1.4.ppt-Micro vs. Macro Economics difference

Micro vs. Macro Economics

1. BUSINESS ECONOMICS
107
UNIT- 1
Faculty Name: Dr. Shuchi Singhal
Designation: Associate Professor
School/Dept: Management
Email address of Faculty Member: [email protected]

2. Programme Outcomes
2
PO1: Apply knowledge of various functional areas of business
PO2: Develop communication and professional presentation skills
PO3: Demonstrate critical thinking and Analytical skills for business
decision making
PO4: Illustrate leadership abilities to make effective and productive
teams
PO5: Explore the implications and understanding of the process of
starting a new venture
PO6: Imbibe responsible citizenship towards a sustainable society
and ecological environment
PO7: Appreciate inclusivity towards diverse cultures and imbibe
universal values
PO8: Foster Creative thinking to find innovative solutions for
various business situations

3. Course Outcomes
3
CO1:Understand the fundamental concepts of Business
Economics.
CO2:Analyze the relationship between consumer behaviour
and demand.
CO3:Explore the theory of production through the use of
ISO-QUANTS.
CO4:Understand the concept and relevance of short-term
and long-term cost.
CO5:Examine pricing decisions under various market
conditions.
CO6:Analyse economic challenges posed to businesses

4. Syllabus

5. Unit 1- Introduction to Business Economics and
Fundamental Concepts
1.1 Nature, Scope, Definitions of Business Economics- Part 1
1.2 Nature, Scope, Definitions of Business Economics-Part 2
1.3 Difference Between Business Economics and Economics
1.4 Contribution and Application of Business Economics to Economics
1.5 Micro vs. Macro Economics
1.6 Opportunity Costs
1.7 Time Value of Money
1.8 Marginalism
1.9 Incrementalism
1.10 Market Forces and Equilibrium
1.11 Risk, Return and Profits
1.12 Introduction to Behavioural Economics: Nudge Theory

6. 1.4
•Micro Economics
•Macro Economics
•Micro v/s Macro
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7. 1.4 Micro vs. Macro Economics
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8. Suggested Readings
1. Author: Christopher R. Thomas & S. Charles Maurice
Title of the Book: Managerial Economics-Foundations of
Business Analysis and Strategy
Chapter’s Name: Managers, Profits and Markets
2. Author: Paul A. Samuelson and William D Nordhaus
Title of the Book: Economics
Chapter’s Name: The Central Concepts of Economics
https://
www.yourarticlelibrary.com/economics/microeconomics-vs-macroeconomi
cs-which-one-is-more-important/8806
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9. 1.4 Micro vs. Macroeconomics
•Economics is a study about how individuals, businesses and governments
make choices on allocating resources to satisfy their needs.
• These groups determine how the resources are organised and coordinated
to achieve maximum output. They are mostly concerned with the
production, distribution and consumption of goods and services.
•The modern economic theory is divided into two branches-
microeconomics and macroeconomics.
•Microeconomics is the analysis of the individual behaviour. It focuses on
individual consumers and businesses.
•Macroeconomics ,on the other hand, is the analysis of mass or aggregate
behaviour.
•Microeconomics and macroeconomics are the core of economics. Ragnar
Frisch of Oslo University has developed these two terms.
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10. 1.4.1 Microeconomics:
•The term ‘micro’ is derived from the Greek worf ‘mikros’ which means
small. Thus, micro-economics is the theory of small.
•Microeconomics is that branch of Economics which studies an economic
or decision making unit and considers in detail the behaviour of that
particular unit.
•Microeconomics is the study of decisions made by people and businesses
regarding the allocation of resources and prices of goods and services.
•Microeconomics focuses on the supply, that determines the price level of
the economy.
• It uses the bottom-up approach strategy to analyze the economy.
• In other words, Microeconomics tries to understand human choices and
resource allocation.
•Microeconomics does not decide what are the changes taking place in the
market, instead, it explains why there are changes happening in the market.
•One of the major goals of microeconomics is to analyze the market and
determine the price for goods and services that best allocates limited
resources among the different alternative uses.
By: Shuchi Goel 10

