Micro Economic Analysis

• The subject matter of economics consists of two parts,

namely Micro economics and Macro economics. Ragnar
Frisch, who is among the first Nobel laureates in
Economics coined these terms which are now universally
used. “Micro” is derived from the Greek word “Mikros”
meaning small and “Macro” from “Makros” meaning
large.
Micro Economic Analysis

• In Micro-Economics we study the economic behaviour of an

individual, firm or industry in the national economy. It is thus a
study of a particular unit rather than all the units combined. We
mainly study the following in Micro-Economics:
• Product Pricing
• Consumer behaviour
• Factor pricing
• Economic conditions of a section of the people.
• Study of firms
• Location of an industry
 Macro Economic Analysis

• Macroeconomics is the study of aggregates; hence called Aggregative Economics.

It is the analysis of the entire economic system, the overall conditions of an
economy like total investment and total production. I
• n the words of K.E. Boulding, “Macroeconomics deals not with individual
quantities as such but with aggregates of these quantities; not with individual
incomes, but with the national income; not with individual prices but with the
price levels; not with individual outputs but with the national output.” It
analyses the entire economy and its large aggregates like total national income
and output, aggregate consumption, saving and investment and total
employment.
 Macro Economic Analysis

• In Macro-Economics, we study the economic behaviour of the large aggregates such

as the overall conditions of the economy like total production, total consumption,
total saving and total investment in it. It is the study of overall economic
phenomena as a whole rather than its individual parts. It includes:
• National income and output;
• General price level
• Balance of trade and payments
• External value of money
• Saving and investment
• Employment and economic growth
 Micro Vs. Macro Analysis

Micro Macro
• Add yourIndividual economic units • Economy as a whole
• Individual Units • Aggregate units
• Demand & Supply of a Particular • Aggregate Demand & Aggregate Supply of
Commodity Economy as a whole
• Price determination of commodities or • Determination of level of income and
factors of production employment
• Deciding n relative prices • Deciding on Absolute Prices
• Partial Equilibrium Analysis •  General Equilibrium Analysis
• Narrow • Wider
• Easier • Complex
• objective here
Interdependence of Micro and Macro
Economics

• Microeconomics and Macroeconomics are

interdependent. Neither of the two is complete
without the other. Every microeconomic issue
involves macroeconomic analysis. E.g. demand
of a product for a firm depends on the total
employment, income and demand of the entire
country. Further, law of demand came into
existence from the analysis of the behaviour of a
group of people.
Interdependence of Micro and Macro
Economics

• Similarly, every macroeconomic issue requires

microeconomic analysis for its proper
understanding. An economy consists of
individuals, firms and industries. E.g. to study
national income, we will have to study the
income of individuals. The working of an
economic system can be understood by studying
the behaviour of individuals i.e. components of
an economy.
PARTIAL EQUILIBRIUM ANALYSIS

• It studies the internal outcome of any policy action in a single

market only.
• The effects are examined only in the markets which is directly
affected not on other markets
• We refer to partial equilibrium analysis when a single firm or a
single consumer is in equilibrium while other firms in industry
may not be in equilibrium
GENERAL EQUILIBRIUM ANALYSIS

• It is the branchy of economics that seeks to explain economic

phenomena like production, consumption and prices in a economy
as whole.
• It tries to give an understanding of the whole economy by looking
at the macro perspective.
 STATIC VS DYNAMIC ANALYSIS

• Difference # 1. Time Element:

• In static economic analysis time element has nothing to do. In
static economics, all economic variables refer to the same point of
time.
• Static economy is also called a timeless economy. Static economy,
according to Hicks, is one where we do not trouble about dating.
• On the contrary, in dynamic economics, time clement occupies an
important role. Here all quantities must be dated. Economic
variables refer to the different points of time.
 STATIC VS DYNAMIC ANALYSIS

• Difference # 2. Process of Change:

