Micro & Macro Economics

Micro-Economics

Branches of Economics and their Work in Different Economic Conditions From Shahbaz Ahmad BB07035 To Ms. Rabia Tahir  October 23, 2008

PUNJAB UNIVERSITY GUJRANWALA CAMPUS

Economics

is the the so soci cial al scie scienc nce e that hat stud studie ies s the the pro product ductio ion n, dist distri ribu buti tion on,, and and co cons nsum umpt ptio ion n of good goods s and and se serv rvic ices es.. The The term term economics comes from the Ancient Greek oikonomia, "management of  a household, administration” from oikos, "house" + nomos, "custom" or "law", hence "rules of the house (hold)".

Economics

A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behavior as a rela relattions ionshi hip p betw betwee een n ends nds and and sca carrce mean means s whic which h have have alterna alternative tive

uses." uses." Sc Scar arci city ty

mean means s

that that

avai availa labl ble e

reso resour urce ces s

are are

insu insuff ffic icie ient nt to sa sati tisf sfy y all all want wants s and and need needs. s. Abse Absent nt scar scarci city ty and and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources. Following are the two branches of economics

Economics

Micro Economics

Macro Economics

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Micro-economics is a bra branch of economics that studie dies how individuals, households and firms and some states make decisions to allocate limited resources, typically in markets where goods or services are are bein being g boug bought ht and and so sold ld.. Mi Micr croe oeco cono nomi mics cs exam examin ines es ho how w thes these e decisions and behaviors affect the supply and demand for goods and services, services, which determines determines prices; and how prices, in turn, determine determine the supply and demand of goods and services. Following is the working of this branch in the economy In a nutshell, microeconomics has to do with SUPPLY and DEMAND, and with the way they interact in various markets. Labor economics, for example, is built largely on the analysis of the supply and demand for labor of different types. The field of industrial organization deals with the differ different ent mechan mechanism isms s (MONOPOLY, CARTELS, and and diff differ eren entt type types s of  comp co mpet etit itiv ive e beha behavi vior or)) by whic which h good goods s and and se serrvice vices s are are so sold ld.. Inter Interna nati tion onal al ec econ onom omic ics s worr worrie ies s about about the the deman demand d and and supp supply ly of  individual traded commodities, as well as of a country’s exports and imports taken as a whole and the consequent demand for and supply of  FOREIGN EXCHANGE. Agricultural Agricultural economics economics deals with the demand and supply of agricultural products and of farmland, farm labor, and the other factors of production involved in agriculture. Public finance (see look looks s at how the the gov over ernm nme ent ent enters ers the the sce scene. ne. PUBLIC CHOICE) Tradit Tradition ionally ally,, its foc focus us was on taxes, taxes, which which automa automatic tically ally introd introduce uce  “wedges”  “wedges” (differences (differences between the price the buyer pays and the price the the se sell ller er rece receive ives) s) and and ca caus use e inef ineffi ficie ciency ncy.. Mo More re rece recent ntly ly,, publ public ic finance has reached into the expenditure side as well, attempting to analyze (and sometimes actually to measure) the costs and benefits of  various government outlays and programs. Applied welfare economics is the fruition of microeconomics. It deals with the costs and benefits of just about anything—government projects, taxes on commodities, taxe taxes s on fact factor ors s of prod produc ucti tion on (cor (corpo pora rati tion on inco income me taxe taxes, s, payr payrol olll taxe taxes) s),, agri agricu cult ltur ural al prog progra rams ms (lik (like e pric price e supp suppor orts ts and and ac acre reag age e controls), controls), tariffs on imports, imports, foreign foreign exchange exchange controls, controls, various forms of industrial organization (like monopoly and oligopoly), and various aspects of labor market behavior (like MINIMUM WAGES, the monopoly power of LABOR  UNIONS, and so on). Microeconomics

At the the root root of ever everyt ythi hing ng is supp supply ly and and dema demand nd.. It is no nott at all all farf farfet etch ched ed to thin think k of thes these e as basi basical cally ly human human chara charact cter erist istic ics. s. If  human beings are not going to be totally self-sufficient, they will end 3

up produci producing ng certai certain n things things that they they trade trade in order order to fulfill fulfill their their demands for other things. The specialization of production and the insti institu tuti tion ons s of trad trade, e, co comme mmerc rce, e, and and mark market ets s long long ante anteda date ted d the the science of economics. Indeed, one can fairly say that from the very outset the science of economics entailed the study of the market forms that arose quite naturally (and without any help from economists) economists) out of human behavior. People specialize in what they think they can do best—or more existentially, in what heredity, environment, fate, and their own volition have brought them to do. They trade their services and/o and/orr the the prod produc ucts ts of thei theirr spec specia ializ lizat atio ion n for for those those prod produc uced ed by others. Markets evolve to organize this sort of trading, and money evolves to act as a generalized unit of account and to make barter unnecessary. In this market

process, people try to get the most from what they have to sell, and to satisfy their desires as much as possible. In microeconomics this is translated into the notion of people maximizing their personal “utility,”  or welfare. This process helps them to decide what they will supply and what they will demand. Nine times out of ten, the excess demand will end up being reflected in a gray gray or black black marke market, t, whos whose e exis existe tence nce is prob probab ably ly the the clea cleare rest st evidence that the official price is artificially low. In turn, economists are nearly always right when they predict that pushing prices down via price controls will end up reducing the amount supplied and generating black-market prices not only well above the official price, but also above the market price that would prevail in the absence of controls represents the artificial restriction of production by an entity having sufficient “market power” to do so. The economics of monopoly are most easily seen by thinking of a “monopoly markup” as a privately impos imposed ed,, priva private tely ly co coll llec ecte ted d tax. tax. This This was, was, in fact, fact, a reali reality ty a few few centuries ago when feudal rulers sometimes endowed their favorites with monopoly rights over certain products. The recipients need not ever “produce” such products themselves. They could contract with othe otherr firm firms s to prod produc uce e the the good good at low low pric prices es and and then then char charge ge consumers what the traffic would bear (so as to maximize monopoly profit profit). ). The differe difference nce betwee between n these these two prices prices is the “monop “monopoly oly markup,” which functions like a tax. In this example it is clear that the true beneficiary of monopoly power is the one who exercises it; both producers and consumers end up losing.

