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Introduction to Economics
From ancient times, we have been consuming rice, bread, vegetables, milk, fruits, etc. We have
been using clothes and houses. We have been using the services of doctors, engineers, electricians,
drivers, etc. As a student, you are getting the services of teachers and you have used books, paper,
pens, and pencils. In other words, we are all consumers, as it is a matter of fact, each one of us is a
consumer. Consumption or the using of goods and services is an economic activity.
Goods or commodities are to be produced before they are consumed. Production of anything
requires effort and skill. All those who help in the creation of goods and services are producers. For
example, farmers grow rice, wheat, pulses, etc. Goldsmith makes jewels, and cobbler makes shoes
and slippers, and so on. The services are created by the drivers, tailors, teachers, doctors, etc.
The activities of people are divided into two categories viz., economic and non-economic activities.
Economic activities are those activities which man does to earn money. The farmers work on his
land to grow food-grains, vegetables, cotton, etc. Part of these may be kept for self-consumption
and the rest he may sell in the market. We can say that the farmer is engaged in an economic
activity. The farmer who works in the agricultural field, the nurse who attends to patients in a
hospital, the teacher who teaches in an educational institution - in fact, everyone who works
anywhere and at any time for getting income is considered as an economic activity.
If a man performs any activity which is not done for money is a non-economic activity. For
example, a musician singing for his own pleasure, teacher teaching his own son, a nurse giving
treatment for her own parents, etc.
Hence, the human activities like production, consumption and exchange are considered as
Economic activities which are done for earning income. The activities of human which are not done
for the purpose of earning income are called non-economic activities. The non-economic activities
include social activities, political activities, religious activities, charitable activities, etc.
Meaning of Economics
The term "Economics" is taken from Greek words "Oikos" and "Nomos". 'Oikos' means household
and 'Nomos' means management. So, Economics means household management, i.e. managing a
household, using the limited funds available in the most economical manner possible. In other
words, it means managing the desires and aspirations of family through wise allocation of resources
(money) in order to achieve maximum satisfaction in life. It is important to note that the famous
Greek Philosopher Aristotle considered Economics as the art of household management.
At present, the art of household management is applied by every person i.e. both by Government
and individuals to get maximum satisfaction. Both are trying to solve many economic problems in
day-to-day life. 1

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From the above discussion it is clear that the term Economics refer to all economic activities of
human beings. The Economic activities include production, consumption, distribution, exchange,
public finance, public debt, preparation of budget, etc. As economics is a vast subject. So it is not
easy to give a precise definition or meaning of economics as its scope and the area it covers are very
large. Ever since, it emerged as a separate branch of study in social science, various scholars and
authors have tried to give its meaning and objectives. It should be noted that with development of
time and civilization the definition of economics has undergone modification and change. The
concept of Economics has been changing during different stages of developing Economics as
subject. Definitions of Economics
At present, there are four definitions of economics. Broadly speaking, the various definitions can be
lumped together under four heads viz.:
1. Wealth Definition
2. Welfare Definition
3. Scarcity Definition
4. Growth and Development or Modern Definition of Economics
Let us discuss these stages. Stages of Developing or Definition of Economics as a Subject-

1. Wealth Concept (Adam Smith-1776)

Many scholars and authors in the late eighteenth and early nineteenth century believed that
economics is the science of wealth. These scholars are called the classical thinkers. They viewed
that economics deals with the phenomenon of wealth which includes nature and causes of wealth,
creation of wealth by individuals and nations etc.
Definition (Adam Smith)
"Economics is the science of wealth"
Features:
a) This definition was given by Adam Smith.
b) He is also known as the ‘father of economics’.
c) According to this definition, economics is a science of the study of wealth only.
d) It deals with production, distribution, and consumption.
e) This wealth-centered definition deals with the causes behind the creation of wealth.
Criticism: Wealth concept of Economics was bitterly criticised, because it assumed wealth as an
end of human activities. If it is accepted in life, there will be no place for love, affection, sympathy
and patriotism. Absence of these values will make real life a hell. It did not talk about people who
had no wealth. Having wealth and not having wealth divided the society into rich and "not rich" or
poor. So many scholars in the early nineteenth century thought that economics should address the
issue of "welfare of the society" and not just wealth.

