Meaning and Scope of Economics. Introduction to principles of Economics. Definitions of Micro Economics 9/7/2017

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1 Introduction to principles of Economics By Prof. A.N. Arsiwala M.Com, C.A. NET Meaning and Scope of Economics first coined and used by Ragnar Frisch of Oslo University in Micro Economics is derived from the Greek word 'mikros' which means a small-a millionth part. Macro Economics is derived from the Greek word 'makras' which means large. Thus in Macro Economics we analyze the behavior of the economy as a whole Definitions of Micro Economics According to Kenneth Boulding "Micro Economics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities." In the words of Maurice Dobb, "Micro Economics is in fact a microscopic study of the economy". Scope and subject matter of Micro Economics Theory of product pricing Theory, of factor pricing (Micro theory of distribution). Theory of economic welfare 1

2 Product Pricing The theory of product pricing explains how the relative prices of cotton cloth, rice, car and thousands of other commodities are determined. Price of a commodity depends upon the forces of demand and supply Factor Pricing Theory of factor pricing i.e. Theory of distribution explains how following are determined. Rent Wage Interest Profits Theory of welfare Theory of welfare basically deals with efficiency in the allocation of resources. Efficiency in production Efficiency in consumption Efficiency in the direction of production Wrapping up Micro Economics What goods are produced with and in what quantities? Who will produce them & how? To whom & how the wealth so produced shall be distributed? How shall resources be allocated to production & consumption in efficient manner? 2

3 Defining Macro Economics in the words of Professor Ackley, Macroeconomics deals with economic affairs in the large, it concerns the overall dimensions of economic life. It studies the character of the forest, independently of the trees which compose it. Scope and Importance of Macroeconomics: To Understand the Working of the Economy Indispensable for understanding the working of the economy. Main economic problems are related to the behavior of total income, output, employment and the general price level in the economy. These variables are statistically measurable. Hence we can analysie their impact on functioning of economy. There are lot of National level problems in a developing economy. Responsibility of governments rests in regulating and controlling these problems. No government can solve these problems in terms of individual behaviour. In Economic Policies Certain Complex problems and their solutions: General Unemployment National Income Economic Growth Monetary Problems Business Cycles 3

4 For Understanding the Behavior of Individual Units Basic Economics Problems:- Demand for individual products depends upon aggregate demand in the economy. Unless the causes of deficiency in aggregate demand are analysed, it is not possible to understand fully the reasons for a fall in the demand of individual products. Thus, the study of individual units is not possible without macroeconomics. 1. What to produce; 2. How to produce; 3. For whom to produce. What to Produce This problem involves selection of goods and services to be produced and the quantity to be produced of each selected commodity. What possible commodities to produce How much to produce How to Produce This problem refers to selection of technique to be used for production of goods and services In Labour intensive technique, more labour and less capital (in the form of machines, etc.) is used. In Capital intensive technique, there is more capital and less labour utilization. 4

5 For Whom to Produce? This problem refers to selection of the category of people who will ultimately consume the goods. this problem is concerned with distribution of income among the factors of production (land, labour, capital and enterprise) This problem can be categorized under two main heads Personal Distribution Functional Distribution Production Possibility Curve (PPC) Production Possibility Frontier (PPF) refers to graphical representation of possible combinations of two goods that can be produced with given resources and technology. Assumptions for PPF The amount of resources in an economy is fixed, but these resources can be transferred from one use to another; With the help of given resources, only two goods can be produced. The resources are fully and efficiently utilized; Resources are not equally efficient in production of all products. So, when resources are transferred from production of one good to another, the productivity decreases; The level of technology is assumed to be constant. Example of PPC 5