Q. No.1. Critically explain the scarcity definition of economics.

The scarcity definition of Economics was given by Prof. Lionel Robbins, a distinguished
English Economist from the London School of Economics. In his book “The Nature and the
significance of economic science” published in 1932, Prof. Lionel Robbins defined Economics
as “Economic is a science which studies human behavior as a relationship between ends and
scarce means which have alternative uses.
According to Robbins, the ends are unlimited, but the means to satisfy the ends are not
only limited but also can be used for alternative purposes. So there arise economic problems. The
economic problems are solved by people by adjusting their limited resources, which can be put
to alternative uses, to their unlimited wants. In other words, people solve their economic
problems by choosing between the different wants to which the limited resources can be used.
While choosing the wants, generally, they choose and satisfy more urgent wants and sacrifice
less urgent wants.
The way in which people choose between the different wants and use the scarce
resources, having alternative uses for getting maximum satisfaction constitutes the subject matter
of economics.
The scarcity definition given by Prof. Lionel Robbins was supported by
economists like George Stigler, Cassel J. R. Hicks, Eric Roll, A. P. Lerner etc.
The main points of scarcity definition:-
1. Ends are unlimited:- If human want limited they can be adequately satisfied and there will
not be any economic problems. It is the multiplicity of human wants that creates economic
problems and makes the people choose between different wants.
2. Means to satisfy human wants are scarce or limited: If the means or resources to satisfy
human wants are also unlimited as human wants, there will not be any economic problems and
there will not be any need for choosing between wants.
3. Economic problems will arise only when all the above three conditions, viz. multiplicity of
wants, scarcity of resources and alternative applicability of scarce resources.
Criticism of Robbins Scarcity Definition:-
It has been criticized by economists like Mrs. Barbara Wootton, Thomas, Robertson etc. The
Main Points are: -
1. Robbins definition has reduced economics to simple theory of choice. It lacks human touch,
which formed the core of welfare definition. In the wards of Prof. Ely, In Robbins definition the
human touch is entirely missing.
2. If economics is to serve any social purpose, it cannot ignore the normative or ethical aspects of
ends. Therefore it should not only explain and explore but also advocate and condemn. But
Robbins definition is neutral as regards ends.
3. Robbins definition has made economics abstract and theoretical and not concrete and realistic.
4. Economics is considered as science as well a an art, but Robbins, said economics is a pure
science and not an art.
5. Robbins has taken a static view of the resources. He has ignored the possibility of the
development of resources in the long run.
Q.2: Critically explain the wealth definition of economics?
The credit of defining economics as a subject for the first time goes to AdamSmith. He
is considered as the father of economics and in his book “An Enquiry into the nature and cause
of wealth of nation” he defined economics as a science which enquires into the nature and which
enquires into the nature and cause of wealth of nation. He emphasized the production and growth
of wealth as the subject matter of economics. His followers like J.B Say, J.S Mill,
Walker,Nassu Senior etc, gave similar definitions as follows:
J.B Say: Economics in the science which treats of wealth.
Walker: Economics is the body of knowledge that relates to wealth.
J.S Mill: Economics investigates the nature of wealth and the laws of its production and
distribution.
Nassu Senior:The subject of political economy is not happiness but wealth.

Main features of the wealth definition

1. Economics is the study of wealth only. It deals with the consumption production, exchange
and distribution of wealth.
2. Only such material commoditiescontribute wealth as arc scare and useful. Non material goods
like services and free goods like air and water are not wealth.
3. Economics studies the cause of wealth changes which means economic development. To
increase wealth, production of material goods will have to be increased.