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2. Welfare Concept (Alfred Marshall 1890)

According to this concept Economics is not the science of wealth but it is concerned with human
welfare. It studies and emphasises wealth as a means of satisfying human wants, not as an end of
human activities. Definition (Alfred Marshall) "Economics is the study of man in the ordinary
business of life". Welfare is the social effort to promote the basic physical and material wellbeing of
people in need. Marshall was the pioneer of welfare thought. Accordingly economics was seen as
science of welfare. Welfare is both quantitative and qualitative in nature. Consumption of goods and
services, increase in per capita income etc is quantitative aspects of welfare. Living in peace,
enjoying leisure, acquiring knowledge etc are qualitative aspects of welfare. As science of welfare,
economics was said to be concerned with the quantitative welfare only because it can be measured
in terms of money.
Features:
a) This definition was put forward by Alfred Marshall.
b) Economics is the study of man in the ordinary business of life.
c) Economics is the science of human welfare.
d) Economics is a social science.
e) Economics is the study of only economic activities.
f) It examines how a person gets his income and how he invests it.
g) Thus, on one side, it is a study of wealth.
h) On the other most important side, it is a study of well-being (welfare).
Criticism: Welfare concept was also criticised by the pioneers of Scarcity Concept. According to
these economists, it will be an injustice to the subject, if it is restricted to ordinary business of life,
concerned with economic activities and related to human welfare only. The welfare definition of
economics explained only the material aspects of welfare. But people want both material goods and
non-material services. Since resources available with every individual or society are scarce, people
try to achieve their goals by alternative use of these resources which they do by making appropriate
choice. So, economics was treated as science of scarcity and choice.

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3. Scarcity Concept (Lionel Robbins -1932)

According to Robbins, neither wealth nor human welfare should be considered as the subject-
matter of economics. His definition runs in terms of scarcity.
Definition (Lionel Robbins)
"Economics is the science which studies human behaviour as a relationship between ends and
scarce means which have alternative uses."
As science of scarcity and choice, economics studies human behavior as relationship between ends
and means which are scarce and have alternative uses. Here "ends" simply "wants". "Scarce
Means" simply "limited resources". According to the scarcity definition, limited resources can be
used alternatively. Take the example of production of two goods - Cloth and Wheat. We cannot
produce unlimited amount of cloth and wheat with limited amount of resources. The resources have
to be divided to produce these goods. Let demand for one of the goods say wheat increases so it has
to be produced in larger quantity for which we need more resources. But given that, resources are
limited, we can produce more wheat only by withdrawing some resources from the production of
cloth and putting them in production of wheat. As a result, cloth production will fall and wheat
production will increase. In this example, we have two alternatives-
(i) Keep producing the same amount of cloth and wheat.
(ii) Produce more wheat due to increase in its demand thereby decreasing some amount of
cloth.
Since the economy wants more wheat, the study of economics tells us how this problem can be
solved with limited resources.
Features:
a) Economics is a positive science.
b) Economics is the study of human behaviour.
c) Human wants are unlimited and our resources are limited/scarce.
d) It has an alternative use of scarce resources.
e) It is an efficient use of resources.
f) It is needed for optimisation, i.e., best allocation of resources.
Criticism In the twentieth century the objective of achieving growth and development of the entire
economy gained momentum. Role of the government in economic growth and development became
increasingly important. So economics, no longer, remained limited to individual decision making

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and use of resources only. Its scope has been expanded to include production and consumption of
commodities overtime so that the economy achieves growth and development.

4. Growth and Development Concept (Paul. A. Samuelson-1948)

Now economics is treated as the science of growth and development. In fact, it is true that now a
day's people talk about well being of individual and the whole nation. It is understood that for an
individual to be able to satisfy his/her wants, it is necessary that the whole economy must grow and
find proper mechanism to distribute the benefits of growth among the individual citizens. So
performance of the economy is very important in terms of use of its resources and production and
distribution of goods and services. The economy must allocate its resources among various
alternative activities, ensure the efficient use and find ways as to how they would grow for future
development of the economy.
Definition: (Paul A. Samuelson)
Economics is concerned with determining the pattern of employment of scarce resources to
produce commodities 'over time'.
According to him, “economics is the study of how people and society choose, with or without the
use of money, to employ scarce productive resources which could have alternative uses, to produce
various commodities over time and distribute them for consumption now and in the future among
various persons and groups of society”. It analyses the costs and benefits of improving patterns of
resource allocation. This definition is the combination of welfare and scarcity definition.
On this basis, many economies in the world have performed well. For example the USA, European
countries, Japan, etc. is called developed economies because they have achieved higher level of
income for their citizens. Our Indian economy is a developing economy because many of its
citizens are still poor. A study of economics tells us the state of our economy and guides us to
achieve higher level of growth and development. Economists of late twentieth century have also
started talking about welfare of future generation and protection of natural environment. Hence
economics is also treated as science of Sustainable Development. To achieve higher level of
growth and development, economies around the world have been exploiting natural resources and
polluting the environment. Consumption of goods and services has even resulted in lots of
wastages. Note that some resources like minerals, mineral oil, forests are depleting fast because of
their rising consumption by present generation. So, future generation may be left with little or no
resources. It is our moral duty to use the available scarce resources judiciously, efficiently and
ensure welfare of our future generation.

