Nature and Scope of

Economics

07/09/2024 1
 Microeconomics vs. Macroeconomics
Microeconomics Macroeconomics
The branch of economics
The branch of
that studies decision-
making by a single economics that studies
individual, household, decision-making for
firm, industry, or level of the economy as a
government whole
 The study of how  The study of the
households and economy as a whole,
businesses make choices, including topics such as
how they interact in inflation,
markets, and how the unemployment,
government attempts to
influence their choices. economic growth
07/09/2024
National income etc. 2
 Micro- Macro Economics
Economics noble prize winner (1969), Ragner
Frisch was the first to use the terms micro and
macro in economics in 1933.
The terms micro and macro derived from
Greek. Mikros (small) and makros (large).
Micro means individualistic and macro
aggregative.

07/09/2024 3
 Micro Economics.

Micro economics is the study of particular firms,

households, individual prices and particular
commodity.
Micro economics is based on the assumption of
full employment and ‘ceteris paribus’ (other
things remain constant).
Micro economics was popularized by David
Ricardo, Marshall, J.B Say and J.S Mill.
Micro economics called as ‘ Price Theory.’
07/09/2024 4
 Macro Economics:
Macro economics is the study of economic system as a whole.
Macro economics studies aggregates values like National Income,
National output, general price level, total consumption, saving and
investment of a country.
Macro economics is called ‘ Income and Employment theory.’
J.M Keynes popularized macro Economics
Where micro economics explain a tree in the forest, macro economics
explains all the trees in the forest.

07/09/2024 5
 Static and Dynamic Analysis
The French sociology philosopher Augustine
Compte used the terms ‘static and dynamic’ first
time in social science.
J.S Mill was the first to use these terms in
economics.
Clear and scientific distinction between the two
terms made by Ragner Frisch in 1928.

07/09/2024 6
 Static Analysis
The word ‘static’ derived from the Greek ‘statike.’
which means bringing to a stand still. It means a
state of rest or no movement.
According to Clark, where five kinds of changes are
conspicuous by their absence. The size of
population, the supply of capital, methods of
production, forms of business organization and
wants of people.
Static economy thus a time less economy where no
changes occur.
Static is like a snapshot from a ‘still.’
07/09/2024 7
 Dynamic Analysis

Dynamic is the study of change .

Economic dynamics is concerned with time lags,

rates of change,

Economic dynamics is the running picture of the

working of the economy.

07/09/2024 8
5.Deductive-Inductive Methods
To study economics, two methods are
there.1.Deductive method, 2. Inductive
method.
Deduction proceeds from general to particular
while induction proceeds from particular to
general.

07/09/2024 9
Deduction method
1. This method deduces conclusions from the truths
established by other methods.
2. It involves the process of reasoning from certain laws or
principles which are assumed to be true, to analysis of
facts.
3. “Deduction as a descending process” in which we
proceed from a general to principle to particular.
4. It as ‘a priori’ method and also called it abstract and
analytical method
5. Ricardo regarded as the first economist who applied this
method.
6. Ex; the law of diminishing returns.

07/09/2024 10
Deduction method -merits
1. It is intellectual method, near to reality.
2. This method is simple.
3. The use of mathematics brings exactness.
4. Universal validity.

07/09/2024 11
Deduction method – demerits
1. This method based on assumptions.
2. Inadequate data.
3. Lerner criticised this method is simply
armchair analysis.

07/09/2024 12
Inductive method
This method involves the process of reasoning
from particular to general.
It as an ‘ascending process’.
This method involves four stages:
1.observation; 2. formation of hypothesis
3.generalisation; 4. verification.
This method was introduced by German
historical school Roscher, Hillbrand, and Fedric
List.

07/09/2024 13
Inductive method-Merits
1. This method proceeds from particular to
general, it is thus realistic.
2. Helps in future enquiries.
3. Statistical method.
4. Dynamic.

07/09/2024 14
Inductive method-Demerits
1. Statistical numbers can be misused and
misinterpreted.
2. Probable.
3. Time consuming and costly method.
4. Differ from investigator to investigator for the
same problem.

