Forms of Economic Analysis

Ms. Lavi Vats

 Outline
•Micro and Macro Economics
•Partial and General Equilibrium
•Static and Dynamic
•Positive and Normative
•Short Run and Long Run
 Micro and Macro Economics
• Micro and macro economics are interdependent, neither of
the two is complete without the other. Prosperity and
wellbeing of individual economic unit can be insured only if
the performance of the whole economy is excellent. Thus,
every micro economic problem involves macroeconomic
analysis. Similarly, the working of an economic system can
be appreciated by studying the behaviour of individual
firms, industries and so on that is component of an
economy.
• Microeconomics behavior cannot be simply added up to
derive the macroeconomic behaviour. Thus, the application
of micro-approach to generalize about the behaviour of the
economy as a whole (that is macroeconomic aggregate) or
vice-versa is incorrect and misleading. There is a need for
independent and separate analyses of the two. 
Partial and General Equilibrium
Equilibrium is a state of reservation from where there is tendency for change. Here the
market forces of demand and supply balance each other.

Partial equilibrium: To attain the state of equilibrium defined by the optimal economic
choice, the economic problem may be analysed part by part, one at a time, assuming other
things remaining the same. For example: Given the budget, the price,the technology, the
advertising manager has to decide the amount to be spent on advertising.
Under partial equilibrium approach to the pricing, price determination of a commodity
assumes constant prices of other commodities and independence of various commodities.
That is why, partial equilibrium analysis is not useful when significant inter relationship exists
between commodities and factors.
General equilibrium: The partial equilibrium analysis fails when the changes in price of a
commodity or a factor have important repercussions on the demand of another commodity.
We should use general equilibrium analysis by considering simultaneous equilibrium of all
markets and taking into account all effects of change in price of one market over the others.
For example: rise in price of petrol has an important effect on demand of automobiles.
 In such cases of mutual interdependence of the market for commodities general equilibrium
analysis should be used.
Partial and General Equilibrium
Partial Equilibrium
a)Micro economics uses
partial equilibrium analysis
based on the assumption,
other things remaining
constant.
(b) Partial equilibrium studies
the equilibrium of a
consumer, a firm, an industry
or a market.
(c) It deals with one or two
variables at a time. So it is a
simple method. It is
independent.
General Equilibrium
(a) Macro economics uses
general equilibrium. It is not
based on any` assumption.
(b) It deals with the
equilibrium position of the
economy as a whole.
(c) It deals with all the
variables of the economic
system simultaneously. So it is
sophisticated. There is
interdependence between
variables.
 Positive and Normative
Positive Normative
It explains the actual behavior of It explains ideal situation and gives policy
economic agents prescription explicitly

Positive economics describe the state of Normative economics is body of

operation of a firm or economy at a point
of time or during a period
It explains cause and effects
It is neutral between ends
It does not assign value judgments
systemized knowledge concerning what
ought to be.
It prescribes norms for welfare of the
society
It regulates in order to achieve idealized
norms
It assigns value judgments and explains
rightness or wrongness of a thing.

Ex: A reduction in income tax will improve Ex : The government should increase
incentives of the unemployed to find work minimum wage to Rs 100 to reduce
poverty.
 Static
In the economic theory methodology, techniques of Economics Static and Economic
dynamic occupy an important place. A large part of the classical and neoclassical
economics theory has been formulated with the aid of Economics static.

In static, the behaviour of a system is studied at a particular time. Here we establish

static functional relationship between the relevant variables.
Economic static is concerned with economic phenomena independent of the time
element. In economic static, parameters or basic elements of economic system like
size of population, prices of goods, techniques of production are assumed to be
constant. Given these parameters an equilibrium position is selected and one or more
specified variable are allowed to change subject to the assumption of ceteris paribus.

Static analysis has been gainfully employed in this studying economic behavior in the
following fields: law of demand, law of diminishing marginal utility, distribution of
national income, marginal productivity, Theory of Distribution, theory of rent, theory
of comparative cost, analysis of price output determination.
 Comparative Static
The technique of estimating and comparing the new(post-change) equilibrium position
with the old one(pre-change) under two conditions given above is called comparative
static, since in this technique two equilibrium positions are compared.

Here we study the evolutionary process in a series of equilibria allowing the change in
a single variable at a particular time. In a refined form, parameters are allowed to vary
but at a predetermined rate. This method does not deal with the transitional period
from one position of equilibrium to another. It simply jumps over the transitional
development.
It does not study the whole part of change that is how, whether or in what time the
new position of equilibrium will be reached from the initial position. It gives only a
partial glimpse of the moment as we have only two still pictures to compare where as
dynamic this is a movie for realistic study of economic mom's the dynamic traces the
time part of economic variables
 Dynamic
Economic dynamic has become popular in modern economics. Under dynamic, we
study the behaviour of a system over time. Economic dynamics study of large
number of static positions of an economy it deals with an evolutionary process in a
dynamic manner that is economic phenomena which itself varies with time. There
is no assumption of ceteris paribus instead all the changes in lags and expectation
is taken.
It pictures the entire series of adjustment, which takes place between the breakup
of the old equilibrium and the establishment of new.
In dynamic, both the parameters of the economy and other things are allowed to
change in an unpredictable manner.
Examples are the theory of Business Cycle, Malthus theory of population, Ricardo
Theory of Distribution, theory of interest, theory of causation, theory of profit.
 Short Run and Long Run
•If some factors are fixed while others are variable
it is considered as short run analysis.
• No Entry and Exit of new firms

•If all factor are variable or adjustable it is called

long run analysis.
•Entry and Exit of new firms