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Central Problems of an Economy or Problem of Choice An economic problem generally means

the problem of making choices that occurs because of the scarcity of resources. It arises because
people have unlimited desires but the means to satisfy that desire is limited. Therefore, satisfying all
human needs is difficult with limited means. Causes of Economic Problem
1. Scarcity of resources: Resources like labour, land, and capital are insufficient as compared
to the demand. Therefore, the economy cannot provide everything that people want.
2. Unlimited Human Wants: Human beings' demands and wants are unlimited which means
they will never be satisfied. If a person's one want is satisfied, they will start having new
desires. People's wants are unlimited and keep multiplying, therefore, cannot be satisfied
because of limited resources.
3. Alternative Uses: Resources being scarce, the same resources are used for different
purposes, and it is therefore essential to make a choice among resources. For instance, petrol
is used in vehicles and is also used for generators, running machines, etc. Therefore, the
economy should now make a choice within the alternative uses.
Problem of Choice
Prof. Samuelson, an American Nobel Prize winner in Economics points out the significance of the
problem of choice. He says "Economics is the study of how people and society use scarce resources
to produce various valuable commodities and distribute them for consumption among various
persons and groups in society." According to him economizing problem (problem of choice) is a
fundamental problem to be studied in economics. This problem arises because of multiplicity of
wants and relative scarcity of means.

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The fundamental problem in economics is the problem of economic choice. Economic choice
arises because our wants are unlimited and resources are scarce in a society.
The above definition reveals that economics is a social science deals with human behavior which
relates to production, exchange and consumption of goods and services.
In other words individual or the society has to make a choice. They chooses only those wants are
urgent and important and other wants are postponed. When a choice is made, individual or a society
is putting the limited resources to the best possible use. The process of putting the limited resources
to the best possible use is known as economizing. It is also called economic efficiency.
At this point, it is possible for us to understand that economics is a science of efficiency in the use
of scarce resources.
Fundamentals of Economic Choice in an Economy Choice is necessary in a society. A society
follows a policy of economizing and efficiency. Limited resources have to be put into the best use.
While doing so a society attempts to answer three fundamental questions.
1. What is to be produced? The first function of the society is to decide which goods are to be
produced and in how much quantity. Since human wants are multiple. The resources available are
limited. These make it necessary for a society to make use of the resources judiciously so that we
can fulfill as many as possible. Therefore society has to decide what types of goods and services are
produced (producer goods or consumer goods). The decision what to produce depends on the
prevalent conditions in the economy, e.g. if economy faces food shortage, resources have to be
diverted to production of food. If economy faces external threat, then resources are flown to the
production of defense goods. This decision must be consistent with the production possibility
curve faced by a country. A society has to choose a combination of goods and services, which lie on
the production possibility curve. This ensures efficiency.
2. How to produce? (Choice of technology) The next problem we have to tackle is the problem of
how to produce the desired goods in the economy. Thus the question of techniques to be used in the

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production comes in the mind. We have to decide whether we should use labour-intensive technique
or capital - intensive technique. Labour-intensive method of production implies more use of labour
per unit than capital whereas; capital-intensive technique indicates more use of capital per unit than
labour. The choice depends on the availability of resources. A labour surplus economy can well use
the labour-intensive technology.
3. For whom to produce? The next question to be answered by the society is making choice is the
distributing of total output. Output has to be distributed among households, businesses and the
government. The decision in this context involves economics, politics and ethics. The principle of
equity in economics advocated equitable distribution of output in the society. The method of
distribution depends on the nature of the society i.e. in capitalist society goods are produced for
those who can pay, this method gives room for inequitable distribution of total output in the society.
This leads to economic concentration among few. In a socialistic society government adopts its own
distribution policy to distribute output as equitably as possible. In mixed economy society
government adopts for both those who can pay and those who can't pay.
Economics as a Science or an Art Economics is both a science and an art. Economics is
considered as a science because it is a systematic knowledge derived from observation, study and
experimentation which creates relationship between causes and their effects. In other words, every
discipline which has got certain theories, concepts and Laws showing the relationship between
causes and their effects is science. Economics has got its own theories, concepts and Laws, so it is
definitely a science though not an exact science, like Physics and Chemistry. Science is classified as
follows:
Classification of Science

