Microeconomics Chapter-1| Economics and Economy.

Microeconomics Chapter-1 | Economics and Economy

Hey all, we all know very well that the resources are very less and the management of these less resources are one of the biggest problems . Today we have many scientific ways to save resources and utilise the resources in an optimum manner. For The management and optimum utilisation of resources we study Economics and this subject gives us an overview idea of day to day usage of resources and its managements. So, lets begin the first chapter of our Microeconomics chapter-1| Economics and Economy.

# What is Economics?

Put yourself as the richest person of the world and think what all you can buy at a certain period of time , 'can you buy all the things?' the answer must be 'No' because the resources are less in compare to our unlimited wants. Likewise no matter how rich you are you'll never find enough resources to satisfy all you wants. Scarcity of resources ids one of the major and hard fact of life. It is an universal problem. It exist both at individual level (called micro level) as well as at the level of country as a whole (called macro level). It can never be solved but can be managed.
Resources are not only scarce but have alternative uses as well. The scarcity of resources and the fact that resources have alternative uses have led to the emergence of the economic problem: the problem of the rational management of resources is the problem of optimum utilisation of the resources , this is also called the problem of allocation of resources or simply ' the problem of choice'. (In short we can state that the economic problem is the problem of rational management of resources or the problem of optimum utilisation of resources . It arises because the resources are scarce and resources have alternative uses.)
Economics is a subject matter that deals with the rational management of limited resources (in relation to unlimited wants )in a manner such that at the micro level individual is able to maximise his satisfaction , and an individual producer is able to maximise his profit and at the macro level, a country is able to achieve the highest possible GDP growth and highest possible social welfare.
Briefly, we can state that the economics is the study of optimum utilisation of the scarce resources in a manner such that individual gains are maximised at the micro level and the social gains is maximised at the macro level.

Economics is broadly divided into two parts :

1. Microeconomics:

Micro means small and the microeconomics deals with the economics issues related with the small economic units like an individual consumer, an individual producer, an individual industry and an individual market.
A consumer is an important unit in context of microeconomics . He faces the problem of choice (the problem of rational management of resources) . He is to use his resources(income) on the different goods in such a manner that he is able to maximise his satisfaction. To manage the problem of choice for an individual consumer the economists have formulated the Theory of Consumer Behaviour or the Theory of Demand. It is an important component of microeconomics.

A producer is another important unit of microeconomics . He also faces the problem of choice as he is to decide that what type of goods he should produce so that his profits are maximised . Also he has to choose the technology that minimises the cost of production of the commodity. To study the behaviour of an individual producer the economist have formulated the Theory of Supply. This is an another important component of micro economics.
When we are talking about the Theory of Demand (relating to consumer's behaviour) and the Theory of Supply(relating to the producer's behaviour ) we cannot ignore the study of the Market which is driven by the forces of demand and the supply. Microeconomics studies how the price of a good is determined in the market . The Theories that describes the market price determination are called Price Theories. These are other vital components of microeconomics.

2. Macroeconomics:

Macro means large. In economics,'large' means the economy as a whole . Macroeconomics deals with the economic issues related to the economy as a whole. The basic issues of Macroeconomics include equilibrium in the economy. Here , we study how is equilibrium stuck in the terms of the balance between aggregate demand (demand of all goods and services in the economy), and aggregate supply (supply of all goods and services in the economy), disequilibrium in the economy ; when aggregate demand and aggregate supply are not in a state of balance, and when resources are not fully utilised (or fully employed ), and correction of disequilibrium (or the restoration of balance between aggregate demand(AD) and aggregate supply(AS)) along with the fully restoration of resources.
The economist have formulated different theories to study the various issues of Macroeconomics . The theory of income and employment is formulated to study how equilibrium is reached in the economy. These are several theories to study the problem of disequilibrium in the economy. Notable ones are the theories related to 'deflationary gap' and 'inflationary gap'
To address the problem of disequilibrium (inflationary and deflationary gaps), the economist have designed certain theories (or policies) like monetary policy and fiscal policy.

