Economics (NCERT) Notes

1.3 Microeconomics and Macroeconomics

Study of economy
•Economics is divided into two different categories:
     1. Microeconomics
     2. Macroeconomics 
•Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
•These two branches of economics are actually interdependent and complement one another since there are many overlapping issues between the two fields.
 
Microeconomics 
•Microeconomics studies the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets.
•It is the study of decisions made by people and businesses regarding the allocation of resources and prices of goods and services.
•It also takes into account taxes and regulations created by governments.
•It focuses on supply and demand and other forces that determine the price levels in the economy.
•It takes a bottom-up approach to analyzing the economy.
•In other words, microeconomics tries to understand human choices and resource allocation.
 
How Microeconomics works
•Microeconomics does not try to answer or explain what forces should take place in a market.
•It tries to explain what happens when there are changes in certain conditions.
•For example, microeconomics examines how a company could maximize its production and capacity so that it could lower prices and better compete in its industry. 
•The rules in microeconomics flow from a set of compatible laws and theorems, rather than beginning with empirical study.
 
Principles of Microeconomics
•Demand, Supply, and Equilibrium: Prices are determined by the theory of supply and demand. Under this theory, suppliers offer the same price demanded by consumers in a perfectly competitive market. This creates economic equilibrium.
•Production Theory: This is the study of production.
•Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during production.
•Labour Economics: This principle looks at workers and employers, and tries to understand the pattern of wages, employment, and income.
 
Macroeconomics
•Macroeconomics   tries to get an understanding of the economy as a whole by focusing our attention on aggregate measures such as total output, employment and aggregate price level.
•It finds out how the levels of these aggregate measures are determined and how the levels of these aggregate measures change over time.
•It studies the behaviour of aggregate or macro measures of the performance of the economy.
•It examines economy-wide phenomena such as gross domestic product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels.
 
Questions studied in macroeconomics 
•What is the level of total output in the economy?
•How is the total output determined?
•How does the total output grow over time?
•Are the resources of the economy (e.g. labour) fully employed?
•What are the reasons behind the unemployment of resources?
•Why do prices rise?
•What should the rate of inflation be?
•What stimulates economic growth?
 
A top down approach
•It is a top-down approach as it analyzes entire industries and economies, rather than individuals or specific companies,
•It studies the behavior of a country and how its policies affect the economy as a whole.
•It examines economy-wide phenomena such as gross domestic product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels.
•It analyzes how an increase or decrease in net exports affects a nation's capital account, or how GDP would be affected by the unemployment rate.
 
Roles
•Investors can use microeconomics in their investment decisions.
•Macroeconomics is an analytical tool mainly used to craft economic and fiscal policy.



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