Criticism:
1. Too much importance to wealth: - wealth has been given the primary place in economics.
Many economists like Carlyle John Ruskin criticized.
2. Restricted meaning of wealth: - Material goods only are considered as wealth. Non material
services are not taken as wealth. But modern economist uses the word wealth for both goods and
services.
3. No mention of man’s welfare:- This definition give no importance to the economic welfare
of society. It emphasis only the accumulation of wealth.
4. No study of means:- This definition makes the earning of wealth an end itself. It does not tell
us the propriety of means for earning wealth.
Q. No.3 Explain the different types of economic systems.
Introduction:
“choice “is an important tool in the organization of economic activities because like an
individual a nation too has limited resources therefore nations have to decide what to produce,
how to produce and whom to produce , through the world different people have different
solutions to these centeral problems.
Meaning: The way of nation tries to solve these problems determines it’s type of economy also
called economic system.
The Economic System divided into 3 types:
1) Capitalism or market 2) Socialism or centrally planned & 3) Mixed Economy.

The free enterprise system is otherwise called capitalism. Prof. Locks says, Capitalism is a
system of economic organization featured by the private ownership and the use for private profit
of man made and nature made capital.

1.Capitalism is a system of production for profit under which instruments and materials of
production are privately owned and the work is done by hired labour whose subsistence, security
and personal freedom seen dependent on the will of the owners, who control the organization of
factors of production, the product belonging to capitalist owner or owners. The owners are free
to use the factories, farms and other means of production with a view to making profit or not to
use them, if it is so suits them. Every produce is free to take up any line of production he likes
and is free to enter into any contract with others for his profit. The free enterprise system without
any governmental interference is called Laissez.
Merits
1.production according to needs & Wishes of Consumers
2. Higher Rate of Capital Formation and More Economic Growth
3. Optimum Utilisation of Resources Available
4. Efficient Production of Goods and Services
5. Varieties of Consumer Goods
6. It Provides the Best Atmosphere for Inventions

Demerits Features

1. Inequality of Distribution of Wealth and Income 1. Private Property

2. Class Struggle as Inevitable in Capitalist Economy 2. Right of Private Property
3. Social Costs are Very High 3. Price Mechanism
4. Instability of the Capital Economy 4. Profit Motive
5. Unemployment and Under-employment 5. Consumer’s Sovereignty
6.Slow and Unbalanced Growth
2.Socialism:- Planned economic system is otherwise called socialism. According to H.D.
Dickenson. “Socialism is an economic organization of society in which the material means of
production are owned by the whole community and operated by organs representative of and
responsible to the community according to a general economic plan, all members of the
community being entitled to benefits from the results of such socialized planned production on
the basis of equal rights.

Merits
1. Social Justice is Assured
2. Rapid Economic Development
3. Production According to Basic Needs
4. Balanced Economic Development
5. It has Economic Stability
6. It has More Flexibility
Demerits
1. No Suitable Basis of Cost Calculation
2. Choice of Working Incentives
3. It Becomes Lack of Incentives
4. There is Loss of Economic Freedom
5. Loss of Economic Freedom
6. Too Much Power is Concentrated in the State

Features of Socialism:-
1.Socialism is an alternative system of capitalism.,
2 In socialism. there is social ownership of means of production and no private enterprise.
3.There is Central Authority with adequate power to determine the objectives and co-ordinate
society’s efforts to attain those objectives.
4.Socialist economy is necessarily a centrally planned economy.
5.Equitable distribution of income is an essential feature of socialism.
6.Equal opportunities are provided to all.
7.Socialism is differ from social welfare.

3.Mixed Economy:- The free enterprise system without any Governmental Interference is
propounded by Adam Sumiter. It is not supported by later economists like J. M. Keyner. He
pleaded for the participation.. and interference of Govt. in economic activities. The mixed
economy is a mixture of capitalism and socialism. The mixed economy lines to avoid the two
extremities of pure capitalism and pure socialism and the evils associated with each other. It
strikes a middle path between capitalism and socialism.
Merits Demerits
1.Encouragement to Private Sector 1. Un-stability
2. Freedom 2. Ineffectiveness of Sectors
3. Optimum Use of Resources 3. Inefficient Planning
4. Advantages of Economic Planning 4. Lack of Efficiency
5. Social Welfare 5. More Wastages
6. Economic Development 6. Corruption and Black Marketing

