Academic Script

MACRO-ECONOMICS: SOME BASIC CONCEPTS

Introduction:

Today, Economics has become an all pervasive and basic human

activity. If we look around and observe any activity, we will immediately
realise the economic implications of that activity whether its agriculture,
Trade, Industry or business. Every such activity has an economic
implication. The principle motive of all such activities is to earn money
and have satisfaction by fulfilling certain wants. Economics is the
yardstick of most of the human activity. It measures the monetary and
financial implications of different activities and helps to classify these
activities according to their economic importance. Every nation, society
or economy has various activities and engagement of economic nature.
The classification of people as rich and poor, have’s and has not’s all
are nothing but economic concept. The concept of scarcity, satisfaction,
wants and pleasures also have economic implications. From this point
of view it has now become essential to learn about economics. Human
wants have no bounds and the multiplicity of wants is essential and
fundamental feature of human existence .Considering this, one should
learn economics as an exercise to understand the implication of wants
and measures to balance between resources and wants .This lecture
helps us to understand what is the concept of economics- studying
economics on a large scale or economy as a whole.

Concept of Economics:
The science of economics took its birth with Adam Smith’s publication
“An Inquiry into the Nature and Cause of Wealth of Nations” in the year
1776. At its birth, the name of economic was “Political Economy”. By
the end of the 19th century, there was a change from the word “Political
Economy “to “Economics”

Economics is derived from two Greek words: oikou which means a

house and nomos which means to manage. Therefore economics
refers to home management with limited funds in the most economical
manner possible.

Economics is a social science that studies production, distribution and

consumption of goods and services. Economics explains how
economies work and how the economic agents interact with each other.
Economic analysis is applied throughout the society that is not only in
business, finance and government but also in crime, education, health,
politics etc.

Modern economics makes assumptions about people’s desire for

material goods and services. First assumption is that they are
Insatiable which means no matter how many goods and services
people have, they are not satisfied, they want more. The second
assumption is that they are rational which means people’s desires are
not be questioned.

Therefore in order to satisfy the desires of the people, the people in the
country must engage in production activities .For production, natural
resources are required .Nature provides land, minerals, trees, water,
fish, animals and so forth. The human needs will be satisfied only if
people do something to these natural resources like dig the minerals,
cut the trees, catch the fish and so forth.
The productive contribution made by the people is called labour. But
just with the natural resources and labour, the society will not be able to
satisfy the desires of the people very well. From earliest times, people
are aware that they could satisfy their desires better by taking some of
the resources and converting them into a form that will not meet the
present desires of the people but will allow greater production in future.
For example wood and iron are used to make hammer. This hammer is
not desired by anyone for its own sake but it helps people to build
things they do desire.

Definitions:

1. Lionel Robbins defines economics as “ a science of scarcity”

2. According to Prof.Robbins – “Economics is a science which
studies human behaviour as a relationship between ends and
scarce means which have alternative uses”
3. According to Paul.A.Sameulson –“the study of how men and
society choose, with or without the use of money, to employ
scarce productive resources which could have alternative uses ,
to produce various commodities over time and distribute them for
consumption now and in future among various people and groups
of society”

These definitions help us to draw certain conclusions:

a. Economics is a science though not like a pure science.

b. It deals with wants and resources.
c. It balances wants and resources to achieve maximum
satisfaction
d. It is a science of making rational choice.
Economics deals with the following matters of decision making:

a. Production decision: Production decisions include what to

produce, how much of goods to produce and how to produce a
given quantity of a specific good.
b. Exchange decisions: Exchange decisions include what price t
charge for a particular commodity and to whom it should be
sold.
c. Consumption decisions: Consumption decisions include what
to consume and how much to consume.

Therefore the main aim of all these questions is to allocate the scarce
resources among the alternative uses and because of which
economics is called as the science of choice making. It also deals
with issues like economic development, public finance,
unemployment, poverty, inflation etc.

Classification of economics:

Before 1930, there was only one economics. In 1933, Ragnar Frish
coined the terms “micro” and “macro” in order to denote the two
branches of economic theory namely, microeconomics and
 macroeconomics.