A. Positive Science B. Normative Science

What is? What ought to be?
What was? What ought to have been?
What will be?
A. Positive Science: It deals with the actual happenings. It presents the real picture of facts without
any comments and suggestions. Economics also deals with the positive issues, so it is appositive
science.
Examples: i. India is an over populated country ii. Price in Indian economy are constantly rising iii.
We have adopted mixed economy iv. Indian economy is developing economy 8
B. Normative Science: It deals with the norms of facts and suggestions, what ought to be or what
ought to have been. It promotes social and economic values. Economics is also normative science
because it suggests ways and measures to be adopt for economic betterment of people.
Examples: a) The fundamental principle of economic development should be the developments of
our rural India. b) Agricultural income should also be taxed. c) Private sectors should be encouraged
accelerating the pace of our industrialization.

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Economics is an Art An art is the practical application of knowledge for achieving definite ends. A
science teaches us to know a phenomenon and an art teaches us to do a thing. For example, there is
inflation in India. This information is derived from positive science. The government takes certain
fiscal and monetary measures to bring down the general level of prices in the country. The study of
these fiscal and monetary measures to bring down inflation makes the subject of economics as an
art. After arriving at a conclusion that economics is both a science as well as an art.
Methods of Economics The following two methods are used for propounding theory: a) Deductive
Method: It is a method which goes from general to particular on the basis of general truth. We try
to find out particular truth by logical discussions. In the words of Wilson Gee "By deductive
method is meant the reasoning from general to particular or from universal to individual". We
accept certain general facts and use them in certain specific cases to prove our own accepted truth.
For example, it is a universal truth "man is mortal" so Ram, Hari who are also men must die. In the
same way, it is an established fact that "man is rational" so he will try to purchase lesser quantity
of a particular commodity when it is costlier. Mohan, who is also a man will behave in the same
way and purchase lesser quantity of goods. This method assumes that the behavior of the general
public will also be the behaviour of individual person. Deductive method is used to propound theory
regarding the economy. Studies of national income, employment, price level and international trade
is made on the basis of deductive method. Macro economics theories are based upon deductive
method. It is also known as scientific method. 9
b) Inductive Method: It moves from particular to general on the basis of our experience.
According to Wilson Gee, "Inductive method is the process of reasoning from particular to general
or from Individual to universal". We study the behaviours of an individual and reach certain
conclusion. We study the behaviours of other individuals also. If we reach the same conclusion, we
generalize the statement as an observed truth and the theory is propounded. For example: If Ranjita
purchased more garments its price falls. We observed that Sunita does the same thing. Riau and
Mita also behave in the same manner. Finally, we can generalize their behavior and economic
theory that customers have tendency to buy more of a commodity when its price falls is formed.
Micro economics theories are formulated according to inductive method.
Goals of Economics The following are the economic goals: a) A high level of employment b) Price
stability c) Efficiency d) Equitable distribution of income e) Growth 10
Micro and Macro Economic Analysis Economics is concerned with the well-being of all people,
including those with jobs and those without jobs, as well as those with high incomes and those with
low incomes. Economics is divided into two different categories: Microeconomics and
Macroeconomics. Microeconomics focuses on the actions of individual agents within the
economy, like households, workers, and businesses. Macroeconomics looks at the economy as a
whole. It focuses on broad issues such as growth of production, the number of unemployed people,
the inflationary increase in prices, government deficits, and levels of exports and imports.
Microeconomics and macroeconomics are not separate subjects, but rather complementary
perspectives on the overall subject of the economy.