The Main features of mixed economy are:

1.Co-existence of the Public and Private sectors.
2.Role of price system and Govt. directives
3.Acceptance of economic planning.
4.Govt. regulations and control of Private sector.
5.Consumer sovereignty.
6.Govt. protection of labour.
7.Reduction of economic inequalities
8.Control of monopoly.
Q. No.4. Briefly explain the law of Equi-Marginal utility

The Law of equimarginal Utility is another fundamental principle of Economics. This law
is also known as the Law of substitution or the Law of Maximum Satisfaction.
We know that human wants are unlimited whereas the means to satisfy these wants are
strictly limited. It, therefore’ becomes necessary to pick up the most urgent wants that can be
satisfied with the money that a consumer has. Of the things that he decides to buy he must buy
just the right quantity. Every prudent consumer will try to make the best use of the money at his
disposal and derive the maximum satisfaction.
Explanation of the Law
In order to get maximum satisfaction out of the funds we have, we carefully weigh the
satisfaction obtained from each rupee ‘had we spend If we find that a rupee spent in one
direction has greater utility than in another, we shall go on spending money on the former
commodity, till the satisfaction derived from the last rupee spent in the two cases is equal.
It other words, we substitute some units of the commodity of greater utility tor some units
of the commodity of less utility. The result of this substitution will be that the marginal utility of
the former will fall and that of the latter will rise, till the two marginal utilities are equalized.
That is why the law is also called the Law of Substitution or the Law of equi-marginal Utility.
Suppose apples and oranges are the two commodities to be purchased. Suppose further
that we have got seven rupees to spend. Let us spend three rupees on oranges and four rupees on
apples. What is the result? The utility of the 3rd unit of oranges is 6 and that of the 4th unit of
apples is 2. As the marginal utility of oranges is higher, we should buy more of oranges and less
of apples. Let us substitute one orange for one apple so that we buy four oranges and three
apples.
Now the marginal utility of both oranges and apples is the same, i.e., 4. This arrangement
yields maximum satisfaction. The total utility of 4 oranges would be 10 + 8 + 6 + 4 = 28 and of
three apples 8 + 6 + 4= 18 which gives us a total utility of 46. The satisfaction given by 4
oranges and 3 apples at one rupee each is greater than could be obtained by any other
combination of apples and oranges. In no other case does this utility amount to 46. We may take
some other combinations and see.

We thus come to the conclusion that we obtain maximum satisfaction when we equalize
marginal utilities by substituting some units of the more useful for the less useful commodity.
We can illustrate this principle with the help of a diagram.
Diagrammatic Representation
In the two figures given below, OX and OY are the two axes. On X-axis OX are represented the
units of money and on the Y-axis marginal utilities. Suppose a person has 7 rupees to spend on
apples and oranges whose diminishing marginal utilities are shown by the two curves AP and
OR respectively.
The consumer will gain maximum satisfaction if he spends OM money (3 rupees) on
apples and OM’ money (4 rupees) on oranges because in this situation the marginal utilities of
the two are equal (PM = P’M’). Any other combination will give less total satisfaction.
Let the purchase spend MN money (one rupee) more on apples and the same amount of
money, N’M'( = MN) less on oranges. The diagram shows a loss of utility represented by the
shaded area LN’M’P’ and a gain of PMNE utility. As MN = N’M’ and PM=P’M’, it is proved
that the area LN’M’P’ (loss of utility from reduced consumption of oranges) is bigger than
PMNE (gain of utility from increased consumption of apples). Hence the total utility of this new
combination is less.

We then, conclude that no other combination of apples and oranges gives as great a satisfaction
to the consumer as when PM = P’M’, i.e., where the marginal utilities of apples and oranges
purchased are equal, with given amour, of money at our disposal.