Economics

Micro Macro
economics economics

Micro Economics:

The term Micro is derived from the Greek word prefix micros meaning
“small “.It deals with small sections of the society .Microeconomics is
defined as the study of behaviour of individual decision making units
such as consumers, resource owners and firms. Micro economics is
also called as Price theory as it mainly deals with the determination of
price of commodities and factors. It has theoretical as well as practical
importance. Micro economics solves the three vital problems of the
economy that is what, how and for whom to produce.
The subject matter of microeconomics is vast and it includes the
following topics:

(Source: Business economics; Dr. Deepashree ,Ane books Pvt.Ltd)

Comments:

Microeconomics basically thus deals with certain basic issues related

with human desires and wants. It tries to understand how and why
people make certain demands and what is rationally appropriate to
satisfy these demands.

It also deals with certain factors related with demand and supply and
balances these factors by applying the concept of rational equilibrium.
Furthermore, it satisfies the expectations of different stakeholders in
terms of giving due returns for their contribution to the economic
process. A labourer or worker gets wages; a landlord receives rent and
an investor receives interest whereas an entrepreneur or businessman
gets share of profit. Microeconomics also deals with welfare or
developing a system to protect the interest of socially challenged
segments. It also helps the economic planners to protect and help the
different sections of the society by providing them necessary amenities
essential for life.

According to Lerner “Microeconomics consists of looking at the

economy through a microscope , as it were, to see how million of cells
in a body like economic-the individuals and households as consumers
and the individuals firms as producers- play their part in the working of
the whole economic organism”

Microeconomics studies the behaviour of how individuals, households,

firms take decisions regarding how to allocate limited resources.
Microeconomics examines how these decisions affect the supply and
demand for goods and services.

Importance of Microeconomics:

It has a lot of importance for managers. It can be understood with the

help of the points:

1. Microeconomics helps in framing economic policies which helps

in improving productivity and helps in attaining greater social
welfare.
2. It explains how the capitalist economy works wherein the
individuals units (i.e. producers and consumers) are free to take
their own decisions.
3. It explains how individual units attain equilibrium position in a free
enterprise economy.
4. It assists managers in formulating price policies.
5. It helps in maximum utilization of resources by entrepreneurs.
 6. It assists managerial economists in making conditional predictions
and business forecasts.
7. It helps in explaining gains from trade, disequilibrium in the
balance of payment position and determination of international
exchange rate.

Limitations:

Microeconomics fails in explaining the functioning of the entire

economy. It failed to explain unemployment, poverty, illiteracy and
other problems prevailing at the country level.

Macroeconomics

The term Macro is derived from the Greek prefix makros- meaning
"large". The term ‘macro’ was first used in economics by Ragner Frisch
in 1933. However, its origination dates back to the mercantilists of 16th
and 17th centuries who attempted to adopt a methodological approach
to economic problems. They were concerned with the economic system
as a whole. The development of this important branch of economics
can be accredited to both- the 18th century physiocrats and modern
economists. Certain economists, like Cassel, Marshall, Pigou,
Robertson, Hayek and Hawtrey, developed a theory of money and
general prices in the 1920s. However, it was Keynes who in real sense
brought macroeconomics in limelight with development of a general
theory of income, output and employment.

Macroeconomics is a branch of economics that deals with the

the economy as a whole. As such, through macro economics we can
study the nature, structure, performance and behaviour of the entire
 economy as one single entity, rather than as separate individual entities
or markets.

The study of macroeconomics is basically aimed to understand as to

how the entire economy functions. As such, macro-economics is the
study of aggregate economic indicators such as Gross Domestic
Product, unemployment rates and price indices. This branch of social
sciences helps to establish relationship between factors such as
national income, output, consumption, unemployment, inflation,
savings, investments, international trade and finance.