• Another difference between static economics and dynamic
economics is that static analysis does not show the path of change.
It only tells about the conditions of equilibrium. On the contrary,
dynamic economic analysis also shows the path of change. Static
economics is called a ‘still picture’ whereas the dynamic
economics is called a ‘movie’ of the market.
 STATIC VS DYNAMIC ANALYSIS

• Difference # 3. Equilibrium:
• Static economics studies only a particular point of equilibrium. But
dynamic economics also studies the process by which equilibrium
is achieved. As a result, there may be equilibrium or may be
disequilibrium. Therefore, static analysis is a study of equilibrium
only whereas dynamic analysis studies both equilibrium and
disequilibrium.
 STATIC VS DYNAMIC ANALYSIS

• Difference # 4. Study of Reality:

• Static analysis is far from reality while dynamic analysis is nearer
to reality. Static analysis is based on the unrealistic assumptions of
perfect competition, perfect knowledge, etc. Here all the
important economic variables like fashions, population, models of
production, etc. are assumed to be constant. On the contrary,
dynamic analysis takes these economic variables as changeable
 STATIC VS DYNAMIC ANALYSIS

• Now we can sum up by saying that static and dynamic approaches

of economic analysis are not competitive but complementary of
each other. Statics is simpler and easier while dynamics is nearer
to reality. It is useful to study some economic problems through
the static analysis while others may be studied through the
dynamic approach.
POSITIVE VS. NORMATIVE ECONOMICS

• Economics is a science as well as art. But which type of science is

a big question here, i.e. positive or normative? 
• Positive economics is related to the analysis which is limited to
cause and effect relationship.
• On the other hand, normative economics aims at examining real
economic events from the moral and ethical point of view. It is
used to judge whether the economic events are desirable or not.
POSITIVE VS. NORMATIVE ECONOMICS

• While Positive economics is based on facts about the economy.

Normative economics is value judgment based. Most of the people
think that the statements which are commonly accepted are a fact
but in reality, they are valued. By, understanding the difference
between positive and normative economics, you will learn about
how the economy operates and to which extent the policy makers
are taking correct decisions.
POSITIVE VS. NORMATIVE ECONOMICS

•
BASIS POSITIVE ECONOMICS NORMATIVE
ECONOMICS
Meaning A branch of economics A branch of economics
based on data and facts based on values,
is positive economics opinions and judgments
is normative economics

Nature Descriptive Prescriptive

What is does Analysis Cause and Passes Value Judgement
Effect Relationship
Perspective Objective Subjective
POSITIVE VS. NORMATIVE ECONOMICS

•
BASIS POSITIVE ECONOMICS NORMATIVE
ECONOMICS
Study of What actually is What ought to be

Testing Statements can be Statements cannot be

tested using scientific tested
methods
Economic Issues It clearly describes It provides solution for
Economic Issue the economic issue,
based on value
Perspective Objective Subjective
SHORT RUN VS. LONG RUN

• There are different periods in economics. The most prominent among them are
short run and long run. These are the concepts that involve many factors of
production.
• Let us know more about the long run and the short run in the following points:
• Short run: In the short run scenario, any one of the factors associated with
production is fixed. For achieving more output, the firms may change the level of
other factors necessary for production. The factors that remain fixed are known as
the fixed factors of production, while the variable factors are known as the
variable factors of production.
• An example of a short run can be a company, ABC, which is able to produce 10
cars in a day and looks to produce more cars (15 cars per day) by using the
available infrastructure due to increasing demand during the season.
SHORT RUN VS. LONG RUN

• Long run: In the long run, the factors associated with production,
and also the associated costs, are variable. In this period, a firm
achieves flexibility in making decisions. In addition to that, a firm
can expect more competition in the long run.
• An example of a long run can be of the same company, ABC,
permanently looking to expand production capacity of cars instead
of only during the season. It requires new land, labour, and
equipment in addition to the existing infrastructure.