Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)

Unit 1: Introduction Sub: - Applied Economics

Unit: 1 (One)
Introduction
1.1 Concept and Types of Microeconomics and Macroeconomics

1.1.1 Meaning and Definition of Micro Economics

The modern economists have divided the whole study of economics into two parts such
as microeconomics and macroeconomics. Prof. Ranger Frisch of Oslo University
invented these terms in 1933 A.D. and since then other economist has adopted these
words. Hence, by now they have become part of current economic terminology. The
literal meaning of micro is small and macro is large. These terms came from Greek
words mikros and makros.

The term ‘Micro’ is derived from the Greek word ‘Mikros’, meaning ‘small’.
Microeconomics, thus, deals with a small part or small component of the national
economy of the country. Microeconomics is the study of the economic action of
individual and small group of individuals. Microeconomics may be defined, as that
branch of economic analysis, which studies the economic behavior of the individual
unit, may be a person, a particular household, or a particular firm. It is the study of one
particular unit rather than all the units.

According to prof. K.E. Boulding,” Microeconomics is the study of particular firm,

particular households, individual prices, wages, incomes, individual industries,
particular commodities.”

Similarly, according to prof. A.P. Lerner,” Microeconomics is consisting of looking

economy through a microscopic.”

Finally, microeconomics is the scientific analysis of economic behavior of individual

economic units like consumer, firm, industry, and investor etc. of the economic system.
It studies economy in disaggregated manner. Its main variables are relative prices,
individual demand and supply, output of individual firm etc.

1.1.2 Types of Micro Economics

Microeconomics is of three types which are explained below:
1. Micro Static: Micro static is the study of static relationship between different
microeconomic variables. It deals with the final position of equilibrium of these

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
variables at a particular point of time. As such, it is a static analysis. For
example, micro static analyses the condition of equilibrium price of a
commodity at a particular point of time. However, it does not deal with the
process by which the forces of demand and supply have reached the equilibrium
position. This concept can be explained through the given figure:

Y
S
D
Price

P E

D
S X
0 Quantity
Q
In the given figure DD and SS are demand and supply curves respectively. Point
E is the equilibrium point, where DD and SS curves are intersected to each other.
OP and OQ are equilibrium price and quantity respectively. As price, demand
and supply are related to the same point of time, it is a static analysis.

2. Comparative Micro Static: Comparative micro static is concerned with a

comparative study of different equilibrium position at different points of time.
However, it does not deal with the transitional period involved in the movement
from one equilibrium position to the other. It merely compares the initial
equilibrium position with the final equilibrium position. This concept can be
explained through the given figure:

Y D1
S
D

P1 E1
Price

P E

D1
D
S X
0 Quantity
Q Q1

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
In the given figure E is the initial equilibrium point where OP is the equilibrium
price and OQ is the equilibrium quantity. When demand increases, the demand
curve shifts upward from DD to D1D1. Now, the new equilibrium point is E1
where equilibrium price and quantity are OP1 and OQ1 respectively. The
comparative study of two equilibrium points E and E1 is called comparative
micro static. But it does not explain the process through which new equilibrium
is attained.

3. Micro Dynamic: Micro dynamic analyses the process by which the system
moves from one equilibrium point to another. It explains the happenings in the
market during the period of transition from one equilibrium point to another.
This concept can be explained through the given figure:

Y D1
S
D
P1 a b
>
E1
P2
c d
Price

P E

D1
D
S X
0
Q Q2 Q1 Quantity
In the given figure E is the initial equilibrium point. When demand increases. The
demand curve shift upward from DD to D1D1. This means demand is exceeding supply
that exerts upward pressure on price. This increases price from OP to P1. At price OP1
demand is less than supply. This exerts downward pressure on price. This process
continues in different steps (as shown by the points a, b, c, d ….) until the new
equilibrium is obtain. The arrows show the process of change. Thus, micro dynamic
shows the process of adjustment from one equilibrium point to another.

1.1.3 Concept of Macroeconomics:

The word ‘macro’ is also derived from the Greek word ‘Makros’ meaning large and
therefore, macroeconomics is concerned with the economic activity in aggregate. It is
the study of economic analysis as whole. It is the study of overall condition of economy
say total production, total consumption, total saving and total investment. In the word
of K.E. Boulding,” Macroeconomics is the study of the forces of factors that determine

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
the level of aggregate production, employment, and prices in an economy and their
rates of change overtime.”
According to Gardner Ackley,” Macroeconomics deals with economic affairs in the
large; it concerns the overall dimensions of economic life.”
According to Prof. Edward Shapiro,” Macroeconomics is the study of economy’s total
output, employment and price level.”
On the above definition, it is clear that macroeconomics is the study of aggregate (large)
variables. It studies the behaviors of not one particular unit but of all the units combined
together.

