The Scope of Economics
Chapter – 2
INTRODUCTION
Micro and Macro-Economics
- Basic Economic Problems arise from the scarcity of resources; economics studies how individuals, firms, and organizations make choices about what goods to produce, in what quantities, and how they are distributed for consumption.
- Economists analyze unemployment of resources, which causes economies to operate inside the Production Possibility Curve (PPC), and study factors influencing national income, employment levels, and price levels.
- The scope of economics is divided into two main fields: Microeconomics and Macroeconomics.
- Microeconomics focuses on small individual units of the economy, such as consumers, firms, and specific markets or industries.
- Macroeconomics analyzes the economy as a whole, examining large aggregates like total national output, income, employment, consumption, and investment.
- The terms microeconomics and macroeconomics were first introduced by Ragnar Frisch and are widely used in economic analysis.
- Positive Economics involves explaining and analyzing economic issues without making value judgments, while Normative Economics suggests policies and makes recommendations regarding what should be done to promote social welfare.
- According to K. E. Boulding, microeconomics studies specific entities like individual firms, households, and particular commodities, whereas macroeconomics deals with aggregates such as national income, price levels, and total output.
MICROECONOMICS
- Microeconomics focuses on the economic actions and behavior of individual units and small groups within the economy.
- It examines how various components, such as consumers, producers (firms), workers, and resource suppliers, conduct their economic activities and achieve equilibrium.
- Microeconomic analysis provides a microscopic view of the economy, studying the interrelationships between countless individual units rather than the economy as a whole.
- In microeconomics, the demand of an individual consumer is analyzed to derive market demand, which reflects the demand of a group of consumers for a specific good.
- The behavior of individual firms regarding price fixation and output is also studied, along with their responses to changes in demand and supply conditions.
- Microeconomic theory seeks to determine the mechanisms by which different economic units achieve equilibrium, progressing from individual units to industries and markets.
- Microeconomics does not address the total behavior of all units in the economy; rather, it focuses on individual industries and markets.
- The study of the economic system or the economy as a whole falls outside the scope of microeconomic analysis.