07/09/2024 15
 The Scope of Economics
Microeconomics is the branch of economics
that examines the functioning of individual
industries and the behavior of individual
decision-making units—that is, business
firms and households.
Macroeconomics is the branch of economics
that examines the economic behavior of
aggregates— income, output, employment,
and so on—on a national scale

07/09/2024 16
 The Diverse Fields of Economics
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment

Microeconomics Production/Output Price of Individual Distribution of Employment by

in Individual Goods and Services Income and Wealth Individual
Industries and Businesses &
Businesses Price of medical Wages in the auto Industries
care industry Jobs in the steel
How much steel Price of gasoline Minimum wages industry
How many offices Food prices Executive salaries Number of
How many cars Apartment rents Poverty employees in a
firm

Macroeconomics National Aggregate Price National Income Employment and

Production/Output Level Total wages and Unemployment in
salaries the Economy
Total Industrial Consumer prices
Output Producer Prices Total corporate Total number of
Gross Domestic Rate of Inflation profits jobs
Product Unemployment
Growth of Output rate

07/09/2024 17
 The Method of Economics
Positive economics studies economic behavior without making
judgments. It describes what exists and how it works.
Normative economics, also called policy economics, analyzes
outcomes of economic behavior, evaluates them as good or bad, and
may prescribe courses of action.
Positive economics includes:
Descriptive economics, which involves the compilation of data
that describe phenomena and facts.
Economic theory, which involves building models of behavior.
An economic theory is a general statement of cause and effect, action and
reaction
Empirical economics refers to the collection and use of data to test
economic theories.
Many data sets are available to facilitate economic research. They are
collected by both government agencies and private companies,
07/09/2024 18
 Criteria for judging economic outcomes
Economic growth, or an increase in the total output of an
economy.
Economic stability, or the condition in which output is
steady or growing, with low inflation and full employment
of resources.
Efficiency, or allocative efficiency. An efficient economy is
one that produces what people want at the least possible
cost
Equity, or fairness of economic outcomes

07/09/2024 19
 Economic System
The manner or the structure through which
the economy of a country operates is known
as Economic System
Variety of Economic Systems
They differ from each other not only in
details but also in broader outlines
Types of Economic Systems:
Capitalist
Socialist and
Mixed Economy

07/09/2024 20
 Capitalism
All economic activities are guided by market
forces
Policy of laiseez-faire (absence of state
intervention). Privately owned resources
What to Produce, how to produce and for
whom to produce power rests with the
producers
Profit maximization is the main aim

07/09/2024 21
 Merits and Demerits

Capitalism

Merits Demerits
Hide Inequ
Fast s real alities
impleme- need High in
Self of rate of
incom
regulatory ntation of obsole
efficient the scence e and
decisions socie wealt
h
ty

07/09/2024 22
 Socialism
Originated due to drawbacks of capitalism
Just opposite to capitalism
The merits of capitalism become the
demerits and merits thus become the
demerits
It aims at removing the inequalities of
income and wealth, inequalities of economic
opportunities, unemployment and waste of
productive resources

07/09/2024 23
 Mixed Economy
Merits of capitalism and Socialism are taken and
a Mixed economy is formed
Generally adopted by countries with low per
capita income and is underdeveloped or is
developing (India)
Some sectors are kept in Government control

07/09/2024 24
 Two Main Streams
The study of Economics is divided into two
parts on the basis of looking the system as
whole or in terms of its innumerable decision-
making units
Micro Economics
It is also called Price Theory
Macro Economics
It is also called Income Theory

07/09/2024 25
 Micro Economics
The word ‘micro’ means a millionth part
In ‘micro economics’ we analyze small part or
component of the whole economy
e.g. individual consumer’s behaviour or firm, price of
particular product or factor of production, employment
in firm or industry

In simple, micro-economic theory studies the

behaiour of individual decision making units such as
consumers, resource owners and business firms

The basic assumption in micro economic analysis

07/09/2024 26
is
 Importance of Micro-economics
It tells us how millions of consumers and producers take decisions
about the allocation of productive resources among millions of
goods and services