Limitations of the Law of Equimarginal Utility

i) Ignorance
ii) Inefficient Organisation
iii) Unlimited Resources
iv) Hold of Custom and Fashion
v) Frequent Changes in Prices

Importance
i) Consumption
ii) Production
iii) Exchange
iv) Distribution
v) Public Finance
vi) Influences Prices
Q. No.5. Define rent? Explain the Ricardian theory of rent
Introduction
Rent refers to that income which the owner of land getsand other natural assets get
for using them in production. Ricardo was the first person who formulated a
comprehensive theory of rent. He defined rent as “that portion of produce of the car in
which is paid to the landlords for the use of original and indestructible powers of the
soil.

Explanation of the Recardian theory:

According to this theory the cause for the emergency of rent is the difference in the
fertility of land. The more fertile land or superior land would be cultivate first, followed by
the next belt superior land. The output produced by the most superior land is more than the
output produced by the next superior land. The difference of the product of the first category
of the land & that of second category of land is called rent. As successive inferior land are
cultivated rent starts emergingon the superior lands and these further increases the rent on
the superior land.
Suppose A,B,C& D are four pieces of land in the order of fertility. So quintals of rice are
produced by cultivating land A. A is a marginal land, therefore there is no rent. But as the
population increases, land B is also cultivated, which is inferior to land A as regards fertility
and the produce from this land is 60 quintals. Now land A generates a rent of 20 quintals
(80=60=20). As population increases further, lands C and D are also cultivated & they
produce 40 & 20 quintals respectively. Now land D is marginal land & therefore land D is
marginal land & therefore land A generates rent of 60 quintals (80. 20=60). Land B
generates rent of 40 quintals (60. 20=40) and land C, 20 quintals(40. 20=20). This can be
shown with the help of the following table.

Types of land Produced of Rice Rent in Quintals

A 80 80-20=60

B 60 60-20=40

C 40 40-20=20

D 20 40-40=0

No rent land

Land D is the marginal land or no rent land. Excess of the portion over the produce
of land.Ricardian theory applies to extensive cultivation more & more land is
cultivated to produce more.

The above example of four types of land is an example relating to extensive

cultivation.Under intensive cultivation more &more doses of labour& capital are
employed on the same land for increasing production. The marginal dose of labour
and capital is no rent dose. As land is cultivated more intensively, additional doses
of labour and capital applied to it would yield lesser returns than the previous
doses.
Q. No.6.Law of variable proportion
The law of variable proportions states that as the quantity of one factor is increased,
keeping the other factors fixed, the marginal product of that factor will eventually decline. This
means that upto the use of a certain amount of variable factor, marginal product of the factor may
increase and after a certain stage it starts diminishing. When the variable factor becomes
relatively abundant, the marginal product may become negative.
Assumptions
1.Constant State of Technology: First, the state of technology is assumed to be given and
unchanged. If there is improvement in the technology, then the marginal product may rise instead
of diminishing
2.Fixed Amount of Other Factors: Secondly, there must be some inputs whose quantity is kept
fixed. It is only in this way that we can alter the factor proportions and know its effects on
output. The law does not apply if all factors are proportionately varied.
3.Possibility of Varying the Factor proportions: Thirdly, the law is based upon the possibility
of varying the proportions in which the various factors can be combined to produce a product.
The law does not apply if the factors must be used in fixed proportions to yield a product.

Illustration of the Law: The law of variable proportion is illustrated in the following table and
figure. Suppose there is a given amount of land in which more and more labour (variable factor)
is used to produce wheat.