Unlike microeconomics (which is primarily focused on the actions of

individual agents, such as firms and consumers, and how their
behaviour determines prices and quantities in specific markets),
macroeconomics has a much broad based application. The macro
perspective of economics attempts to understand:

- The causes and consequences of short-run fluctuations in

national income i.e. business cycles

- The determinants of long-run economic growth

Macroeconomic models and their forecasts help the government to in

development and evaluation of economic plans policies.

Definition of Macro Economics

Macroeconomic is concerned with aggregates and averages of the entire

economy. Such as national income, output, total employment, total
consumption etc. In other words, macro economics studies how the
aggregates and averages of the economy as a whole are determined and
what causes fluctuations in them.
Macro economics has been defined in various ways, they are:

1. According to Professor Ackley, “Macroeconomics deals with

economic affairs in the large, it concerns the overall dimensions of
economic life. It looks at the total size and shape and functioning of
the “elephant” of economic experience, rather than working of
articulation or dimensions of the individual parts. It studies the
character of the forecast, independently of the trees which compose
it.”
2. “Macro economic theory is the theory of income, employment, prices
and money”.

3. Macro economics is,” that part of economics which studies the overall
averages and aggregates of the system”.

4. Macro economics is,” the study of the forces of factors that determine
the levels of aggregate production, employment and prices in an
economy and their rates of change over time”.
 The scope and subject matter of macroeconomics includes the
following topics:

(Source: Business economics; Dr. Deepashree ,Ane books Pvt.Ltd)

Comments:

Macroeconomics covers a variety of disciplines related with economic

activities and processes. It covers issues related with larger interests of
the economy such as how to generate sufficient level of employment
and satisfy the expectations of people.

It also helps in controlling unwarranted price rise and inflation. It helps in

maintaining a desired rate of economic growth and enhances the
process of economic advancements. Furthermore the principle task of
macroeconomics is to distribute the available wealth and income
generated by the country in an equitable and fair manner to all the
sections of the society
Difference between Microeconomics and Macroeconomics:

Micro economic and macro economics can be differentiated on the

following grounds.

1. Basis of Study

Micro economics deals with problems of scarcity and choice at an

individual or household or company or industry. It studies individual
economic units

Macro economics deals with the problem of scarcity and choice at the
country level (As a whole).It studies aggregate economic units.

Example:

MICRO ECONOMICS MACRO ECONOMICS

The problems studied under Micro The problems studied under Macro
economics include: economics include:

a) Consumers’ behaviour and a) Unemployment in the

equilibrium economy
b) Producers’ behaviour and b) Problem of Price rise
equilibrium (Inflation)

2. Degree of Aggregation:
The degree of aggregation of economic variable is limited in case of
Microeconomics when compared with macroeconomics
 Example:

MICROECONOMICS MACROECONOMICS

It studies equilibrium of a particular It studies equilibrium of the

industry. Therefore it is an economy (as a whole). Here it is an
aggregation of all firm producing a aggregation of all the units in the
particular commodity in a particular economy
industry

3. Different Set of Assumptions:

Both Microeconomics and Macroeconomics are based on certain
assumption. Some variables are assumed to remain constant in
microeconomics, whereas they assumed to be changing in
macroeconomics
Similarly those variables that are assumed to remain constant in
macroeconomics are assumed to be changing in microeconomics.
Example:
MICROECONOMICS MACROECONOMICS

Here the total output and Here the distribution of output or

employment as assumed to be income is assumed to be
constant whereas these are constant, while these are
important variables in important variables in
microeconomics. microeconomics

4. Central Issue:

The central issue in case of microeconomics is the allocation of

resources whereas the central issue of macroeconomics is the
determination of the overall level of output and employment.
5. Method Of Study:

The method of study used in macroeconomics is general equilibrium

analysis (simultaneous equilibrium in all the markets in the economy)
given by Leon Walras

The method of study used in microeconomics is partial equilibrium

analysis (equilibrium in part or equilibrium in one market) given by
Alfred Marshall

6. Micro- Macro Paradox:

What is logical in the micro level may not be logical in the micro level.

Example:

If an individual saves more, it results in his prosperity whereas if all the

people start saving more and spending less, then the demand for
commodities starts declining.