It explains how through market mechanism goods and services

produced in the community are distributed

It also explains the determination of the relative prices of the

various products and productive services

It explains the conditions of efficiency both in consumption and

production and departure from the optimum

Micro-economics helps in the foumulation of economic policies

calculated to promote efficiency in production and the welfare
07/09/2024 27 of
 Limitation of Micro-economics

It cannot give an idea of functioning of

economy as a whole
An individual industry may be flourishing but
economy as a whole may be languishing
It assumes full employment which is a rare
phenomenon in the capitalist world
Therefore an unrealistic assumption

07/09/2024 28
 Macro-economics
Macro economics is concerned with aggregates and
averages of the entire economy
E.g national income, aggregate output, total employment,
total consumption, savings and investment, aggregate
demand, aggregate supply, general level of prices etc.

In macro-economics, we study how these aggregates

and averages of the economy as a whole are
determined and what causes fluctuations in them

Macro-economics also analyses the chief

determinants of economic development and the
various stages and processes of economic growth
07/09/2024 29
 Importance of Macro-economics
It is helpful in understanding and functioning of
a complicated economic system
It gives bird’s eye view of the economic world
It is useful in framing economic policies for the
nation
Macro-analysis also occupy an important place
in economic theory in its pursuit of the solution
of urgent economic problems
These problem relate to aggregate output,
employment and national income

07/09/2024 30
 Limitations of Macro-economics
Individual is ignored
It is individual welfare which is the main aim of Economics
The macro-analysis overlooks individual differences
e.g. general price level may be stable but the prices of
food grains may have gone spelling ruin to the poor

07/09/2024 31
 Integration of
Macro and Micro-economics
Neither the two approaches (micro and macro) can alone adequately help us in
analysing the working of the economic system

It is, therefore, essential to integrate two approaches

Ignoring one and exclusively concentrating attention on the other may often lead
not only inadequate or wrong explanation but also to inappropriate or even
disastrous remedial measures

07/09/2024 32
 Is Economics Science or Art?
By science we merely understand a systematized body
of knowledge.
It is not merely collection of facts but the facts so arranged
that they speak for themselves.
That is how laws are discovered which explain and
elucidate the facts.
When laws are formulated then a branch of knowledge
become a science
Judged by this standard, Economics is certainly science.
The economist collects the facts, facts have been carefully
analyzed and put under suitable classification, and general
principles governing these facts have been discovered and
enunciated
Economics is not only science but also an art
It is a science in its methodology and an art in its application
07/09/2024 33
 Positive or Normative Science
Whether Economics is Positive Science or Normative
Science?
Positive science explains WHAT IS
Normative science explains WHAT OUGHT TO BE i.e right or
wrong of a thing
In simple words, positive science ‘describes’ while normative
science ‘evaluates’

Some early economists, like J S Mill, Robbins, Craines;

were of the view that Economics is just a positive
science

However, Cairnes and Macfie talked about normative

character of Economics
07/09/2024 34
 Can Economics Solve Practical Problems?

Kenyes said
The theory of Economics does not furnish a body of
settled conclusions immediately applicable to
policy.
It is a method rather than a doctrine, an apparatus
of the mind, a technique of thinking which helps its
possessor to draw correct conclusions

07/09/2024 35
 Limitations of Economics
Economics cannot predict the future events
since its laws lack definiteness

No magic formula by which schemes of social

betterment can be tested nor a sovereign
remedy to economic ills

It is not business of the economist as such to

decided whether large armaments are
necessary or not

07/09/2024 36
 The Diverse Fields of Economics
Examples of microeconomic and macroeconomic concerns
Production Prices Income Employment

Microeconomics Production/Output Price of Individual Distribution of Employment by

in Individual Goods and Services Income and Wealth Individual Businesses
Industries and & Industries
Businesses Price of medical care Wages in the auto Jobs in the steel
Price of gasoline industry industry
How much steel Food prices Minimum wages Number of
How many offices Apartment rents Executive salaries employees in a firm
How many cars Poverty

Macroeconomics National Aggregate Price Level National Income Employment and

Production/Output Total wages and Unemployment in
Consumer prices salaries the Economy
Total Industrial Producer Prices
Output Rate of Inflation Total corporate Total number of jobs
Gross Domestic profits Unemployment rate
Product
Growth of Output

07/09/2024 37