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Assignment No:-1

Subject:-Managerial Economics

Topic: Microeconomics and Macroeconomics

Submitted by:Badhe suraj - 13 Badjate Ankur -14 Dhanawate Sheetal - 30 Patil Megha - 61

Managerial Economics:Economics is the study of men as they live, behave, move and thinking ordinary business of life. Economics as a social science studies human behavior as a relationship between numerous wants and scares means having alternative uses. According to Prof. Spencer Siegelman, Managerial economics deals with integration of economic theory with business practice for the purpose of facilitating decision making and forward planning. According to Prof. Joel Dean, The purpose of Managerial Economics is to show how economic analysis can be used in formulating business policies. According to Prof. Hague, Managerial economics is concerned with using logic of economics, mathematics and statistics to provide effective ways of thinking about business decision problems.

Classification of Economics:-




Microeconomics and macroeconomics are the two major branches of modern economic theory. The terms macroeconomics and microeconomics were originated by Ragnar Frisch in 1933.The worlds macro and micro are derived from the Greek world Micros and Makros which mean small and large respectively.

Meaning of Microeconomics:Microeconomics is the branch of economics which is concerned with the analysis of behavior of the individual economic units or variables such as individual consumer or a producer. It is the study of particular firms, households, individual prices wages, incomes, particular commodities. Essentially, microeconomics is the study of particular economic organisms and their interactions and particular economic quantities and their determination. Microeconomics basically deals with individual decision making and the problem of resource allocation, it examines, in particular, as to how individual consumers and producers behave and how their behaviors interact. Microeconomics theory is often called price theory or value theory because it is primarily concern with determination of relative prices of different goods. The subject matter of Microeconomics fundamentally covers the following areas: 1) Theory of value i.e. product pricing and factor pricing. 2) Theory of economic welfare.

The subject matter and the Scope of microeconomics.

Microeconomics is basically concerned with market behavior and allocation of resources. The subject matter of microeconomics is thus, confined to the following major fields: Pricing Distribution Welfare

Pricing:A major part of microeconomic theory is confined to the price theory. Microeconomics assumes the total quantity of recourse available in the economic society as given and seeks to explain how these shall be allocated to the production of particular goods for the satisfaction of chosen wants. In a free market economy, the allocation of recourses is based on the relative prices and profibility of different goods. As such, to explain the allocation of recourses, microeconomics seeks to explain the pricing phenomenon. Price theory explains how the price of a particular commodity is determined in the commodity market. For in depth analysis of price determination it contains:

Theory of demand of the analysis of consumer behavior. Theory of production and cost or the analysis of producer behavior. Theory of product pricing or price determination under different market structures.

Distribution:Distribution is an equally important branch of microeconomics. The theory of distribution basically deals with the factor pricing. It seeks to explain how rewards of the individual factors of production such as land, labour, capital and enterprise are determined for their productive contribution. In other words, it is concerned with the phenomenon of rent, wages, interest and profits, as the respective rewards of these four categories of factors viz. land, labour, capital and enterprises. Since demand and supply of each these factors are characteristically different, there are separate theories to explain rent, wages interest and profits. Thus, distribution field includes general theory of distribution, theories of rent, theories of wages, theories of interest and theories of profits.

Welfare:Welfare economic is an important branch of microeconomics as it seeks to explain how efficient is the allocation of recourses so determined. It seeks to explain under what conditions the efficiency in production, efficiency in distribution and overall economic efficiency, i.e. the efficiency in the direction of production are attainable. The theory of economic welfare explains how an individual consumer maximizes his satisfaction when production efficiency is achieved by allocation of resources or reallocation of resources in a such a way as to maximize output from a limited set of input. Along with individual economic welfare ,welfare economics is also confined to the social welfare .social welfare is based on overall economic efficiency of the system .when maximum individual wants are satisfied at the best possible or optimum level by the production patterns through efficient allocation of recourses ,overall economic efficiency or pareto optimality condition is reached .conditions of overall economic efficiency ,i.e. Pareto optimality conditions ,are of great help in raising the standard of living of the population and maximization of social welfare. The subject matter and the scope of microeconomics may be thus pinpointed as in chart given below:


Pricing (Theory of value)

Distribution (Factor Pricing)

Welfare (Welfare Economics)

