The terms ‘micro-‘
and ‘macro-‘ economics were first coined and used by Ragnar
Fiscer in 1933. Micro-economics studies the economic actions and behaviour of
individual units and small groups of individual units.
In micro-economics, we are chiefly concerned with the economic study of
an individual household, individual consumer, individual producer, individual
firm, individual industry, particular commodity, etc.
Whereas, when we are analysing the problems of the economy as a whole, it
is a macro-economic study. In
macro-economics, we do not study an individual producer or consumer, but we
study all the producers or consumers in a particular economy.
or Price Theory:
The term ‘micro-economics’
is derived from the Greek prefix ‘micro’, which means small or a
millionth part. Micro-economic
theory is also known as ‘price theory’.
It is an analysis of the behaviour of any small decision-making unit,
such as a firm, or an industry, or a consumer, etc.
For micro-economics, in contrast to macro economic theory, the statistics
of total economic activity are valueless as far as providing clues to policy
decisions. It does not give an idea
of the functioning of the economy as a whole.
An individual industry may be flourishing, whereas the economy as a whole
may be suffering.
In respect of
employment, micro-economics studies only the employment in a firm or in an
industry and does not concern to the aggregate employment in the whole economy.
In the circular flow of economic activity in the community,
micro-economics studies the flow of economic resources or factors of production
from the resource owners to business firms and the flow of goods and services
from the business firms to households. It
studies the composition of such flows and how the prices of goods and services
in the flow are determined.
A noteworthy feature
of micro-approach is that, while conducting economic analysis on a micro basis,
generally an assumption of ‘full employment’ in the economy as a
whole is made. On that assumption,
the economic problem is mainly that of resource allocation or of theory of
Micro-economics occupies a very important place in the study of economic theory.
- Functioning of free enterprise economy: It explains the functioning of a free enterprise economy. It tells us how millions of consumers and producers in an economy take decisions about the allocation of productive resources among millions of goods and services.
- Distribution of goods and services: It also explains how through market mechanism goods and services produced in the economy are distributed.
- Determination of prices: It also explains the determination of the relative prices of various products and productive services.
- Efficiency in consumption and production: It explains the conditions of efficiency both in consumption and production and departure from the optimum.
- Formulation of economic policies: It helps in the formulation of economic policies calculated to promote efficiency in production and the welfare of the masses.
Thus the role of
micro-economics is both positive and normative.
It not only tells us how the economy operates but also how it should be
operated to promote general welfare. It
is also applicable to various branches of economics such as public finance,
international trade, etc.
Micro-economic analysis suffers from certain limitations:
or Theory of Income and Employment:
The term ‘macro-economics’
is derived from the Greek prefix ‘macro’, which means a large part.
Macro-economics is an analysis of aggregates and averages of the entire
(large) economy, such as national income, gross domestic product, total
employment, total output, total consumption, aggregate demand, aggregate supply,
etc. Macro-economics is the
economic theory which looks to the statistics of a nation's total economic
activity and holds that policy change designed to alter these total statistical
aggregates is the way to determine economic policy and promote economic
progress. Individual is ignored
altogether. Sometimes, national
saving is increased at the expense of individual welfare.
It analysis the chief
determinants of economic development, and the various stages and processes of
economic growth. Different
macro-economic models of economic growth have been suggested, one of which most
famous is Harrod-Domar Model. It
can be applied to both developed and under-developed economies.