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Microeconomics Micro means a millionth part. Micro economics thus deals with a small
component of the national economy of a country. Micro economics may be defined as the branch of
economic behavior of the individual unit may be a person, a particular household or a particular
firm. It is a study of one particular unit rather than all the units combined together. In micro
economics we study the various units of the economy, how they function and how they reach their
equilibrium. Here, we attempt only a microscopic study of the national economy. We do not study
the national economy in its totality. Microeconomics focuses on supply and demand and other
forces that determine price levels in the economy. It takes a bottom-up approach to analyzing the
economy. Since micro economics splits up the entire economy into smaller parts for the purpose of
intensive study, it is sometimes referred to as the slicing method. An important tool used in micro
economics is that of marginal analysis.
The fields covered by Microeconomics: a) Demand, Supply and Equilibrium: Prices are
determined by the law of supply and demand. In a perfectly competitive market, suppliers offer the
same price demanded by consumers. This creates economic equilibrium. b) Production Theory:
This principle is the study of how goods and services are created or manufactured. c) Costs of
Production: According to this theory, the price of goods or services is determined by the cost of the
resources used during production. d) Labor Economics: This principle looks at workers and
employers, and tries to understand patterns of wages, employment and income. e) Theory of
product pricing, i.e. theory of consumers' behavior and production. f) Theory of factor pricing
i.e. theory of wages, rent, interest and profits. g) Theory of economic welfare.
Concept of Microeconomics a) Microeconomic study deals what choices people make and factors
influence their choices and how their decisions affect the goods markets by affecting the price, the
supply and demand. b) One goal of microeconomics is to analyze the market mechanisms that
establish relative price among goods and services and allocate limited resources among alternative
uses. c) Microeconomics shows condition under which free markets lead to desirable allocations. d)
It also analyzes market failure, where markets fail to produce efficient results. e) It deals with the
effects of economic policies (such as changing taxation levels) on microeconomic behavior and thus
on the aforementioned aspects of the economy. f) Modern macroeconomics theories have been built
upon micro foundation i.e. based upon basic assumptions about micro-level behavior.
Microeconomic Analysis deals with: a) Individual consumer satisfaction b) Market demand for the
product of an individual producer c) It study the equilibrium of firm & industry
Scope of Microeconomics a) Are the resources in the country fully utilized or not? b) What should
be produced & in what quantity? (Theory of value) c) The problem of selecting technique of
production (Theory of production) d) How the goods & services produced are distributed? (Theory
of distribution) e) How effectively the resources are allocated? (Economics of welfare) f) Whether
the capacity of the economy to produce goods & services is growing or is static? (theories of
economic growth)
Importance of Microeconomic Analysis a) Allocation of resources and promote efficiency in
production. b) The distribution of national income. c) Consideration of welfare of masses. d)
Importance of applied field of economics.

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Limitation of Micro Economic Analysis

1. The cases true in individual unit may not be true in the cases of aggregates e.g. an individual
industry may be flourishing where as the economy as a whole may be languishing.
2. It assumes other things to be equal and based on the assumption that of full employment.
This is highly unrealistic.
3. It concentrates only on small parts of total economy consequently it throws no light to total
economy.
4. There are certain economic problems which cannot be analyzed with the aid of micro
economics i.e. Public finance, monetary policy because these are macro in nature.
5. It fails to formulate appropriate economic policies for the Government. 12

Macroeconomics Macroeconomics, on the other hand, looks at the decisions of countries and
governments. It studies the behavior of a country and how its policies impact the economy as a
whole. It analyzes entire industries and economies, rather than individuals or specific companies,
which is why it's a top-down approach. It tries to answer questions such as, "What should the rate
of inflation be?" or "What stimulates economic growth?" Macroeconomics examines economy-wide
phenomena such as gross domestic product (GDP) and how it is affected by changes in
unemployment, national income, rates of growth and price levels. Macroeconomics analyzes how
an increase or decrease in net exports impacts a nation's capital account, or how gross domestic
product (GDP) is impacted by the unemployment rate. It is defined as that branch of economic
analysis which studies the behavior of not one particular unit, but of all the units combined
together. It is a study of aggregates. Hence it is often called aggregative economics. It is the study
of the economic system as whole. It is the studies of the overall condition of an economy say total
production, total consumption, total saving and total investment. It deals with great averages and
aggregates of the system rather than with particular units in it. It is also otherwise called as Theory
of Income. Since macro economics splits up the economy into big lumps or sectors for purpose of
study, it is also called the method of lumping.
The field covered by Macroeconomics:
1. The behaviour of an economic system i.e. whole.
2. Theory of income, output and employment i.e. theory of consumption function and theory of
investment function.
3. Theory of prices i.e. theory of inflation deflation and reflation.
4. Theory of economic growth i.e. long run growth of income, output and employment applied
to developed and developing countries.
5. Behaviour of large aggregators such as - total employment, national product, national
income, price- levels etc.
Concept of Macroeconomics: a) The term 'Macro' has been derived from a Greek word 'Macros'
meaning 'large'. Thus Macro-economics is the study and analysis of an economy as a whole. b)
The study of the performance, structures, behavior and decision making of an economy as a whole,
rather than individual markets. c) Macroeconomists focus on the national, regional and global