Theory of

Theory of

Theory of

General Theory of Distribution

Theories of

Demand Production Pricing






Microeconomics has great theoretical and practical significance. It Explains Price Determination and Allocation of Resources. It provides an understanding of the working of market mechanism in capitalist/free enterprise economy. It has Direct Relevance in Business Decision-making. The knowledge of price theory has its own significance in practical business decision making. It is useful to a businessman in determining the price policy. It guides him in attainment of maximum productivity through optimum allocation of his given resources. It teaches him in analysis of the costs of production and estimation of the demand for his product. It serves as a Guide for Business/Production Planning. Tools of microeconomics are useful in preparing the expansion of business. It is also helpful in investment decision taking by the firm. It serves as a basis for prediction. Microeconomics theory is useful to make conditional predictions. Demand forecasting, for instance, rests on microeconomic principles of demand. It Teaches the Art of Economizing. Microeconomic principles deal with economizing of scares resources and show how to use them efficiently so as to gain maximum out of minimum. Microeconomic law, like the law of substitution, shows how a consumer can maximize his satisfaction by equating the ratios of marginal utilities to prices of different goods which he buys. Likewise, there is optimum utilization of the factors of production when their marginal products become unequal.

It is useful in Determination of Economic Policies of the Government. For instance, in determining a tax policy the government can know the effect and incidence of particular tax through micro-economic tools and then judge its rationality and desirability. It also provides the principle for determining the price policy for the public enterprise. Similarly, the nature of price control administered prices, and such other policy issues can be determined on the basis of relevant micro-economic analysis. It serves as the Basis for Welfare Economics. Microeconomics examines the subjective satisfaction that individuals drive from consuming goods and services and from enjoying leisure. It also suggests how to eliminate wastages and have optimization of resources so as to fetch maximum social welfare which is the underlying goal of welfare economics. It Explains the Phenomena of International Trade. Microeconomics theories explain many aspects of international trades such as emergence, nature and gains of international trade. Determination of exchange rate, impact of tariffs on prices etc.

Limitations Of microeconomics:Despite being a significant major branch of economic science and its immense usefulness in explaining economic behavior of the individual economic units, microeconomics has inherent limitations as follows: Concept Marginalism:Microeconomics theories are based on the principle of marginalism.Marginal changes are assumed in the relevant phenomena. A marginal change refers to the addition of just a single unit more. Thus, these are concepts like marginal utility, marginal cost, marginal product, marginal revenue, etc.It thus refer to a bit change in the total variation. The theories thus imply equilibrium conditions in terms of margin, such as a consumer equating marginal utility with price for the maximization of total satisfaction, a producer equating marginal cost with marginal revenue for maximization of profits, etc.In practice, however,it is very difficult to realize this marginal approach. Unrealistic Assumption of full Employment and other simplification:The entire microeconomics is based on the assumption of full employment even in a short-term analysis, which is unrealistic. By assuming full microeconomics theories have over simplified the conditions of reality. Pure capitalist model:Microeconomics theories assume laissez faire policy and pure capitalism in there behaviurristic models today there is no pure capitalism,, so most of micro economic theories have no significant relevance to practice.

Incomplete expiation and misleading generalization. Micro-economic studies specific economic units separately from the rest of whole economy. It thus explains only a part and not the whole of working of an economic system. Microeconomics thus doesnt furnish a complete explanation of the whole phenenomenon. Again application of deductive method in generalization from particular behavior is often misleading. What is true for and individual may not be true for the entire system.

In fact, the classical economy had made the same mistake in stating that when each individual saves every one of them, would become wealthy so the society tends to be, reach and wealthy. Here they failed to realize the paradox of thrift caused by deficiency of aggregate demand and consequently falling level of income. To recapulite in a nutshell, microeconomics certain inheritance limitations Most of the micro economics theories are abstract. Most of the micro economics theories are static based on ceteri paribusi.e. assuming other things being equal. Microeconomics unrealistically assume laissez faire policy and pure capitalism Micro economic study only part and not the whole economic thus it cannot explain the functioning of the economy at large By assuming the independence of wants and production system micro economics has failed to consider dependent effects on economic welfare Microeconomics misleads when one tries to generalize from the individual behavior of aggregate ,simply by generalizing from character and behavior of the individual components Microeconomic in dealing with macroeconomic system unrealistically assumes full employment

Meaning of Macroeconomics
Macro means large or aggregate (total). It is a branch of economics which deals with the aggregate behavior of the economy as a whole. Macroeconomics is essentially an aggregate economics. It makes a study of the economic system in general. It looks at the total size, shape and functioning of the economy as whole, rather than working of articulation or dimensions of the individual parts. Macroeconomics is a study of very large economy- wide aggregate variables like national income, total savings, total consumption, total investment, money supply, price levels, unemployment, economic growth rate etc.