Evolution of Macroeconomics as a different branch of economics:

The emergence of Keynesian school of thought marked the emergence of

macroeconomics as a different branch of economics.

In the beginning, classical economist where of the view that in a free

economy, there exists full employment. Accordingly, in their analysis, they
focussed on the micro issues. But it was during the Great Depression of
the 1930s, the classical assumption of full employment did not work.

Later, Keynes emphasised on the need to study economic variables. He

was of the opinion that economists need to develop different programmes
and policies in order to deal with macroeconomic issue like that of
unemployment.

This marked the evolution of macroeconomics as a different branch of

economics.

Concepts associated with macro-economics:

Macroeconomics encompasses a variety of concepts and variables.

However, there are three key concepts around which most of
macroeconomic topics revolve. These are:

- Output and income

- Unemployment, and

- Inflation.

These concepts are important to every player of the economy i.e.

producers, labourers, consumers and policy makers.

A. Output and income

 a. National output is the lowest amount of everything a nation
produces in a given time period.

b. Everything that is produced and sold generates certain income.

Thus output and income are often used interchangeably.

c. Output can be measured as total income. It can be measured

as the total value of final products and services or the sum of
all value added in the economy.

d. Macroeconomic output is usually measured by Gross Domestic

Product (GDP).

e. Long-run increases in output are an indicator of economic

growth.

f. Technological advancement, accumulation of machinery and

other capital inputs, increase in human capital, educational
advancement, skill development- all these factors lead to
increased economic output over time.

g. Usually output does not increase consistently. It is greatly

influenced by business cycles.

B. Unemployment

a. The amount of unemployment in an economy is measured by the

unemployment rate.

b. Unemployment rate is the percentage of workers without jobs in

the aggregate labour force of the economy.
 c. The aggregate labour force of the economy includes those people
who are physically capable, are willing to work and are actively
looking for jobs.

d. People between the age group 15 to 65 years are considered in

the category of aggregate labour force.

e. People who are

- Retired

- Physically unfit

- Pursuing education

- Unwilling to seek job opportunity

- Discouraged from seeking work by a lack of job prospects; are

excluded from the category of aggregate labour force.

f. Economic growth leads to a lower unemployment rate.

Unemployment is generally divided several types depending on its

various causal factors. Some of the types have been explained here:
 Classical unemployment:

This type of unemployment is based on the factor of increase in wage

rates. Classical unemployment suggests that unemployment occurs
when wage rates are too high for employers to be willing to hire more
workers.

 Frictional unemployment

Frictional unemployment occurs when appropriate job vacancies exist

for a worker. However, the length of time needed to search for and find
the job leads to a period of unemployment.

 Structural unemployment:

Structural unemployment occurs when there is a change in the demand

for the set of skills in a particular industry. A mismatch between
workers' skills and the skills required for open jobs occurs due to
industrial transition in an economy.
 Cyclical Unemployment:

Cyclical unemployment is the result of economic growth

stagnation. Cyclical unemployment occurs when the overall demand for
goods and services in an economy cannot support full employment. It
occurs during periods of slow economic growth or during periods of
economic contraction.

C. Inflation and deflation

1. A general price level increase across the entire economy is

called inflation. Conversely when prices decrease in the economy,
deflationary situation arises.

2. The changes in prices are measured with the help of price

indices.

3. Inflation can occur when an economy grows at a galloping rate.

Similarly, a declining economic growth can lead to deflation.

4. Central banks, in order to control the money supply of the

economy, try to avoid changes in price level by using
appropriate monetary policy. Central banks try to stabilize prices
to protect economies from the negative consequences of price
changes.

5. Inflationary situation in an economy can lead to increased

uncertainties and other adverse consequences. On the contrary,
deflationary pressures can hamper economic productivity.
Conclusion:

Friends, this lecture help us to understand the basic concept of

macroeconomics and its salient features. It also tells us how
macroeconomics is different from microeconomics in terms of its
features and scope of activities. We shall learn more about the relation
of macroeconomics with other branches of economics, its scope and
limitations in another lecture.