11. •This study is especially important for producers as they decide what to
manufacture and the appropriate selling price.
•Microeconomics assumes businesses are rational and produce goods
that maximizes their profit.
•If each firm takes the most profitable path, the principles of
microeconomics state that the market’s limited resources will be
allocated efficiently.
•The main key role of Microeconomics is to examine how a company could
maximize its production and capacity, so that it could lower prices and
better compete in its industry.
•A lot of microeconomic information can be obtained from the financial
statements.
•The key factors of Microeconomics are :
Demand, Supply, and Equilibrium
Production Theory
Costs of Production
Labor Economics
•Examples:
 
Individual Demand, Price of a product.
By: Shuchi Goel 11

12. •Microeconomics has application in various diversified fields of Economics
such as agricultural economics, labour economics, etc.
KEY TAKEAWAYS
Key Points
•One of the major goals of microeconomics is to analyze the market and determine
the price for goods and services that best allocates limited resources among the
different alternative uses.
•Microeconomics assumes businesses are rational and produce goods that maximize
their profit.
By: Shuchi Goel 12

13. 1.4.2 Macro Economics:
•The term macro is derived from the Greek word ‘makros’ which means
‘large’.
•Most of the modern economics is now macroeconomics, It has become
popular only after the publication of John Maynard Keynes’s ‘General
Theory of Employment, Interest and Money’ in 1936.
•Besides Keynes, Robert Malthus, Karl Marx, Leon Walras and Irving
Fisher were among the prominent economists who contributed to the
development of the macroeconomic analysis.
•Macroeconomics is concerned with the analysis of the economy as a
whole. It studies the entire economic system or its major components
such as households, business firms and government. It deals with total
private consumption expenditure, total private investment expenditure,
total government expenditure, total imports and exports of goods as well as
services, etc. It seeks the causes and cures for unemployment, inflation,
balance of payments deficits, etc.
•Macroeconomics is the study of the performance, structure, behavior and
decision-making of an economy as a whole.
By: Shuchi Goel 13

14. •Thus, macroeconomics is not concerned with a particular decision
making unit, but, with all such units combined together. It presents a
complete picture of the economic system. That is why, the macro-
economics is termed as aggregative economics.
•In the words of Kenneth E.Boulding, “Macroeconomics deals not with
individual quantities but with aggregate of these quantities, not with
individual incomes but with national income, not with individual prices but
with price levels, not with individual outputs with the national output.”
•Macroeconomists focus on the national, regional, and global scales. For
most macroeconomists, the purpose of this discipline is to maximize
national income and provide national economic growth. Economists hope
that this growth translates to increased utility and an improved standard of
living for the economy’s participants.
•To achieve the goals, macroeconomists develop models that explain the
relationship between factors such as national income, output, consumption,
unemployment, inflation, savings, investment and international trade.
•These models rely on aggregated economic indicators such as GDP,
unemployment, and price indices.
By: Shuchi Goel 14

15. •On the national level, macroeconomists hope that their models help
address two key areas of research:
1.the causes and consequences of short-run fluctuations in national income,
otherwise known as the business cycle, and
2.what determines long-run economic growth.
•The analysis of macroeconomics has acquired great significance in recent
years. The movements in economic aggregates influence the health of the
macro economy and economic fortunes of individuals. Macroeconomics
explains as to why some economies grow with increases in their living
standards, while others do not. The study of macroeconomics is useful
in many ways:
i.Formulation and Execution of Economic Policies: The government
intervention in the economic activities has been increasing day by day. The
government, however, can not deal with a particular individual or with
small groups. (Cont..)
By: Shuchi Goel 15

16. Hence, the study of the macroeconomics becomes very important at
the time of formulation and execution of economic policies.
ii.Functioning of Economy: It is very difficult to interpret the functioning
of an economy in terms of microeconomics, as there are numerous
decision making units in the economy. One can understand the complex
economic system through the study of national aggregates like income,
output, expenditure, saving and investment.
iii.Helps to Understand Microeconomics Better: The study of the
macroeconomics makes the understanding of microeconomics better.
For instance, the law of diminishing marginal utility has been framed by
observing the behaviour of many consumers in the society.
iv.Study of Economic Development: The macroeconomic developments
have led to the study of the economic growth. This has enabled us to study
and understand the problems of the underdeveloped countries. By
analysing such problems, it has become possible for us to promote the
development of these countries.
By: Shuchi Goel 16