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scales. d) For most macroeconomists the purpose of this discipline is to maximize national income
and provide national economic growth. e) This growth further increases utility and improve
standard of living for the economy's participants. 13
Macroeconomics Analysis deals with: a) Unemployment in the country b) Inflation/ deflation c)
Economic growth d) International trade e) National Output f) National Expenditure g) Level of
saving & investment
Scope of Macroeconomics: The scope of Macro Economics lies in the study of analysis of the
following: a) Theory of employment b) Theory of income c) Theory of price level d) Theory of
growth e) Theory of distribution f) Theory of national income
Importance of Macroeconomic Analysis:
a) It always gives the complete picture about the economy as whole hence it helps to understand
working of the whole economy.
b) Macro- economic has increased the utility of economics.
c) It helps to the Government of all over the world in formulating and implementing appropriate
economic policies.
d) It also helps governments to achieve uninterrupted economic growth and full employment with
the help of suitable economic policies.
e) It provides the basis for planning the economic development of underdeveloped countries.
f) Social accounting is another field where macro economics has made valuable contribution to
economic policies.
Limitations
1. The danger of excessive generalization from individual experience to the system as a whole.
What is true of an individual component may not necessarily be true of the aggregates.
2. Danger of excessive thinking in terms of aggregates which are by no means homogenous.
3. An aggregative tendency may not influence all the sectors of economy in the same manner.
4. A study of aggregates may lead us to believe that no change has taken place as such no new
policy is called for.
5. Possibility of wrong predications.
Differences between Microeconomics and Macroeconomics Analysis

Microeconomics Macroeconomics
1. Meaning Microeconomics is the branch of Macroeconomics is the branch of Economics
Economics that is related to the study that deals with the study of the behaviour
of individual, household and firm's and performance of the economy in total. It
behaviour in decision making and focuses on the sum total of economic
allocation of the resources. It activity, dealing with Gross Domestic
comprises markets of goods and Product, inflation, unemployment, growth
services and deals with economic rate and with national policies relating to

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issues. these issues.

Macroeconomics studies the whole
2. Area of Microeconomics studies the particular
economy, that covers several market
study market segment of the economy.
segments.
The basis of microeconomics deals
The basis of macroeconomics deals with
with various issues like demand,
3. Basis deals various issues like national income,
supply, factor pricing, product pricing,
with distribution, employment, general price
economic welfare, production,
level, money, and more.
consumption, and more.
4. Business Microeconomics is applied to internal Macroeconomics is applied to environmental
Application issues. and external issues.
The objective of microeconomics is to
The objective of macroeconomics is to attain
maximize satisfaction, output, and
5. Objectives full employment, price stability and
sales revenue and to minimize cost
economic growth etc.
etc.
Microeconomics covers several issues
Macroeconomics covers several issues like
like demand, supply, factor pricing,
6. Scope distribution, national income, employment,
product pricing, economic welfare,
money, general price level, and more.
production, consumption, and more.
Microeconomics is useful in
Macroeconomics perpetuates firmness in the
regulating the prices of a product
broad price level, and solves the major
7. alongside the prices of factors of
issues of the economy like deflation,
Significance production (labour, land, entrepreneur,
inflation, rising prices (reflation),
capital, and more) within the
unemployment, and poverty as a whole.
economy.

Microeconomics Macroeconomics
Microeconomics is based on partial
Macroeconomics is based on general
8. equilibrium analysis and studies the
equilibrium analysis and studies the
Equilibrium equilibrium condition of an
equilibrium of an economy as a whole.
individual firm or an industry.
Micro economics the study of
Macro economics on the other hand is based
equilibrium conditions are analyzed
9. Nature on time lags rates of change etc. So it is
at a particular period of time. So it is
dynamic in nature.
a static analysis.
Micro economics is also called as Macroeconomics is called as the theory of
10. Theory
price theory of economics. income.
11. Method Microeconomics referred as the Macroeconomics referred as the method of
method of slicing. lumping.
Microeconomics is based on Macroeconomics has been scrutinized that the
impractical presuppositions, i.e., in misconception of composition incorporates,
12. microeconomics, it is presumed that which sometimes fails to prove accurate
Limitations there is full employment in the because it is feasible that what is true for
community, which is not at all aggregate (comprehensive) may not be true
feasible. for individuals as well.