Units of Total Marginal Average

Labour Product Product Product

1 2 2 2

2 6 4 3

3 12 6 4

4 16 4 4

5 18 2 3.6

6 18 0 3

7 14 -4 2

8 8 -6 1

It can be seen from the table that upto the use of 3 units of labour, total product increases
at an increasing rate and beyond the third unit total product increases at a diminishing rate. This
fact is shown by the marginal product which is the addition made to Total Product as a result of
increasing the variable factor i.e. labour.
 It can be seen from the table that the marginal product of labour initially rises and beyond
the use of three units of labour, it starts diminishing. The use of six units of labour does not add
anything to the total production of wheat. Hence, the marginal product of labour has fallen to
zero. Beyond the use of six units of labour, total product diminishes and therefore marginal
product of labour becomes negative. Regarding the average product of labour, it rises up to the
use of third unit of labour and beyond that it is falling throughout.
Three Stages of the Law of Variable Proportions: These stages are illustrated in the following
figure where labour is measured on the X-axis and output on the Y-axis.
Stage 1. Stage of Increasing Returns: In this stage, total product increases at an increasing rate
up to a point. This is because the efficiency of the fixed factors increases as additional units of
the variable factors are added to it. In the figure, from the origin to the point F, slope of the total
product curve TP is increasing i.e. the curve TP is concave upwards upto the point F, which
means that the marginal product MP of labour rises. The point F where the total product stops
increasing at an increasing rate and starts increasing at a diminishing rate is called the point of
inflection. Corresponding vertically to this point of inflection marginal product of labour is
maximum, after which it diminishes. This stage is called the stage of increasing returns because
the average product of the variable factor increases throughout this stage. This stage ends at the
point where the average product curve reaches its highest point.

stage 2. Stage of Diminishing Returns: In this stage, total product continues to increase but at a
diminishing rate until it reaches its maximum point H where the second stage ends. In this stage
both the marginal product and average product of labour are diminishing but are positive. This is
because the fixed factor becomes inadequate relative to the quantity of the variable factor. At the
end of the second stage, i.e., at point M marginal product of labour is zero which corresponds to
the maximum point H of the total product curve TP. This stage is important because the firm will
seek to produce in this range.
Stage 3. Stage of Negative Returns: In stage 3, total product declines and therefore the TP
curve slopes downward. As a result, marginal product of labour is negative and the MP curve
falls below the X-axis. In this stage the variable factor (labour) is too much relative to the fixed
factor.
 Q. No.7.Explain the features of Monopoly, Monopolistic competition, oligopoly, Duopoly
1. Monopoly
Definition: The Monopoly is a market structure characterized by a single seller, selling the
unique product with the restriction for a new firm to enter the market. Simply, monopoly is a
form of market where there is a single seller selling a particular commodity for which there are
no close substitutes.

Features of Monopoly:
1.Full control: Under monopoly, the firm has full control over the supply of a product. The
elasticity of demand is zero for the products.
2.No close substitutes: There is a single seller or a producer of a particular product, and there is
no difference between the firm and the industry. The firm is itself an industry.
3.Downward Sloping Demand Curve: The firms can influence the price of a product and
hence, these are price makers, not the price takers.
4.Barriers to Entry: There are barriers for the new entrants
5.Price Marker: The demand curve under monopoly market is downward sloping, which means
the firm can earn more profits only by increasing the sales which are possible by decreasing the
price of a product.
6.Firm is itself an industry: There are no close substitutes for a monopolist’s product.
Under a monopoly market, new firms cannot enter the market freely due to any of the
reasons such as Government license and regulations, huge capital requirement, complex
technology and economies of scale. These economic barriers restrict the entry of new firms.

2.Monopolistic Competition
Definition: Under, the Monopolistic Competition, there are a large number of firms that
produce differentiated products which are close substitutes for each other. In other words, large
sellers selling the products that are similar, but not identical and compete with each other on
other factors besides price.