1.1.4 Types of Macro Economics

Macroeconomics is of three types which are explained below:
1. Static Analysis (Macro Statics): Static Analysis (Macro Statics) explains the
final position of equilibrium of the whole economy at a particular point of time.
It shows a still picture of the economy as a whole. It also investigates the relation
between macro variables in the final position of equilibrium. But it does not tell
the process of adjustment to the final equilibrium. The following equation
reflects the final position of equilibrium.

Y=C+I
Where, Y= Aggregate Income
C= Aggregate Consumption
I= Aggregate Investment

The concept of static analysis has been clear in given figure:

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
In the given figure, aggregate demand curve (C+I) and aggregate supply curve (450
line) are intersected at point E. point E is the equilibrium point where the equilibrium
level of national income is OY. As aggregate demand and aggregate supply refers to
the same point of time, it is static analysis.

2. Comparative Analysis (Comparative Macro Static): Comparative Analysis

(Comparative Macro Static) is concerned with a comparative study of different
equilibrium positions attained by the economy as a result of change in
macroeconomic variables. It compares the new and old equilibrium attained by
the economy. But it does not deal with the transitional period and process
involved in the movement from one equilibrium point to another.

The comparative analysis has been clear from given figure:

In the given figure, E is the original equilibrium point where aggregate demand
curve (C+I) and aggregate supply curve (450 line) are intersected. OY is the
equilibrium level of national income. When there is an increase in investment
the aggregate demand curve shifts to C+I+ΔI. Consequently, the new
equilibrium point is E1 and new equilibrium national income is OY1. The
comparative study of two equilibrium points E and E1 is called comparative
analysis. But it does not explain the process of through which new equilibrium
is attained.

3. Dynamic Analysis (Macro Dynamic): Dynamic Analysis (Macro Dynamic) is

the study of the process by which the economy moves from one equilibrium

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
point to another as a result of change in macroeconomic variables. The concept
of dynamic analysis has been clear from the given figure:

In the given figure, initial equilibrium point is E where the level of income is
OY. With the increase in investment, initial equilibrium shifts from E to E1 and
level income increases from OY to OY1. When income increases due to increase
in investment, consumption demand also increases. These further increases
investment to meet the increased demand. So, the income goes on increasing till
the final equilibrium is reached at E1 through the path a, b and c.

1.2 Distinction between Micro and Macroeconomics

Modern economic theory is broadly sub-divided into microeconomics and
macroeconomics. This is because microeconomic analysis and macroeconomic
analysis are the two distinct approaches adopted by modern economists in order to
analyze and understand the various economic issues and problems of present-day
society. The main differences between microeconomics and macroeconomics are as
follows:

1. Difference in Nature: The nature of microeconomics is quite distinct from that

of macroeconomics. Microeconomics studies the individual units of the
economy like a consumer, a household, a firm, etc. on the contrary,
macroeconomics deals with aggregates like national income, total consumption,
total expenditure, etc. It studies the behaviour of the economy as a whole.

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
2. Difference in objectives: The objective of microeconomics on the demand side
is to maximize utility whereas on the supply side is to maximize profits at the
minimum cost. But, the main objectives of macroeconomics are full
employment, price stability, economic growth and favourable balance of
payment.

3. Difference in Basis: The basis of microeconomics is price mechanism, which

operates with the help of individual demand and supply. These forces help to
determine the equilibrium price in the market. But the basis of macroeconomics
is the general price level, which is determined by aggregate demand and
aggregate supply.

4. Difference in Assumptions: Microeconomics is based on the assumption of

full employment of resources. Based on the assumption of full employment,
microeconomics analyses how resources are allocated. But macroeconomics
rejects the assumption of full employment and analyses how resources can be
fully employed.

5. Difference in Method of Study: Microeconomics is based on the partial

equilibrium analysis which helps to explain the equilibrium of an individual, a
firm, an industry, etc. but macroeconomics is based on the general equilibrium
analysis which is an extensive study of a number of economic variables and
their interdependence for understanding the working of the economic system as
a whole.

6. Area of Study: Theory of value and theory of economic welfare are the major
areas covered in microeconomics. The theory of value includes product pricing
and factor pricing. But income and employment theory and monetary theory are
the core topics of macroeconomics. Similarly, public finance, growth theories
and international trade are also included in the field of macroeconomics.

