Micro & Macro Economics

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Micro-Economics

Branches of Economics and their Work in Different

Economic Conditions

From Shahbaz Ahmad

BB07035

To

Ms. Rabia Tahir

October 23, 2008

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Economics Economics

Economics

Economics _is_{is th}_the_{e so}_soci_cial_{al sc}_scie_ienc_nce_{e ttha}_hat_{t st}_stud_udie_ies_{s th}_the_{e pr}_pro_odu_duct_ctio_ion_n,, di

diststriribubutitionon, , anand d coconsnsumumptptioion n of of gogoodods s anand d seservrviciceses. . ThThe e tetermrm

economics

economics comes from the Ancient Greekcomes from the Ancient Greek oikonomia,oikonomia, "management of "management of a household, administration” from

a household, administration” from oikos,oikos, "house" +"house" + nomos,nomos, "custom""custom" or "law", hence "rules of the house (hold)".

or "law", hence "rules of the house (hold)".

A definition that captures much of modern economics is that of Lionel A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behavior Robbins in a 1932 essay: "the science which studies human behavior as

as a a rerelalattioionsnshihip p bebetwtweeeen n eendnds s anand d sscacarrce ce memeanans s whwhicich h hahaveve alte

alternarnative tive useuses."s." ScScararcicity ty memeanans s ththat at avavaiailalablble e reresosoururceces s araree in

insusufffficicieient nt to to sasatitisfsfy y alall l wawantnts s anand d neneededs. s. AbAbsesent nt scscararcicity ty anandd alternative uses of available resources, there is no economic problem. alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are The subject thus defined involves the study of choices as they are affected by incentives and resources.

affected by incentives and resources. Following are the two branches of

Following are the two branches of economicseconomics

Economics

M

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Micro-economics Micro-economics Microeconomics

Microeconomics _iis_{s a}_{a br}_bra_an_nc_ch_{h o}_of_{f e}_ec_co_on_no_om_miics_{cs tth}_ha_at_{t s}_sttu_udi_die_es_{s h}_ho_ow_w individuals, households and firms and some states make decisions to individuals, households and firms and some states make decisions to allocate limited resources, typically in markets where goods or services allocate limited resources, typically in markets where goods or services ar

are e bebeining g bobougught ht anand d sosoldld. . MiMicrcroeoecocononomimics cs exexamaminines es hohow w ththesesee decisions and behaviors affect the supply and demand for goods and decisions and behaviors affect the supply and demand for goods and service

services, which s, which detedetermines prices; and rmines prices; and how prices, in how prices, in turn, deterturn, determinemine the supply and demand of goods and services. Following is the working the supply and demand of goods and services. Following is the working of this branch in the

of this branch in the economyeconomy

In a nutshell, microeconomics has to do with

In a nutshell, microeconomics has to do with SUPPLYSUPPLY andand DEMANDDEMAND, and, and

with the way they interact in various markets. Labor economics, for with the way they interact in various markets. Labor economics, for example, is built largely on the analysis of the supply and demand for example, is built largely on the analysis of the supply and demand for labor of different types. The field of industrial organization deals with labor of different types. The field of industrial organization deals with the

the difdifferferent ent mecmechanhanismisms s ((MONOPOLYMONOPOLY,, CARTELSCARTELS, , anand d didiffffererenent t tytypepes s of of

co

compmpetetititivive e bebehahavivioror) ) by by whwhicich h gogoodods s anand d seserrviviceces s arare e sosoldld.. Int

Interernanatitiononal al ececononomomicics s woworrrrieies s aboabout ut ththe e dedemanmand d anand d susupppply ly of of individual traded commodities, as well as of a country’s exports and individual traded commodities, as well as of a country’s exports and imports taken as a whole and the consequent demand for and supply imports taken as a whole and the consequent demand for and supply of

of FOREIGNFOREIGN EXCHANGEEXCHANGE. . AgricuAgricultural economltural economics deals ics deals with the with the demand anddemand and

supply of agricultural products and of farmland, farm labor, and the supply of agricultural products and of farmland, farm labor, and the other factors of production involved in agriculture. Public finance (see other factors of production involved in agriculture. Public finance (see

PUBLIC

PUBLIC CHOICECHOICE) ) lolookoks s at at hhow ow ththe e ggovoverernmnmeent nt enentterers s ththe e scsceenene..