# DIFFERENCE BETWEEN MICROECONOMICS AND MACROECONOMICS

#MICROECONOMICS

⦁ Microeconomics deals with the economic issues related to small economic units: an individual firm, an individual household or an individual consumer.
⦁ Microeconomics is basically concerned with the determination of price in the market . Accordingly, it is often called as"The Theory of Price".
⦁ Study of Microeconomics assumes that macro variables remain constant. Thus, it is assumed that the general price level is constant while we are studying determination of price in the individual market.
Principal components of Microeconomics are: (a) Theory of Consumer Behaviour,(b) Theory of Producer Behaviour, and (c) Theory of Price.

#MACROECONOMICS

⦁ Macroeconomics deals with the economic issues at the level of the economy as a whole .
⦁ Macroeconomics is basically concerned with the determination of aggregate output and general price level in the economy as a whole . Accordingly, it is often called " The Theory of Income and Employment".
⦁ Study of Macroeconomics assumes that micro variables remain constant. Thus, it is assumed that the distribution of GDP remains constant when we are studying the level of GDP in the economy.
Principal components of Macroeconomics are: (a) Theory related to Equilibrium in the Economy(AS=AD), (b)Theory related to Disequilibrium or Theory related to Inflationary an Deflationary Gap in the Economy , and (c) Theory related to Correction of Disequilibrium: Monetary Policy, Fiscal Policy and Exchange Rate policy.

# POSITIVE AND NORMATIVE ECONOMICS

#POSITIVE ECONOMICS:

Positive economics deals with the economic issues (or economic behaviour) related to past , present or future . It deals with such economic situations which can be studied by using facts and figures.
Read the following observations carefully:
⦁ On the eve of independence , poverty in India affected larger percentage of population than now(it's an observation related to the past).
⦁ 22% of population in India is absolutely poor (below poverty line)(it is an observation related to the present).
⦁ If population in India continues to grow at the existing rate , the percentage of population below poverty line will exceed 22% in the year 2020 (it is an observation related to the future).
All these observations / statements are elements of positive economics . These observation highlight the state of poverty in the past, present and the future . Thus, positive economics is the economics of 'what was', 'what is', and 'what would be'.

#CHARACTERISTICS OF POSITIVE STATEMENTS:

Observation/ Statements related to positive economics show the following characteristics:
⦁ These statements highlight the nature and extent of economics problem or analyse the economic behaviour of the people related to past, present or future.
⦁ These statements are based on facts and figure related to past, present or future.
⦁ These statements are verifiable for truth (facts and figures can be verified).
⦁ These statements do not reflects any value judgement or opinion of the economist (which could be a matter of debate).

#NORMATIVE ECONOMICS:

Normative is the economics of 'what ought to be'. It deals with the 'opinions' of the economist related to the economics issues or economic problems. Different economist may offer different opinions on the solution to an economic problem. Opinion involve value judgements.
Read the following statements carefully:
⦁ MGNREGA( Mahatma Gandhi National Rural Employement Gurantee Act) will one day bring an end to the problem of unemploymentin the country.
⦁ MGNREGA is just a programme of financial aid to the unemployed people in rural India. It will make the people ' prasites' and life-long un productive.
⦁ MGNREGA uses taxpayers' money, and should therefore , be stopped.
⦁ MGNREGA should not be persued unless it ensures asset- creation in the economy.
All these statements are elements of normative economics . These are merely opinions. These are not verifiable of truth.

#CHARACTERISTICS OF NORMATIVE STATEMENTS:

Observations/ Statements related to normative economics show the following characterstics:
⦁ These statements involve value judgement.
⦁ These statements leads to controversies and debates.
⦁ These statements indicates opinions and are therefore , not verifiable for truth.
⦁ These statements reflect 'what ought to be' ,as a solution to economic problems.