Features of Monopolistic Competition

1. Product Differentiation: This is one of the major features of the firms operating under the
monopolistic competition, that produces the product which is not identical but is slightly
different from each other.
2. Large number of firms: A large number of firms operate under the monopolistic competition,
and there is a stiff competition between the existing firms. Unlike the perfect competition, the
firms produce the differentiated products which are substitutes for each other.
3. Free Entry and Exit: With an intense competition among the firms, the entity incurring the loss
can move out of the industry at any time it wants. Similarly, the new firms can enter into the
industry freely, provided it comes up with the unique feature and different variety of products to
outstand in the market and meet with the competition already existing in the industry.
4. Some control over price: Since, the products are close substitutes for each other, if a firm
lowers the price of its product, then the customers of other products will switch over to it.
Conversely, with the increase in the price of the product, it will lose its customers to others..
5. Heavy expenditure on Advertisement and other Selling Costs: Under the monopolistic
competition, the firms incur a huge cost on advertisements and other selling costs to promote the
sale of their products.
6. Product Variation: Under the monopolistic competition, there is a variation in the products
offered by several firms. To meet the needs of the customers, each firm tries to adjust its product
accordingly. The changes could be in the form of new design, better quality, new packages or
container, better materials, etc. The monopolistic competition is also called as imperfect
competition because this market structure lies between the pure monopoly and the pure
competition
 3.Oligopoly Market
Definition: The Oligopoly Market characterized by few sellers, selling the homogeneous or
differentiated products. In other words, the Oligopoly market structure lies between the pure
monopoly and monopolistic competition, where few sellers dominate the market and have
control over the price of the product there are two types namely:

1.Homogeneous product: The firms producing the homogeneous products are called as Pure or
Perfect Oligopoly. It is found in the producers of industrial products such as aluminum, copper,
steel, zinc, iron, etc.
2.Heterogeneous Product: The firms producing the heterogeneous products are called as
Imperfect or Differentiated Oligopoly. Such type of Oligopoly is found in the producers of
consumer goods such as automobiles, soaps, detergents, television, refrigerators, etc.
Feactures.

1. Few Sellers: Under the Oligopoly market, the sellers are few, and the customers are many. Few
firms dominating the market enjoys a considerable control over the price of the product.
2. Interdependence: it is one of the most important features of an Oligopoly market, wherein, the
seller has to be cautious with respect to any action taken by the competing firms. Since there are
few sellers in the market, if any firm makes the change in the price or promotional scheme, all
other firms in the industry have to comply with it, to remain in the competition.
3. Advertising: Under Oligopoly market, every firm advertises their products on a frequent basis,
with the intention to reach more and more customers and increase their customer base.This is due
to the advertising that makes the competition intense.
4. Competition: It is genuine that with a few players in the market, there will be an intense
competition among the sellers. Any move taken by the firm will have a considerable impact on
its rivals.
5. Entry and Exit Barriers: The firms can easily exit the industry whenever it wants, but has to
face certain barriers to entering into it. These barriers could be Government license, Patent, large
firm’s economies of scale, high capital requirement, complex technology, etc. Also, sometimes
the government regulations favor the existing large firms, thereby acting as a barrier for the new
entrants.
6. Lack of Uniformity: There is a lack of uniformity among the firms in terms of their size, some
are big, and some are small.
Q. No.8.Properties of indifference curve

1.A higher indifference curve represents a higher level of satisfaction than a lower
indifference curve:Every consumer attempts to move to a higher indifference curve provided
her/his income and price of goods permit him.

In the dig, the point A is preferable to the point M as it represents greater satisfaction than point
M.
2.An indifference curve cannot be a vertical line or horizontal line: if it were so, it would be
country to the principles of indifference curve analysis.

In the dig , the point B represents greater combination of the

commodities then the point A. the consumer gets Y Y1 more of
commodities Y axis without sacrificing any unit of commodity X.the
consumer will obviously prefer B to A. this is contradictory to the basic
principle of indifference curves. All the points on an indifference curve
must give the same level of satisfaction.

In the dig ,at the point B the consumer gets XX1 more of commodities X
axise with out safcrificing any units of commodity Y.therefore, the
consumer prefers B to A. however, an indifference curve must have
different combinations giving the same level of satisfaction.Hence, the
indifference curve cannot be a horizontal straight line.

3.Indifference curve cannot be positively sloped: it indicates that the consumer

prefers more units of both the commodities, which is not feasible in difference
curve analysis.