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Modern monopolies are a bit less transparent, for two reasons. First, even though governments still grant monopolies, they usually grant them to the producers. Second, some monopolies just happen without governm government ent creati creating ng them, them, althou although gh these these are usually usually shortshort-live lived. d. Eith Either er way, way, the the proc procee eeds ds of the the mono monopo poly ly mark markup up (or (or tax) tax) are are commingled with the return to capital of the monopoly firms. Similarly, labor labor mono monopo poly ly is usua usually lly exer exercis cised ed by unio unions ns,, whic which h are are able able to charge a monopoly markup (or tax), which then becomes commingled with the wages of their members. The true effect of labor monopoly on the competitive wage is seen by looking at the nonunion segment of  the the ec econ onom omy. y. Here Here,, wage wages s end end up lowe lowerr beca becaus use e the the unio union n wage wage causes fewer workers to be hired in the unionized firms, leaving a larger labor supply (and a consequent lower wage) in the nonunion segment. Artificially high urban wages attract migrants from rural areas. If the wage does not adjust downward to equate supply and demand, the rate of urban UNEMPLOYMENT will rise until further migration is deterred. Still other examples are in banking and drugs. When the “margin” in banking is set too high, new banks enter and/or branches of old ones proliferate until further entry is deterred. Artificially maintained drug prices led, in several Latin American countries (Argentina, Chile, and Urugua Uruguay y before before their their major major libera liberaliza lizatio tions ns of recent recent decade decades), s), to a pharmacy on almost every block.

The great unifyin unifying g princip principles les of micro microeconom economics ics are, ever and always, supply and demand. The normative overtone of microeconomics comes from the fact that competitive supply price represents value as seen by suppliers, and competitive demand price represents value as seen by demanders. The motivating force is that of human Beings,, alwa Beings always ys gra gravita vitatin ting g tow toward ard cho choice ices s and arr arrang angeme ements nts tha thatt reflect their tastes. The miracle of it all is that on the basis of such simple and straightforward underpinnings, a rich tapestry of analysis, insights, and understanding can be woven. This brief article can only give its reade readers rs a glimps glimpse—hope e—hopefully fully a tempt tempting ing one—of the richne richness, ss, beauty, and promise of that tapestry.

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Macro Economics Macroeconomics deals not with individual quantities as such but wit aggregate of these quantities, not with individual incomes but with the national income, not with the individual prices but with the price level, not with the individual outputs but with the national outputs. Main issues in macro economics The main issues which are addressed in macroeconomics are in brief  as under: It Help Helps s In Employment

Unde Underrstan standi ding ng

The

Dete Determ rmin inat atio ion n

Of Inco Income me And And

Late J.M Keynes laid great stress on macroeconomic analysis. He, in his revolu revolutio tionar nary y book, book, “gener “general al theory theory,, employm employment ent intere interest st and money” brought drastic changes in economic thinking. He explained the the for force ces s or fact facto ors whic which h dete determ rmin ine e the the leve levell of aggr aggre egate gate employment and output in the economy. Determination Of General Level Of Prices Macroeconomics analysis answers question as to how the general price leve levell is dete determ rmin ined ed and and what what is the the impo import rtan ance ce of vario various us fact factor ors s which influence general price level Economic Growth The macroeconomics models help us to formulate economic polices for achieving long run economic growth with stability. The new developed growth theories explained the causes of poverty in under developed countries and suggest remedies to overcome Macroeconomics And Business Cycles It is in term terms s of macr macroe oecon conom omic ics s that that cause causes s of fluc fluctu tuat ation ion I the the nati nation onal al inco income me or anal analyz yzed ed.. It has has also also been been poss possib ible le no now w to formul formulate ate polici policies es for contro controllin lling g busine business ss cycles cycles i.e. i.e. inflati inflation on and deflation International Trade 7

Another important subject of macroeconomics is to analyze the various aspec aspects ts of inter interna nati tion onal al trad trade e in good goods, s, se serv rvic ices es and and balan balance ce of  paym paymen ents ts prob proble lems ms,, the the effe effect ct of exch exchan ange ge rate rates s on bala balanc nce e of  payment etc. Income Shares From The National Income Mr. M. Kalecki and Nicholas Kelder, by making the departure from Ricar Ricarde de theo theory ry,, have have pres presen ente ted d a macr macro o theo theory ry of dist distri ribu buti tion on of  income. According t these economists, the relative shares of wages and profits depend upon the ratio of investment to national income. Unemployment Ano Another macro croeco con nomics issue sue is to expl xplain the cause ses s of  unemployment unemployment in the economy. Stagflation is another another important important issue of modern economics. The Keynesian and post Keynesian economists are putting lot of efforts in explaining the causes cyclical unem unemplo ployme yment nt and and high high unem unempl ploy oyme ment nt co coupl upled ed wit wit infla inflati tion on and and suggesting remedies to counteract them. Macroeconomics Polices Fiscal and monetary policies affect the performance of the economy. These two major types of macroeconomic policies are central in the macroeconomic analysis of the economy. Global Economic System In macroeconomic analysis, it is emphasized that a nation’s economy is a part of global economic system. A good or weak performance of a nation’s economy can affect the performance of the world economy as a whole.

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