#DIFFERENCE BETWEEN POSITIVE AND NORMATIVE ECONOMICS

#POSITIVE ECONOMICS:

⦁ Positive economics deals with economic issues (or economic behaviour) related to past, present and future.
⦁ Statements of positive economics relate to 'what was', 'what is', and 'what would be'.
⦁ Statements of positive economics are not necessarily the statements of truth. These may be true or false.
Example- Somebody says population of India is greater than the population of China, it is definitely a positive statement. But , one can verify it.
⦁ Facts and figures ( as elements of positive economics) are verifiable for truth.
⦁ Positive economics does not involve value judgement.

#NORMATIVE ECONOMICS:

⦁ Normative economics deals with opinions of the economists related to the economic issues or economic problems.
⦁ Statements of normative economics are related to 'what ought to be '.
⦁ Normative statements cannot be termed as true or false. These statements involve opinions only .
Example- Somebody says that old-age pensions should be stopped. It is just an opinion.
⦁ Normative statements are not verifiable at all.
⦁ Normative economics involves value judgement.

#What is Economy?

People perform different economic activities to earn their living. The teachers go to school, the doctors go to the hospitals, the farmers go to their field and the industrialists go to their industries. The nature and level of the economic activities performed by the people of an area would reveal a system by which the people of that area earn their living. This system is called Economy.
OR
In normal words we can say that Economy is a system by which people of an area earn their living.

#NATURE AND LEVEL OF ECONOMY.

The system (by which people of an area earn their living) includes two basic elements:
1. Nature of economic activities performed by the people.
2. Level of economic activities performed by the people.
Nature of economic activities reveals the nature of economy, and the level of economic activities reveals the level(or state) of the economy(whether it is developed or underdeveloped). Let us consider a village. We may find that most peoples are engaged in agricultural activities to earn their living. Accordingly, we shall conclude that the economy of this village is an agricultural economy. This is about the nature of economy. Further, we may find that most farmers in the village are rich farmers . They are engaged in high-level production activity. Accordingly, we shall conclude that the economy of this village is a rich economy or a developed economy. This is about the state of economy.

#TYPES OF ECONOMIES:

Economic activities (activities of production, consumption, investment and exchange) are controlled or regulated by the government of a country. But the degree of control varies across different nations. In China, Russia and North Korea, the degree of control is very high. Such economies where the degree of control(of economic activities) s very high is called 'controlled economies' or 'Centrally Planned Economies'. Second, there are the economies where the degree of control is notional(very low). These are called 'Free Economies' or 'Market Economies'. Economies of USA and UK are some examples. Third, there are economies where the degree of control is moderate (neither very low nor very high). India is an example.

#CONTROLLED OR CENTRALLY PLANNED ECONOMY:

These are the economies where the economic activities (production consumption, investment and exchange) are firmly controlled by the government or some central authority.
Economic decisions are driven by the motive of social welfare.
The consumer is not sovereign (the central authority decides what goods are to be produced for the people).
Most resources are controlled (or owned) by the government. The government decides at what price the goods are to be sold in the market.
Public sectors dominates the economic activities.

#FREE ECONOMY OR MARKET ECONOMY:

These are the economies where the economic activities are controlled by the market forces.
Economic decisions are driven by the motive of profit maximisation.
The consumer is sovereign. The consumer buys goods according to his choice.
Most Resources are controlled (or owned) by the people. The market determines the price of goods and services.
Private sectors dominates the economic activities.

#MIXED ECONOMY:

These are the economies where the economic activities are governed by the free play of market forces but are regulated by the government.
Economic decisions are driven by the motive of the both profit maximisation and social welfare.
The consumer is sovereign. However, PDS( Public Distribution System) ensures the supply of essential goods to the consumer .
Resources are controlled both by the government and by the people. Prices are determined by the market . But, the government regulates/ controls the price of essential goods.
Both public and private sectors dominates the economic activities.