4.The indifference curves cannot be parallel: If they are parallel, the diminishing
marginal rate of substitution is the same on all the indifference curve.
As the consumer goes for a higher budget line and a higher I , the MNS
diminish but need not be at the same rate. It can be different.
5.indifference curve will not touch either X-axise Or Y-axise: it means
the consumer is having only commodity X or commodity Y which is not
feasible under indifference curve analysis.

6.Indifference curve cannot interest each other: two indifference curves

intersect one another, because they represent two different sets of
combinations of two goods providing unequal level of satisfaction. The
dig explains this point.
In dig ,two indifference curves I1 and I2 cut each other at point C.
thus the point C reflects equal level of satisfaction from the two different
curves which is unrealistic according to the assumption.
Q. No.9. What is micro and macro economic ,explain merits and demerits
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 of micro economics
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 of micro economics

According to Kenneth E. Boulding,In micro economics, particular firms, particular
families, individual prices, wages, incomes, particular industries and specific commodities are
studied.

Merits of micro economics

1. Correct knowledge of the nature of individual units

It makes analytical study of individual units, which helps in understanding the nature
of economics.
2. Helpful in the determination of economic policies
It provides significant contribution in the determination of individual economic
policies.
3. Helpful in solving economic problems
It helps in providing solutions to the economic problems of individual units by
studying their economic nature.\

Demerits of micro economics

1. Ignore the whole

It ignores the whole economy and studies only the small parts of the economy. Due to
this, it does not represent the correct form of the whole economy.
2. Unsuitable in many areas
There are many areas of economic analysis, where the use of micro economics is
unsuitable. In the fields like, international trade, national income, national savings, nation
-investments etc. There is limited use micro economics.
3. Unrealistic assumption
The assumption that the laws of micro economics are also applicable on macro-
economics is not correct because it is not necessary that what is appropriate for an
individual concern is also appropriate for the whole economy. For example, by the point
of view of an employment, it is good for a person and a country that a person of that
country is employed at a high post but if each individual of that country is employed at
high posts, then it would become a curse for the murky. This is because if even a small
activity of daily life is hindered, it would disturb the whole country, like; lack of sweeper
in a country would make that country a dust-bin.
Macro Economics
The term 'Macro' is derived from the Greek word 'Uakpo' which means large. Macro
economics looks at the economy as a whole. It examines the factors that determine national
output and its growth overtime. It studies the economic aggregates such as the overall level of
prices, output and employment in the economy.
Definition
According to R. G. D. Allen: "The term macro economics applies to the study of relations
between broad economic aggregates such as total employment, income and production".
Merits
1. Understanding economic policies : Macroeconomics is highly useful for understanding the
various economic. policies of a country. Especially it is useful for studying the severe problems
of developing economies like unemployment, over population, scarcity of goods, low output,
hyperinflation etc.
2. Information on the working of the economy : It provides rich information regarding the
working of the economy. It helps us to estimate the economic variables relating to the total
income, total output, total employment etc. It analyses the working of the economy.
3. Performance of the economy : Macroeconomics helps us to review the overall performance
of the economy in different spheres .
4. Economic growth : It acts as the basis of studying the economic growth of the economy.
Demerits
1. Ignores individual : Macro Economics is concerned more with the variables affecting the
whole economy. It does not concern with the actions of individual consumers, individual
producers etc. Its study is not useful as it ignores the welfare of individual consumers.
2. Statistical and conceptual difficulties : It studies various economic phenomena with the help
of statistical and conceptual methods. The investigators face difficulties in following these
methods. These difficulties relate to the aggregation of micro economic variables.
3. Misleading : Indiscriminate use of Macro Economics may mislead the economists in
analyzing various economic problems. For example it is of no use in applying the same
principles in the case of full employment and structural unemployment.
4. Fallacy : It involves the fallacy of composition. It assumes that aggregate economic behavior
is the sum total of individual activities. But what is real in the case of individual may not be
necessarily real in the case of the economy as a whole.