7. Mortal and Immortal Subject: Microeconomics deals with individuals; and

individuals are mortal because after passing some lifetime in the world, an
individual die. But macroeconomics deals with society as a whole and society
never ends. Therefore, the subject-matter of macroeconomics is immortal.

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
The difference between Microeconomics and Macroeconomics are summarized as
follows:
Basis Microeconomics Macroeconomics
Microeconomics study
Macroeconomics study about
1. Nature about individual units of
economy as a whole.
economy.
Microeconomics studies Macroeconomics studies
small units of variables i.e., aggregates variables i.e.
2. Study Area a consumer, a firm, a National Income, National
household, a commodity Output, General Price Level,
etc. Level of Employment etc.
Microeconomics deals with
Macroeconomics deals with the
determination of price of a
problems of unemployment,
3. Problems commodity, a factor of
trade cycles, international trade,
production, satisfaction of a
economic growth, etc.
consumer, etc.
Microeconomics is based
on partial equilibrium Macroeconomics is based on
4. Equilibrium
analysis, other things general equilibrium.
remaining the same.
5. Mortal or The subject-matter ofThe subject-matter of
Immortal microeconomics is mortal. macroeconomics is immortal.
Microeconomics is suitable Macroeconomics is suitable to
6. Suitable to the problem of individual the problem of economy as a
units of economy. whole.
Macroeconomics is also called
Microeconomics is also
7. Another Theory of income and
called price theory or value
Name employment or Keynesian
theory.
Theory.

1.3 Goals and Instruments of Macroeconomics

The Goals and instruments of macroeconomics refers to the study area which the
subject matter covers. It can be explained as below:
1. Theory of income and employment: Macroeconomics mainly studies the
national income and employment theory. Under this, the subjects are the
determining factors of national income and level of employment- effective
demand theory of consumption, investment theory etc.
2. Theory of general price level and inflation: It is another most important Goals
and instruments of macroeconomics. It studies determination of general price
level, inflation and its theories, money related theories etc.

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
3. Theory of Economic Growth: Under this, it studies the theory of
improvements of economy. The theory of economic growth, which is applicable
in, developed countries and theories of development, which is applicable in
developing countries.
4. Macro theory of Distribution: It is the study of different theories, laws and
principles of distribution of income in the form of wage, interest, profit and rent.
It gives us knowledge of effects of high inequality in the distribution of income
and wealth. It gives us remedies of unequal distribution and the economic
problems due to the inequality.
5. Fiscal policy: It is the policy that is concerned with the revenue and expenditure
of the government. It governs the economy.
6. Monetary policy: It is the policy that is related with the supply, available, cost
control and credit of money. The supply of money, credit creation, interest rate,
exchange rate, banking and financial rules and regulations are under the
monetary policy, which are the variables of macroeconomics.
7. Trade Cycle: Macroeconomics is concerned with trade cycle too. It explains
how the economics ups and downs occur, what are their causes, how the country
can overcome fluctuation. There are different theories of trade cycle. Some of
them are Schumpeter theory, Hessian theory, Calder’s theory etc.

1.3.1 Scope of Micro Economics

1. Product pricing: Microeconomics consists of the product pricing. It means, it
studies how the prices of goods and services are determined. Besides analyzing
the conditions of demand and supply, theory of product pricing seeks to explain
how the price of goods is determined under different market condition, such as
perfect competition, monopoly, imperfect competition, etc. The effects of
change in demand and supply in the process of price determination are also
studied in this theory.
2. Factor pricing: Microeconomics studies about the theory of factor of pricing
such as rent, wages, interest, and profit. Income received by the sale of goods
produced with the help of different factors of production is distributed among
the factors of production in the form of factor-price such as rent, wages, interest,
and profit. How the price of each factor of production is determined is the

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
concern of the theory of factor pricing which is studied under the
microeconomics.
3. Economic welfare: It consists of the analysis of economic efficiency.
Economic efficiency means, working efficiency in production, consumption,
distribution and exchange. It spells out an ideal economy. It deals with the
welfare of people as consumers and producers.
4. Resource Allocation: It studies about the resource allocation and distribution
of the limited productive resource. It concerns with how efficiently resources
are distributed among the consumers and producers. A consumer or a firm is an
equilibrium when there is optimum allocation of resources. Microeconomics,
therefore studies the conditions necessary for achieving equilibrium.
5. Consumption and production: The theory of consumer’s behavior such as law
of diminishing marginal utility, equi-marginal utility, consumer surplus etc. are
studies under microeconomics. Similarly, the theory of production such as law
of variable proportion and law of return to scale etc. are also studies under it.
6. Basis for forecasting: There are various processes of demand forecasting and
sales forecasting which are studied under microeconomics.

