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Macro Economics

Macro Economics



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Published by: api-3700469 on Oct 14, 2008
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Micro and Macro Economics

The terms\u2018mi cro-\u2018 and\u2018macro- \u2018 economics were first coined and used by Ragnar
Fiscer in 1933. Micro-economics studies the economic actions and behaviour of
individual units and small groups of individual units. In micro-economics, we are
chiefly concerned with the economic study of an individual household, individual
consumer, individual producer, individual firm, individual industry, particular
commodity, etc. Whereas, when we are analysing the problems of the economy
as a whole, it is a macro-economic study. In macro-economics, we do not study
an individual producer or consumer, but we study all the producers or consumers
in a particular economy.

Micro-Economics or Price Theory:
The term\u2018mi cro-economics \u2019 is derived from the Greek prefix\u2018micro \u2019, which
means small or a millionth part. Micro-economic theory is also known as\u2018p rice
theory\u2019. It is an analysis of the behaviour of any small decision-making unit, such

as a firm, or an industry, or a consumer, etc. For micro-economics, in contrast to
macro economic theory, the statistics of total economic activity are valueless as
far as providing clues to policy decisions. It does not give an idea of the
functioning of the economy as a whole. An individual industry may be flourishing,
whereas the economy as a whole may be suffering.

In respect of employment, micro-economics studies only the employment in a
firm or in an industry and does not concern to the aggregate employment in the
whole economy. In the circular flow of economic activity in the community, micro-
economics studies the flow of economic resources or factors of production from
the resource owners to business firms and the flow of goods and services from
the business firms to households. It studies the composition of such flows and
how the prices of goods and services in the flow are determined.

A noteworthy feature of micro-approach is that, while conducting economic
analysis on a micro basis, generally an assumption of \u2018full employment\u2019 in the
economy as a whole is made. On that assumption, the economic problem is
mainly that of resource allocation or of theory of price.

Importance of Micro-Economics: Micro-economics occupies a very important
place in the study of economic theory.
1.Functioning of free enterprise economy: It explains the functioning of a

free enterprise economy. It tells us how millions of consumers and
producers in an economy take decisions about the allocation of productive
resources among millions of goods and services.

2.Distribution of goods and services: It also explains how through market
mechanism goods and services produced in the economy are distributed.
3.Determination of prices: It also explains the determination of the relative
prices of various products and productive services.
4.Efficiency in consumption and production: It explains the conditions of
efficiency both in consumption and production and departure from the
5.Formulation of economic policies: It helps in the formulation of
economic policies calculated to promote efficiency in production and the
welfare of the masses.

Thus the role of micro-economics is both positive and normative. It not only tells
us how the economy operates but also how it should be operated to promote
general welfare. It is also applicable to various branches of economics such as
public finance, international trade, etc.

Limitations of Micro-Economics: Micro-economic analysis suffers from certain
1.It does not give an idea of the functioning of the economy as a
whole. It fails to analyse the aggregate employment level of the economy,
aggregate demand, inflation, gross domestic product, etc.
2.It assumes the existence of \u2018full employment\u2019 in the whole economy,
which is practically impossible.
Macro-Economics or Theory of Income and Employment:

The term\u2018macro-econo mics \u2019 is derived from the Greek prefix\u2018macro \u2019, which
means a large part. Macro-economics is an analysis of aggregates and
averages of the entire (large) economy, such as national income, gross domestic
product, total employment, total output, total consumption, aggregate demand,
aggregate supply, etc. Macro-economics is the economic theory which looks to
the statistics of a nation's total economic activity and holds that policy change
designed to alter these total statistical aggregates is the way to determine
economic policy and promote economic progress. Individual is ignored
altogether. Sometimes, national saving is increased at the expense of individual

It analysis the chief determinants of economic development, and the various
stages and processes of economic growth. Different macro-economic models of
economic growth have been suggested, one of which most famous is Harrod-
Domar Model. It can be applied to both developed and under-developed

Importance of Macro-Economics:
1.It is helpful in understanding the functioning of a complicated
economic system. It also studies the functioning of global economy.
With growth of globalisation and WTO regime, the study of macro-
economics has become more important.
2.It is very important in the formulation of useful economic policies for
the nation to remove the problems of unemployment, inflation, rising
prices and poverty.
3.Through macro-economics, the national income can be estimated and
regulated. The per capita income and the people\u2019s living standard are
also estimated through macro-economic study. It explains the fluctuations
in national income, per capita income, output and employment.
Limitations of Macro-Economics:
1.Individual is ignored altogether. For example, in macro-economics
national saving is increased through increasing tax on consumption, which
directly affects the consumer welfare.
2.The macro-economic analysis overlooks individual differences. For

instance, the general price level may be stable, but the prices of food
grains may have gone spelling ruin to the poor. A steep rise in
manufactured articles may conceal a calamitous fall in agricultural prices,
while the average prices were steady. The agriculturists may be ruined.
While speaking of the aggregates, it is also essential to remember the
nature, composition and structure of the components.


The term equilibrium has often to be used in economic analysis. In fact, Modern
Economics is sometimes called equilibrium analysis. Equilibrium means a state
of balance. When forces acting in opposite directions are exactly equal, the
object on which they are acting is said to be in a state of equilibrium.

Types of Equilibrium
Basically, there are three types of any equilibrium:
(a) Stable Equilibrium: There is stable equilibrium, when the object

concerned, after having been disturbed, tends to resume its original position. Thus, in the case of a stable equilibrium, there is a tendency for the object to revert to the old position.

(b) Unstable Equilibrium: On the other hand, the equilibrium is unstable

when a slight disturbance evokes further disturbance, so that the original position
is never restored. In this case, there is a tendency for the object to assume
newer and newer positions once there is departure from the original position.

(c) Neutral Equilibrium: It is neutral equilibrium when the disturbing forces
neither bring it back to the original position nor do they drive it further away from

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