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After learning the above concepts, we can come to the conclusion that these two concepts are not
antithetical but complementary to each other and they are bound to go hand in hand. However, in
the real world no precise demarcation is possible between the two branches of economics. Often
micro economic variables affect the macro economic variables and vice-versa. 16
Utility Analysis
Utility: In ordinary language utility means usefulness. But in economics, utility implies the power
to satisfy human wants. If a commodity satisfies a human want, it is said to possess utility.
Measurement of Utility: Utility cannot be measured directly in a precise manner. There cannot be
a direct numerical expression of utility. However economists adopt an indirect measurement of
utility in terms of price. When a consumer interested to pay a high price for a commodity, it means
it possesses a high utility to him for that commodity and vice versa. But this is just a rough
indication.
Two Approaches: Cardinal: Prof Marshall - According to him utility can be quantify and
measurable numerically. He measured in terms of utils / utility. It is Quantitative. Such a
measurement is imaginary. The law of diminishing Marginal Utility is based on this approach.
Ordinal: Prof Hicks and Allen- According to them utility cannot be quantified, so its numerical
expression is unrealistic. It can be measured on the basis of ordinal sense i.e. 1, 2, 3 order like that.
It is qualitative. The law of Indifference curve analysis is based on this approach.
Total Utility: It means the total satisfaction expressed or attained by the consumer regarding
all the units of a commodity taken together in consumption or acquired at a time.
Marginal Utility: Marginal utility refers to the successive incident in total utility made by taking
separately each unit of the commodity in a successive manner as an addition to its total stock.
Thus marginal utility may be measured as the difference between the utility of the total units of
stock of consumption of a given commodity minus that of consuming one unit loss in the stock
considered. In symbolic term MUₙ = TUₙ − TUₙ₋₁
TUₙ = Total utility of n units taken together
TUₙ₋₁ = Total utility of n−1 units taken together
MUₙ = Marginal utility
Formula: MU = ΔTU / ΔQ
For example, when a person increase the consumption of eggs from one egg to two eggs, then
the total utility increases from 30 utils to 45 utils. The marginal utility here would be the 15
utils of the 2nd egg consumed. 1
The relationship between total utility and marginal utility is now explained with the help of
following schedule and a graph.
Schedule a showing marginal utility and total utility

Units of apples consumed daily Marginal utility in utils per day Total utility in utils per day
1 7 7

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2 4 11 (7+4)
3 2 13 (11+2)
4 1 14 (13+1)
5 0 14 (14+0)
6 -1 13 (14-1)
The above table shows that when a person consumes no apples, he gets no satisfaction. His total
utility is zero. In case he consumes one apple a day, he gains seven units of satisfaction. His total
utility is 7 and his marginal utility is also 7. In case he consumes second apple, he gains extra 4 utils
(MU). Thus, it gives him a total utility of 11 utils from two apples. His marginal utility has gone
down from 7 utils to 4 utils because he has a less craving for the second apple. Same is the case
with the consumption of third apple. The marginal utility has now fallen to 2 utils while the total
utility of three apples has increased to 13 utils (7 + 4 + 2). In case the consumer takes fifth apple,
his marginal utility falls to zero utils and if he consumes sixth apple also, the marginal utility
became negative. Showing the total utility and marginal utility is plotted in figure below.

The law of Diminishing Marginal Utility The law of diminishing marginal utility is one of the
basic laws of economics. It provides the foundation for various laws of consumption. The law took
its birth in the pen of Prof. Sir Gossen in 1854. It was later developed and refined by Marshall and
others. It is also called as Gossen's first law or first law of consumption. The law of diminishing
marginal utility describes a familiar and fundamental tendency of human behavior. The law of
diminishing marginal utility states that: "As a consumer consumes more and more units of a
specific commodity, the utility from the successive units goes on diminishing". According to this
law, a person consumes more and more of units of a commodity its marginal utility declines.
Law is based upon three facts.
• Firstly, the law based upon a particular characteristic of human wants i.e. a particular want
is satiable. It means total wants of a man are unlimited but each single want can be satisfied.
• Secondly, different goods are not perfect substitutes for each other in the satisfaction of
various particular wants. As such the marginal utility will decline as the consumer gets
additional units of a specific good.

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• Thirdly, the marginal utility of money is constant given the consumer's wealth.
The law can be illustrated by the help of the following table:

Units (Rasogola) Marginal Utility Total Utility

1st 20 20
2nd 12 32
3rd 8 40
4th 2 42
5th 0 42
6th -3 39
Diagram The law of diminishing marginal utility can also be represented by a diagram.

Assumptions of the law

1. The successive units of commodity must be similar in quality and quantity.
2. Tastes, habits etc. of the consumer should remain unaltered.
3. There is no time gap between consumption of the two units of the commodity.
4. The price and its substitutes of the commodity should remain the same.
Exceptions to the law In the following cases the law does not operate these points:
1. In case of abnormal persons like drunker and mad persons the law will not be applicable.
2. If the size, quality and quantity of a commodity are different then the law may not held
good.
3. In case of miser the law will not be applicable.
4. In case of rare collections like stamp and coin the law will not operate.
Law of Equi-Marginal Utility A consumer will be in equilibrium with a single commodity
symbolically: MUx = Px
The law of equi-marginal utility is simply an extension of law of diminishing marginal utility to two
or more than two commodities. "The household maximizing the utility will so allocate the
expenditure between commodities that the utility of the last rupees spent on each item is equal". The
position of equilibrium will be reached when the marginal utility of each good is in proportion to its
price and the ratio of the prices of all goods is equal to the ratio of their marginal utilities.