1.4 Interdependence of Micro and Macroeconomics

Microeconomics and Macroeconomics are not competitive to each other but they are
complementary.

➢ Dependence of Macroeconomics on Microeconomics:

Macroeconomics studies the economy as a whole. It depends on microeconomics on
several grounds.
1. General Price level, national income, employment etc. are the subject matter of
macroeconomics but its conclusions are based on individual analysis because
the total is made up of a part. For example, national income is sum of
individuals’ income.
2. To determine the general price, it is necessary to analyze all prices of individual
goods and services.
3. Consumption function in macroeconomics is the result of the consumption
behavior of individual consumers in economy.
4. The aggregate demand is a sum of individual demand functions in the market.

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
Thus, the aggregate and averages that are studies in macroeconomics are nothing but
they are the individual micro economic variables in an economy.
➢ Dependence of Microeconomics on Macroeconomics:
Microeconomics studies the problems and behavior of the individual economic units of
the economy. It depends on macroeconomics on several grounds.
1. The production of a particular commodity, determination of its price, individual
consumption, wages of the labor etc., are the subject matters of
microeconomics. To the determination of these factors value is related to the
aggregate macro variables.
2. Microeconomics analysis theories, values and assumption are made on the basis
of macroeconomics analysis theories, values and assumptions. For example,
quantity demand of an individual firm is not only demand in the price of that
firm but it depends on the purchasing power of the community too.
3. An individual firm cannot determine the wages rate independently. It has to
study the wages given by other firms of the economy.
Thus, the study of microeconomics depends on the study of macroeconomics.
In this way, microeconomics and macroeconomics are interdependent. In this aspect
Gardner Ackley remarked,” Micro and Macroeconomics are a two-Way Street in
absence of one another will not complete.”

1.5 Use of Micro and Macroeconomics

1.5.1 Use or Importance of Microeconomics

Now a days, microeconomics occupies a very important place in the study of economy
theory. It has both theoretical and practical importance. We may list the importance of
microeconomics under the following headings:

1. Helpful to understand the working of the economy: Microeconomics

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 the goods and services.

2. Help to Provide tools for economic policies: Microeconomics tools are useful
in designing policy, taxation policy and others in an economy dominated by
public sector. It is also useful in designing pricing policy of public utilities in an
economy.

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
3. Helpful in formulating sectoral policies: An economy consists of several
sectors such as industry, tourism, trade and others. An understanding of each of
these sectors is imperative before an appropriate policy is designed for them.
Microeconomics provides a useful tool to the government while making sectoral
decisions.

4. Helpful in efficient allocation of resources: Microeconomics is helpful in the

efficient allocation of resources. Microeconomic theory explains the condition
of in both consumption and production that ensures maximum social welfare.

5. Helpful in the study of human behaviour: Microeconomics studies many

forms of human behaviour with the help of diminishing marginal utility, equi-
marginal utility, indifference curve and revealed preference theory.

6. Helpful in Business Decision-making: Microeconomics is very much useful

in business decision-making. It helps the business executives in making
production plan and trade decisions. It also provides an analytical tools to
examine market mechanism and helps business firms to take decision about
their production and pricing policies.

➢ Importance of Microeconomics in Business Decision Making

Microeconomics is very much useful in business decision making. It helps the business
executives in making production plan and trade decisions. It also provides an analytical
tool to examine market mechanism and helps business firms to decision about their
production and pricing policies.
The role or importance of microeconomics in business decision making can be
explained as below:
1. Optimal Resource Utilization: the productive resources are scare in the
economy and microeconomics tells how the productive resources are allocated
in the production of various goods and services. It also helps to find out, what
to produce, how much to produce and for whom to produce.
2. Demand Analysis: with the help of microeconomics analysis, the business
firms try to forecast the demand for their product. As we know, the demand for
the firm’s product would change in response to change in price of the firm’s
product, prices of other goods, which may be substitute or complementary,
consumer’s income, his taste and fashion, his expectations about future changes