Macroeconomics covers following areas of economic studies: Determination of income and employment Theories of consumption function and investment Monetary demand and supply Money, prices and inflation Theories of business cycles and macroeconomic policy New classical economics based on rational expectations Government budget constraints ,fiscal policy and fiscal deficit Open economy macroeconomics :balance of payments ,foreign exchange rate ,international economic linkages Theories of economic growth

Importance of macroeconomics:
Macroeconomics has its unique importance It explains the working of economic system as whole It examines the aggregate behavior of the macroeconomics entities like firms,households,and the government Its knowledge is indespencebale for the policies maker for formulating macroeconomics polices such as monetary policy, fiscal policy industrial policy ,exchange control, income policy etc It is very useful to the planner for preparing economic plans for the countries development It is helpful in international comparison It explains economic dynamism and intricate inter relationship among macro economic variables such as price level,income,output, and employment It studies facilities overall purposes of control and prediction.

Limitation of macroeconomics
It ignores individual behavior all together It has the tendency to excessive generalization. It is not easy to get correct and complete measures of the economic aggregate. Thus it lacks precision in actual practice

Macroeconomic predictions are not fully reliable when they are based on incomplete information or inaccurate measures. National income, price index no etc are only the rough indicators Often macro level policies may not produce the same results at micro levels.

Difference between Micro and Macroeconomics:

Difference in nature: Microeconomics is the study of the behavior of the individual units, in particular, consumers, firms and resource-owners (factors of production), rather than aggregates. Macroeconomics, on the other hand, is the study of the behavior of the economy as a whole. Difference in Methodology: Microeconomics is individualistic, whereas macroeconomics is aggregative in methodological approach. Traditional economic analysis, especially that followed by the neoclassical economists, was largely confined to the study of individual aspects of economic behavior activities, problems, experiences- and the equilibrium process of an economic activity, isolated from the general set-up. Again, the results of such analysis were averaged out and generalized by traditional economists to explain the aggregative behavior of the system as a whole. Modern economists, including Keynes, however, realized the inadequacy of such an analysis and argued that such generalization of individual behavior cannot just be a summation of individual activities. A communitys economic behavior has its own distinctive modes and courses. It is; therefore, wrong to extend micro-level aggregative working of the economy as whole. Obviously, as the overall microeconomic system is highly synchronized and inter connected in nature, no one part of the system can be considered in isolation from the others. A separate branch of study was needed to comprehend the aggregative economic relations. Macroeconomics was consequently developed to describe the typical nature of aggregate economic behavior as distinct from isolated individual activities. Microeconomics of course did refer to aggregate like market demand, market supply, industry, etc. but these were not considered in relation to the economy as a whole. On the other hand, macroeconomics concerns itself with aggregates relating to the economy as a whole. In macroeconomics, economic phenomena are studied in their aggregate size, shape and behavior. Difference in Economic Variables: Microeconomics is concerned with the behavior of micro variables or micro quantities such as individual demand, supply, particular commodity prices, wages, and individual industries. Macroeconomics is however concerned with the behavior of macro variables or macro quantities such as national income, price level, national output, total investment etc.

Difference in the field of interest: Microeconomics primarily deals with the problems of pricing and income distribution. Macroeconomics on the other hand, pertains to the problems of the size of national income economic growth and the general price level. Difference in the outlook and scope: In Microeconomics, usually, behavioral elements of units with homogenous characteristic are aggregated. Macro economics on the other hand, uses aggregates which relate to the entire economy or to a large sector of the economy and when it considers industrial output, it refers to the whole of output produced by the industrial sector and similarly, agricultural output for the entire agricultural sector. These are sub aggregates constituting the economys total output. Demarcation in the areas of study: Theory of value and theory of economic welfare are the major areas covered in micro economics. On the other hand, income and employment theory and monetary theory are the core topics of macroeconomics.