introduction to micro & macroeconomics

1. 2-Introduction to Microeconomics and
Macroeconomics
In modern times, the study of economics has been
divided into two branches i.e. Micro and Macro
economics. The terms ‘microeconomics’ and
‘macroeconomics’ were first used in economics by a
Norwegian economist Ragnar Frisch in 1933. After Prof.
Frisch, the terms earned popularity when J.M. Keynes
clearly distinguished between the terms through his
book entitled ‘General theory of ‘Employment, Interest
and Money’ published in 1936. And now the terms are
being used in economics by the economists all over the
world.

2. 2.1-Meaning of microeconomics:- The word
Microeconomics is formed by the two words, ‘micro’ plus
‘economics’. The words ‘micro’ seems to have been derived
from Greek word ‘mikros’. In Greek language, ‘mikros’
means small. Therefore, Micro-economics refers to the
study of small individual units of an economy. In other
words, Microeconomics deals with the analysis of small
individual units of the economy such as individual
consumers, individual firms and small aggregates or
groups of individual units, i.e. output of particular goods
and services produced by single firms or industries,
particular households, individual prices of goods and
services, individual wages, incomes etc.

3. In this regard K.E. Boulding has given a definition as
‘Microeconomics is the study of particular firm, particular
household, individual price, wage, income industry and
particular commodity.’
Thus, microeconomics is the study which seeks to
explain how a consumer uses his limited income in various
goods and services, how he maximize his satisfaction.
Similarly, it also seeks to explain how a firm decides what,
how and for whom to produce,
This is how microeconomics studies small economic
units and their and behaviour but not the economy as a
whole.

4. Microeconomics is concerned with the issues like;
How a firm determines the sales price of its products,
What amount of output will maximize its profit,
How a firm determines the lowest cost combination of
different factors of production,
How the individual consumer determines the
distribution of his/her spending on various goods and
services so as to maximize satisfaction,
How the prices of individual factors of production are
determined,
How a firm or an industry allocates limited resources
for the production of different good and services, etc.
This way microeconomics studies small parts of an
economic body but not the economy as a whole.

5. 2.2- Meaning of Macroeconomics
The word Macroeconomics is formed by the
combination of the two words ‘Macro’ plus ‘economics’.
The word ‘macro’ seems to have been derived from
Greek word ‘makros’. In Greek language ‘makros’ means
‘big’. Hence, Macro-economics denotes to the study of an
economy as a whole. In other words, Macroeconomics
applies to the study of broad economic aggregates like
level of employment, general price level, aggregate
national output, income, investment, trade cycle,
aggregate demand, aggregate supply etc.
In this regard K. E. Boulding has given a definition as,
‘Macroeconomics deals not with individual quantities
but with aggregate of these quantities, not with
individual income but with national income,

6. not with individual prices but with price level, not with
individual output but with national output.’
In the view of Edward Shapiro, ’In brief, macroeconomics is
the study of total output, employment and price level.’
The above definitions also reveal that macroeconomics is
the study of broad economic units, or the economy as a
whole, such as national income, national output, general
price level, total employment, total saving, total investment
and so on.

7. Macroeconomics is concerned with the issues like;
 Why the economy faces the problem of unemployment
and how this problem can be overcome?
 How national income is estimated and how it is affected
by various variables of the economy?
 How a number of producers take decisions for
investment and how consumers decide to spend their
income?
 Why there are economic fluctuations and what are the
measures to maintain fluctuations?
 How the general price level, demand for and supply of
money are affected interchangeably?
 How the internal economy is influenced by the changes
in external economy etc?

8. 3- Functions of Microeconomic theory
The functions of microeconomic theory are
concerned with the study of economic behavior of
consumers, resource owners and business firms who
individually can play a decision making role in a free
market economy.
Microeconomic theory is called price theory due to
its functional nature related to individual business
activities of households and business firms which
studies the circular flow of goods and services from
household to business firm and from business firm to
household. The theory analyses the composition of such
a flow and the way of price determination of goods and
services as well as price of resources used. The circular
flow of activities are as follow:

9. In the above figure the household activities connected to
sell the factors land, labor and capital to the business
firm through factor market and the business firms buy
the inputs. The business firms produce and sell goods
and services to the households through goods market.
The firms are the sellers and the households are the
buyers. Likewise firms spend money-income received by
selling goods and services to buy factors like raw
materials, labors, capital, land etc.
Consumption
Expenditure
Goods
Market
Business
Firms
House
holds
Factor
Market
Money
Income

10. This circular flow continues till the economy exists in
the society. This is how the firm and household activities
are connected with each other and with an interaction
between them price of goods and services and quantities
are determined. This is the way micro economic theories
function. The functions of microeconomic theory can be
explained pointwise as below.
1. Analysis of Individual Behaviour
The function of microeconomic theory is to explain
the behaviour of individual consumer or household in
relation to optimum allocation of limited means for
achieving maximum possible satisfaction. Similarly, to
explain the behavior of individual producer or firm on
account of use of limited resources to make maximum
possible profits.

11. 2. Pricing
The another function of microeconomic theory is to
give the idea about the determination the prices of goods
and services in different market structures. Similarly it also
function to help understanding the determination of factor
prices like rent, wages, interest in factor markets.
3. Business Decision Making
It is microeconomic theory which provides basic idea
for the firm to make better business decisions so that
maximum possible profits can be achieved.
4. Formulating Economic Policies
Microeconomic theory provides basic tools to
formulate various economic policy like tax policy, trade
policy, Policy of promoting business, import export etc.