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
in price, change in the age composition of population, change in total population
etc. these are the determinants of demand, a study of which is essential for
forecasting future demand for the product as well as the present sales.
3. Cost Analysis: Cost analysis is an important area of microeconomics. There are
many theories to explain different condition of cost in microeconomics such as
fixed cost and variable cost, average cost and marginal cost, short-run cost and
long-run cost. These all help the business manager to compare costs of
production of different periods and thereby to evolve suitable policies in
controlling cost and deriving suitable profits.
4. Optimal Production Decision: The production decision is concerned with
proper product mix. what factors are to be combined in what manner to produce
a given product? Microeconomics deals with different production techniques
that help to find out the optimal production decision.
5. Pricing Policy: We know that pricing of the product is the chief function of a
firm. This depends upon the cost of production and at the same time the prices
of substitutes and the nature of competition. Price affects profits, which in turn
determines the existence and the growth of the firm. The microeconomic
analysis provides the business manger a thorough knowledge of the theories of
production and pricing in order to make sure that the firm gets profits
continuously.

1.5.2 Use or Importance of Macroeconomics

Macroeconomics is useful in several ways. Because it studies about problem of
unemployment, inflation, economic instability and economic growth. Use or
importance can be explained by following points:

1. Helps to understand the work of economy: The nature & work of modern
economy is very complicated. Macroeconomics is useful to know the work and
structure of this economy. In macro-Economics, a universe or aggregates for
e.g., national income, total employment, total production etc. are studied.
Because of this, statistical information of Macro Economic variables gets
available. The impact of these elements on Economy can be understood. From
this one can get the total idea of nature of economy.

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
2. Helpful in formulating economic policy: Government gets support of
information to plan economic policy due to macroeconomic analysis. Plan
economic implementation of economic policy is made for the purpose of
improvement in total economic situation. For that, the aggregates units like
national income total expenditure, total saving, total employment etc. are
studied. Macro Economics helps to make available the extensive statistical
information of whole Economy. Due to macroeconomics analysis, we get
information of problems like poverty, unemployment, economic disequilibrium
inflation etc. it helps to formulating economic policy to solve these problems.

3. Helpful in controlling economic fluctuations: Macroeconomics studies

economic situation of a country - in objective way. That is why causes of
creation of trade cycles are known. The nature of economic boom & recession
can be understood. Proper economic policies can be planned to suggest
remedies on its Macro Economics is developed to solve economic problems
created due to Great Depression. Trade cycles can be controlled through it.
Macroeconomics helps to make changes as per necessity in policies regarding
monetary & fiscal policies.

4. Helpful in International comparisons: Different type of information about

macroeconomic variables in every country can be obtained due to
macroeconomic analysis. This information is obtained frequently in new way.
For e.g., National income, per capita income, total consumption, per capita
consumption, total production total employment, total import- export etc. The
conclusions about consumption tendency, structure of investment, nature of
total demand in every country, can be done with the help of this information,
international comparison of different countries, economic situation can be
made. From this one gets the idea about the country whether it is more advanced
or backward. One gets idea of our country’s place in international economy. But
this type of comparison is not possible in micro Economics as it studies
independent units. One understands the ratio of international & regional
economic disequilibrium.

5. Evaluate performance of the economy: Macro Economics studies the

relations in larger aggregates. It studies frequently changing situations in real

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Class: BCA (5th Semester) By Jagarnath Sah (MA-Economics, MBS)
Unit 1: Introduction Sub: - Applied Economics
way so new information is obtained frequently. Objective study of different
problems is done. So, it makes possible to set many new theories with the help
of macroeconomic Development, Theory of general distribution, theory of
currency value, etc. it helped to more development of Economics than other
social sciences.

6. To development and expand the microeconomics: Micro Economic variables

get affected by the changes in macroeconomic variables. For e.g., total
production, national income total employment etc. If there is change in these
variables it affects Micro economic variables, such as personal formulating,
personal income, personal consumption etc. Because of this the development of
macroeconomics is useful for the development of micro Economics.
Macroeconomics guides to put forth theories in micro Economics. For e.g.,
theory of demolishing marginal Utility, this theory explains the experience of
all consumers of specific good.

7. Help to understand international Trade: The entire world is engaged in

international Trade and macroeconomics helps to understand international
Trade structure of a country. Besides, macroeconomics also helps to analyze
benefit of international trade as well as designing an appropriate trade policy.

8. Useful in Business decisions making: Macroeconomics is very useful in

Business decisions making. The overall economic activity such as national
income and employment, aggregate demand and supply conditions, fiscal and
monetary policies of government, rate of inflation etc. affect business
environment, which affects business decision making. The forecasting of future
demand and investment decision are also based on the situation of the economy
and its growth process.

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