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Mathematically, MUₐ / Pₐ = MUb / Pb = MUc / Pc = MUn / Pn

Here: (a), (b), (c) … (n) are various goods the consumer consumed.
The law of Equi-Marginal Utility This is an important law of consumption. It is derived from the
law of diminishing marginal utility. The law is referred in several ways, such as the law of equi-
marginal utility, the principles of equi-marginal returns, the equi- marginal comparisons, the
law of substitution, the Law of Maximum Satisfaction, the Law of Indifference, the
Proportionate Rule etc. It is also called the Gossen's second law of consumption. 20
The law of equi-marginal utility is based upon one of the characteristics, of human wants are
unlimited. But the means at our disposal are limited. If the marginal utility of the commodity is
equalized in all its uses, Equalization of marginal utility in different uses will maximize his
aggregate satisfaction. This is why, this law is known as the law of equi-Marginal utility.
Example and Explanation of Law of Equi-Marginal Utility The doctrine of equi-marginal utility
can be explained by taking an example. Suppose a person has Rs.5 with him whom he wishes to
spend on two commodities, tea and cigarettes. The marginal utility derived from both these
commodities is as under:

Units of Money MU of Tea MU of Cigarettes

1 10 12
2 8 10
3 6 8
4 4 6
5 2 3
Rs.5/- Total Utility = 30 Total Utility = 39
A rational consumer would like to get maximum satisfaction from Rs.5/-. He can spend money in
three ways:
1. Rs.5 may be spent on tea only.
2. Rs.5 may be utilized for the purchase of cigarettes only.
3. Some rupees may be spent on the purchase of tea and some on the purchase of cigarettes.
If the prudent consumer spends Rs.5 on the purchase of tea, he gets 30 utility. If he spends Rs.5 on
the purchase of cigarettes, the total utility derived is 39 which are higher than tea. In order to make
the best of the limited resources, he adjusts his expenditure: i. By spending Rs.4 on tea and Rs.1
on cigarettes, he gets 40 utility (10 + 8 + 6 + 4 + 12 = 40). ii. By spending Rs.3 on tea and Rs.2
on cigarettes, he derives 46 utility (10 + 8 + 6 + 12 + 10 = 46). iii. By spending Rs.2 on tea and
Rs.3 on cigarettes, he gets 48 utility (10 + 8 + 12 + 10 + 8 = 48). iv. By spending Rs.1 on tea and
Rs.4 on cigarettes, he gets 46 utility (10 + 12 + 10 + 8 + 6 = 46). 21

The sensible consumer will spend Rs.2 on tea and Rs.3 on cigarettes and will get maximum
satisfaction. When he spends Rs.2 on tea and Rs.3 on cigarette, the marginal utilities derived from

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both these commodities is equal to 8. When the marginal utilities of the two commodities are
equalizes, the total utility is then maximum, i.e., 48 as is clear from the schedule given above.
Curve/Diagram of Law of Equi-Marginal Utility: The law of equi-marginal utility can be
explained with the help of diagrams.

In the figure MU is the marginal utility curve for tea and KL of cigarettes. When a consumer spends
OP amount (Rs.2) on tea and OC (Rs.3) on cigarettes, the marginal utility derived from the
consumption of both the items (Tea and Cigarettes) is equal to 8 units ($EP = NC$). The consumer
gets the maximum utility when he spends Rs.2 on tea and Rs.3 on cigarettes and by no other
alternation in the expenditure.
Limitations
1. Difficult to calculate and compare the marginal utilities of different commodities to their
respective price.
2. It assumes that utility can be measured, but in practical. It is impossible to measure exactly.
3. Complementary goods- Some goods are complementary are used together in a definite
proportion. Hence the law is not applicable because we cannot substitute.
4. If the price of goods fluctuate from time to time then it is difficult to operate.
5. Due to non availability of certain goods the consumer changes his option to less useful
commodities in their place, this prevents maximum satisfaction.
6. The law does not hold good in case of free goods like air, water and sunshine.
7. Indefinite budget period, it refers that the law may operate in a definite budget period. But
in practice we find that there are many goods which are bought in one budget period but
used in another budget period.
8. Ignorant consumers because he does not know how to earn maximum profits.
Importance of Law of Equi-Marginal Utility
1. It applies to consumption.
2. Its application to production.
3. Its application to exchange.
4. Its application to price determination.
5. Its application to distribution (Use of four factors of production i.e. Land, labour, capital,
organisation).

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6. Its application to public finance.

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