17. v.Study of Welfare: It is not possible to measure the size of welfare in
terms of the microeconomics. Movements in macro economic
aggregates reflect the health of the sectors in which the individuals
work and the prices of the goods that they purchase.
vi.International Comparisons: Macroeconomics facilitates international
comparisons by providing information about aggregate demand,
national income, consumption and saving for different countries.
1.4.3 Difference Between Micro and Macroeconomics:
•In the economic system, what is true of parts is not necessarily true
of the whole. The microeconomic behaviour cannot be added up to
derive the macroeconomic behaviour. Many problems and forces
affecting the economy as a whole cannot be fully understood by
analysing individual products and markets. It needs to be tackled at
the level of the whole economy.
By: Shuchi Goel 17

18. The following instances will make difference between micro and
macroeconomics clear:
i.It is possible for an individual to become richer by finding a few bundles of
thousand rupee notes but no nation can become richer by just printing more
currency notes.
ii.Saving is always a virtue for an individual. It helps him to accumulate wealth to
start or expand business, for purchasing durable goods like houses, cars, etc., for
education of children, for old age and so on. But, savings by all individuals may
prove to be vice for the economy especially under the conditions of depression and
unemployment caused by the deficiency of aggregate demand. Such collective
savings on the part of the individuals often result in contraction of demand, output,
employment and income. As a result the whole economy will suffer.
iii.An individual can buy more of a commodity at a given price. But if many
individuals try to buy more, the price would shoot up.
iv.An individual can close his account with the bank by withdrawing the entire
deposit. But, if all the depositors in the economy do so at the same time, banking
system will collapse.
By: Shuchi Goel 18

19. v.A cut in money wages at the time of depression and unemployment would
restrict or eliminate unemployment and depression. This conclusion of micro-
economics may be true for an individual industry. The reason is that at a lower
wage, more workers will be employed, given the demand curve for labour.
However, for the economy as a whole, this is highly misleading. Any attempt
to cut wages in the entire economy will bring down the aggregate demand for
goods and services in almost all the industries, as the wages are the incomes of
the workers. Moreover, the demand for labour is a derived demand, derived
from the demand of goods. The fall in aggregate demand for goods and
services will result in decline in demand for labour, which will create more
unemployment rather than reducing it.
vi.The aggregative conclusions show an average tendency and do not
influence all the sectors alike. Steady general price level rarely implies
equal distribution of income among various sections, viz. agriculturists,
industrialists, workers, consumers, etc. The high price in one sector
might have been neutralised by low price in other sector(s). (Cont..)
By: Shuchi Goel 19

20. It is, therefore, important to keep in mind the nature, composition and structure
of different sectors or groups when we make a statement regarding the system or
aggregates on the assumption that it is homogenous.
By: Shuchi Goel 20

21. Micro v/s Macro
By: Shuchi Goel 21
Microeconomics Macroeconomics
1. It is the study of individual
economic units of an economy.
1. It is the study of economy as a
whole and its aggregates.
2. It deals with Individual Income,
Individual prices, Individual output,
etc.
2. It deals with aggregates like national
Income, general price level, national
output, etc.
3. Its main tools are demand and
supply of a particular
commodity/factor
3. Its main tools are aggregate
demand and aggregate supply of the
economy as a whole.
4. It helps to solve the central
problem of ‘what, how and for whom’
to produce in the economy
4. It helps to solve the central
problem of full employment of
resources in the economy

22. Microeconomics Macroeconomics
5. It discusses how equilibrium of a
consumer, a producer or an Industry
is attained.
5. It is concerned with the
determination of equilibrium level of
Income and employment of the
economy.
6. Examples are: Individual Income,
Individual savings, price
determination of a commodity,
individual firm’s output, consumer’s
equilibrium
6. Examples are: National Income,
total savings, general price level,
aggregate demand, aggregate supply,
poverty, unemployment, etc.
By: Shuchi Goel 22

23. Conclusion
•Microeconomics is that branch of Economics which studies an economic or
decision making unit and considers in detail the behaviour of that particular
unit.
•Macroeconomics is concerned with the analysis of the economy as a
whole.
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