AN OVERVIEW: CONCEPTS
OF MICRO AND MACRO
ECONOMICS
-Banik Gour Sundar
ECONOMICS
Economics is the study of how society
decides what gets produced, how and for
whom.
Economics explain how scarce resources
are allocated among competing demands.
Fisher, Stanley, Economics, 1984, P-I
Scarce Resource
A scarce resource is a resource
that is not available in
unlimited quantity at a zero
price.
Approaches to study economic
problems
Microeconomics
Macroeconomics
Microeconomics: Microeconomics is the study
of the economic action/behavior of individuals
and small group of individuals or economic
agents. This includes the study of particular
households, commodities, firms, markets,
individual prices, wages, incomes, and
individual industries.
Macroeconomics
Macroeconomics is the study of the
problems of aggregates or averages
covering the entire economy or economy as
a whole, such as national income, GDP,
total employment, total unemployment,
total investment, total consumption, total
saving, aggregate supply, aggregate
demand, inflation rate, wage level, total
export, total import etc.
Types of economic system
The Command Economy
Free Market Economy
The Mixed Economy
Important Economic Indicators to
Understand the Economy of a Country
GNP, GDP, savings, investment,
import, export, foreign remittance,
foreign liabilities, inflation,
unemployment, income distribution,
gini coefficient, poverty etc.
Concept of Demand
How much of a good a consumer is
willing to buy in a market at a
specific price in a given period of time
is called demand. Demand is a
consumers desire, ability and
willingness to pay for a good or
service.
Law of Demand
If other things held constant, a rise
in the price of a commodity is
followed by a reduction in demand
and a fall in price is followed by an
increase in demand.
Limitations of the Law
Change in taste, fashion or preference
Change in income
Change in other commodity prices
(Substitutes or Complimentary)
Anticipatory change in price
Giffen good
Price Elasticity of Demand
Price elasticity of demand is the rate
at which quantity demanded varies
with a change in price. To be more
specific, the price elasticity of demand
is a measure of the relative change in
amount purchased in response to a
relative change in price.
Production
The activity of production
involves the transformation of
inputs into outputs. These inputs
are called factors of production.
Factors of Production
A factor of production may be defined
as that goods or service which is
required for production. A factor of
production is indispensable for
production because without it no
production is possible. There are four
factors of production: land, labour ,
capital and organisation.
Land
In economics, land as a factor of production
does not refer only to the surface of land but
to all gifts of nature, such as rivers, oceans,
climate, mountains, fisheries, mines, forests,
fertility of land, air, light, heat, etc.
Labour
Labour refers to all mental and physical
work undertaken for some monetary
reward. It includes the services of a
factory workers, a doctor, a teacher, a
lawyer, an engineer, an officer, etc. But
labour does not include any work done for
leisure or which does not carry any
monetary reward.
Capital
Capital means all man made resources.
It comprises all wealth other than land
which is used for further production of
wealth. In modern usage, capital not
only refers to physical capital but also to
human capital which is the process of
increasing knowledge, the skills and
capacities of all people of the country.
Organisation
Organisation refers to the services
of an entrepreneur who controls,
organise and manage the policy of
a firm, innovates and undertakes
all risks.
Theory of Production
The theory of production is the physical
relationship that describes how inputs ( such as
labour and capital) are transformed into outputs
(such as cars and televisions). Combining the
inputs in different ways and different quantities,
same quantity of outputs can be produced. The
functional relationship between quantities of
inputs and outputs is called production function.
Production Function
For simplicity, we assume that there are
two inputs labour L and capital K, we
can then write the production function as
Q = F (K,L)
The production function states the
maximum quantity of output that can be
produced from any chosen quantities of
various inputs.
The Production Isoquant
An isoquant is a curve that shows
all the possible combinations of
inputs that yield the same output.
Return to Scale
Returns to scale is an another concept of theory
of production. The law or returns to scale
describes the relationship between outputs and
the scale of inputs in the long run when all the
inputs are increased in the same proportion.
The measure of increased output associated
with increases in all inputs in fundamental to
the long-run nature of the firms production
process.
Return to Scale
I ncreasing return to scale (Economics of
scale): If output increases more than
double when inputs are doubled.
Constant return to scale: If output is
double when all inputs are doubled.
Decreasing return to scale: If output is
less than double when all inputs are
doubled.
Production Possibility Frontier
The production possibility frontier
shows for each level of the output of
one goods, the maximum amount of
the other goods that can be produced
in an Economy.