Economics (Micro and Macro) Flashcards
What are the three approaches to the subject matter of economics based on its definitions?
Classical: Focus on wealth accumulation.
Neo-Classical: Focus on material welfare.
Modern: Focus on choices in scarcity.
What are the main branches of the modern approach to economics?
Microeconomics: Studies individual choices and market impacts.
Macroeconomics: Focuses on overall economic issues like inflation and growth.
Name five types of economic activities.
Production
Consumption
Exchange
Distribution
Public Finance
Differentiate between economic and non-economic activities.
Economic Activities: Actions aimed at earning money.
Non-Economic Activities: Actions done for personal satisfaction or love.
What is the difference between factor income and transfer income?
Factor Income: Earnings from providing factors of production (included in national income).
Transfer Income: Income not related to production (not included in national income).
What is microeconomics?
Microeconomics studies individual economic units, aiming for efficient resource allocation and analyzing price determination under different market structures.
What are the three types of microeconomics?
Micro Static: Studies a specific point in time.
Comparative Micro Static: Compares different static conditions.
Micro Dynamic: Examines changes over time.
Scope/ Subject matter of microeconomics
- Consumer Behavior: Analyzes utility maximization.
- Producer Behavior: Focuses on profit maximization.
- Cost and Revenue Theory: Studies cost minimization and revenue maximization.
- Product Pricing: Examines pricing methods under different market conditions.
- Factor Pricing: Explains factor price determination across market structures.
- Economic Welfare: Evaluates resource utilization for maximizing total welfare.
Importance of Micro
- Enhances understanding of economic functioning.
- Promotes optimum resource use.
- Determines product and factor prices across markets.
- Aids in formulating economic policies (e.g., tax, subsidy).
- Assists government in price management.
Limitations of micro
- Unrealistic Assumptions: Often oversimplifies economic behavior.
- Ignores Government Role: Does not account for government interventions.
- Neglects Macroeconomic Factors: Fails to consider broader economic influences (e.g., inflation, unemployment).
- Overlooks Behavioral Aspects: Ignores irrational behaviors and emotional factors.
- Focus on Efficiency Over Equity: May not address issues like income inequality adequately.
Concept of macro
Macroeconomics studies the overall functioning of an economy.
Macroeconomics developed by…
J.M. Keynes during the Great Depression of the 1930s.
Goal of macro
Aims to calculate macroeconomic variables and suggest policies for growth and stability.
Macro subject matter
- National income concepts.
- Theories and causes of inflation and deflation.
- Factors affecting money demand and supply.
- Economic growth models.
- Theories of international trade.
- National output and income equilibrium.
- Employment and unemployment theories.
Macro Importance
- Provides insights into the economy as a whole.
- Informs about macroeconomic conditions.
- Aids in policy formulation and effectiveness analysis.
- Identifies socio-economic problems and solutions.
- Facilitates international comparisons.
- Supports business decision-making.
Macro Limitations
- Aggregates data can obscure sectoral variations, leading to inaccurate conclusions.
- Models often rely on unrealistic assumptions (e.g., constant inflation).
- Policies may have time lags in effects, reducing immediate efficacy.
- Measurement limitations can distort the economic picture (e.g., informal sector).
- Balancing inflation and unemployment can be challenging (Phillips Curve).
- Often overlooks individual and sector-specific impacts of policies.
- Ignores externalities.
- Assumes a homogeneous economy.
Similarities between macro and micro
- Study of Economic Behavior:
- Theoretical Models: Employ models to explain phenomena and guide policies.
- Focus on Efficiency: Aim to understand efficient resource use.
- Policy Implications: Policies derived from both theories affect taxation, regulations, and spending.
- Objective of Improving Welfare: Seek to enhance economic welfare and satisfaction.
- Importance of Prices: Prices are critical, with micro focusing on market prices and macro on overall price levels.
- Use of Quantitative Methods: Utilize statistics and econometrics for analysis and forecasting.
- Optimum use of resources
- Based on Assumptions
Differences between Micro and Macro
- Meaning: Microeconomics focuses on individual units; macroeconomics looks at the economy as a whole.
- Objective: Micro aims for efficient resource allocation; macro seeks to assess overall economic conditions.
- Focus: Micro studies small entities; macro examines the entire economy.
- Also Known As: Micro is partial equilibrium analysis; macro is general equilibrium analysis.
- Policy Focus: Micro deals with tax/subsidy policies; macro handles monetary and foreign exchange policies.
-
Time Horizon:
- Micro: Short-term decisions.
- Macro: Long-term trends.
-Government role ignorance
-International Comaprison possibility
Interrelation between micro and macro
-Interest Rates: Set by macro policies, affecting micro borrowing and investment.
-Inflation and Price Levels: Influences micro pricing strategies.
- Economic Growth: Overall growth influences micro-level investment.
-National income is sum total of individual income
-Aggregate demand is sum total of individual demand sin different markets
-Micro decisions regarding saving and investments impact macroeconomic variables.
-Overall employment level determined by employment opportunities in individual firms.
Superior Definition of Microeconomics
Paul A. Samuelson defined microeconomics as: “The study of how households and firms make decisions and how they interact in specific markets.”
encapsulates the core aspect of microeconomics—focusing on individual decision-makers and their interactions within markets.
Superior Definition of Macroeconomics
John Maynard Keynes defined macroeconomics as: “The study of national income, overall employment, aggregate demand, and aggregate supply to understand the broader economic performance of a country.”
Superior Definition of Economics
- Lionel Robbins definition: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
Concept of Economics
Social science studying activities and decisions of economic participants related to production, consumption, exchange, distribution and public finance. Focuses on optimum utilisation of scarce resources
