choice: Individuals and society can never have everything that they desire and hence are forced to make choices

• Opportunity Cost: The second best option forgone for a chosen option.

PESTEL-Airlines

• Political-Treaties to open Markets, relating to the markets

• Economical- recession, prices, exchange rates

• Social- concerns for environment, willingness and desire to travel

• Technological-online booking

• Environmental-concerns over emission, concerns over take off/landing

• Legal- passenger safety, employment laws, Competitions laws

MICROECONOMICS

Branch of economics that studies single, individual unit of an economy like individual, firm, household etc and their behaviour. Thus it is the study which seeks to explain how a consumer uses his limited income in various goods and services to maximise his satisfaction and how a firm decides its course of production to attain maximum profit.

Microeconomics includes:

• Production: What to produce, How to produce, For whom to produce

• Consumption: The group of people/division of society that will consume the produced good.

• Exchange: Goods and services in exchange of money or other goods and services

• Distribution: Income distribution

Factors of production includes:

• Land: any natural resource. Most common land.

• Labour: Mental and physical capacity of workers to produce goods

• Capital: Financial help to put up and run a production unit

• Raw Materials: Materials to be transformed into finished goods

• Entrepreneurs: Creative ability of individuals to seek profits by combining resources to produce innovative products

Importance of microeconomics

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

• Micro economics helps in proper allocation and utilization of resources to produce various types of goods and services.

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

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

Microeconomics answers following questions:

• How a firm determines the sale price of its products?

• What amount of output will maximise its profit?

• What is the ratio of individual income for consumption of particular good or service?

• What is the relation between individual income and individual consumption?

• How individual factors of production are determined?

Limitations of microeconomics

• Unrealistic Assumptions: It assumes uniformity of taste, income, expectations etc which is not possible in real world

•  Inadequate Data: Micro economics is based on the information dealing with individual behaviour, individual customers which is difficult to determine accurately.

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

MACROECONOMICS

Branch of economics that studies the working of an economy as a whole. It applies to broad economic aggregates like level of employment, general price level, investment, trade cycle etc.

Macroeconomics includes:

• GDP

• Inflation

• Employment

• Fiscal and monetary policies

• Trade cycle etc

Importance of Macroeconomics

• Macroeconomics is very essential for understanding the functioning of the economic system.

• Macroeconomic analysis helps in proper formulations of economic policies. 

• The estimates of national income can be used to measure the performance of an economy in an aggregate sense and these allow us to compare the performance with the past.

• Macroeconomics provides necessary information for international comparisons.

Macroeconomics answers following questions:

• Why a country is facing unemployment and how can it be overcome?

• How national income is estimated and how it is affected by various variables of the economy

• What are the causes of inflation?

• How internal economy is affected by changes in external economy?

Limitations of Macroeconomics

• False Generalizations: The main limitation of the aggregative approach is that the logic and conclusions which may be true for individuals or small units tend to be false when applied to the system as a whole. What is true at the micro level need not be true at the macro level. We must, therefore, be on our guard against generalizing too much from individual experience.

• Difficulties in Measuring the Aggregates: Macroeconomic analysis cannot be very precise because of heterogeneous nature of different elements constituting an aggregate. 

Limitations of Macroeconomics

• Diversities: An aggregative tendency may not influence all the sectors of the economy in the same manner. A general rise in prices, for example, may not affect all the sectors of the economy in a similar manner. Some sections may be affected adversely than others.

Parameters Microeconomics Macroeconomics

Production Production of individual unitsE.g. How much steel is produced by a single firm

Production of whole economy(Gross Domestic Product/ Total industrial output)

Prices Price of individual goods and servicesE.g. Food prices, house rents

Aggregate price LevelE.g. Consumer price, Producer price

Income Distribution of wealth: Wages in particular industry/firm

National income: Total wages and salaries

Employment Jobs in particular industry Employment and unemployment issues in an economy

Macroeconomics and microeconomics interlinked

There is an obvious relationship between microeconomics and macroeconomics in that aggregate production and consumption levels are the result of choices made by individual households and firms, and some macroeconomic models explicitly make this connection. The study of macroeconomics is indispensable even for the purpose of building and developing microeconomics. For example, the law of diminishing marginal utility could not have been formulated without the macro-investigation. Thus, no microeconomic law can be formulated without a pre-study of the aggregates bearing unit.