Tra

Traditditionionallyally, , its its focfocus us was was on on taxtaxes, es, whiwhich ch autautomaomatictically ally intintrodroduceuce “wedg

“wedges” (differees” (differences between the nces between the price the buyer price the buyer pays and pays and the pricethe price th

the e sesellller er rerececeiveives) s) anand d cacaususe e ininefeffificieciencyncy. . MoMore re rerececentntlyly, , pupublblicic finance has reached into the expenditure side as well, attempting to finance has reached into the expenditure side as well, attempting to analyze (and sometimes actually to measure) the costs and benefits of analyze (and sometimes actually to measure) the costs and benefits of various government outlays and programs. Applied welfare economics various government outlays and programs. Applied welfare economics is the fruition of microeconomics. It deals with the costs and benefits is the fruition of microeconomics. It deals with the costs and benefits of just about anything—government projects, taxes on commodities, of just about anything—government projects, taxes on commodities, ta

taxexes s on on fafactctorors s of of prprododucuctition on (c(cororpoporaratition on inincocome me tataxexes, s, papayryrololll ta

taxexes)s), , agagriricucultlturural al prprogograrams ms (l(likike e prpricice e susuppppororts ts anand d acacrereagagee contro

controls), tariffs ls), tariffs on on imporimports, ts, foreiforeign gn exchanexchange ge contrcontrols, various ols, various formsforms of industrial organization (like monopoly and oligopoly), and various of industrial organization (like monopoly and oligopoly), and various aspects of labor market behavior (like

aspects of labor market behavior (like MINIMUMMINIMUM WAGESWAGES, the monopoly, the monopoly

power of

power of LABOR LABOR UNIONSUNIONS, and so on)., and so on).

At

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up

up proproduciducing ng cercertaitain n thithings that ngs that thethey y tratrade de in in ordorder er to fulfilto fulfill l thetheirir demands for other things. The specialization of production and the demands for other things. The specialization of production and the ins

instititututitionons s of of trtradade, e, cocommemmercrce, e, anand d mamarkrketets s lolong ng anantetedadateted d ththee science of economics. Indeed, one can fairly say that from the very science of economics. Indeed, one can fairly say that from the very outset the science of economics entailed the study of the market forms outset the science of economics entailed the study of the market forms that arose quite naturally (and without any help

that arose quite naturally (and without any help from economfrom economists) outists) out of human behavior. People specialize in what they think they can do of human behavior. People specialize in what they think they can do best—or more existentially, in what heredity, environment, fate, and best—or more existentially, in what heredity, environment, fate, and their own volition have brought them to do. They trade their services their own volition have brought them to do. They trade their services and

and/o/or r ththe e prprododucucts ts of of ththeieir r spspececiaializlizatatioion n fofor r ththose ose prprododucuced ed byby others. Markets evolve to organize this sort of trading, and money others. Markets evolve to organize this sort of trading, and money evolves to act as a generalized unit of account and to make barter evolves to act as a generalized unit of account and to make barter unnecessary. In this market

unnecessary. In this market

process, people try to get the most from what they have to sell, and to process, people try to get the most from what they have to sell, and to satisfy their desires as much as possible. In microeconomics this is satisfy their desires as much as possible. In microeconomics this is translated into the notion of people maximizing their personal “utility,” translated into the notion of people maximizing their personal “utility,” or welfare. This process helps them to decide what they will supply or welfare. This process helps them to decide what they will supply and what they will demand.

and what they will demand.

Nine times out of ten, the excess demand will end up being reflected in Nine times out of ten, the excess demand will end up being reflected in a

a grgray ay or or blablack ck marmarkeket, t, whwhosose e exexisistetence nce is is prprobobabably ly ththe e clcleaearerestst evidence that the official price is artificially low. In turn, economists evidence that the official price is artificially low. In turn, economists are nearly always right when they predict that pushing prices down via are nearly always right when they predict that pushing prices down via price controls will end up reducing the amount supplied and generating price controls will end up reducing the amount supplied and generating black-market prices not only well above the official price, but also black-market prices not only well above the official price, but also above the market price that would prevail in the absence of controls above the market price that would prevail in the absence of controls represents the artificial restriction of production by an entity having represents the artificial restriction of production by an entity having sufficient “market power” to do so. The economics of monopoly are sufficient “market power” to do so. The economics of monopoly are most easily seen by thinking of a “monopoly markup” as a privately most easily seen by thinking of a “monopoly markup” as a privately imp

impososeded, , prprivaivatetely ly cocollllececteted d tatax. x. ThThis is wawas, s, in in fafact, ct, a a rerealiality ty a a fefeww centuries ago when feudal rulers sometimes endowed their favorites centuries ago when feudal rulers sometimes endowed their favorites with monopoly rights over certain products. The recipients need not with monopoly rights over certain products. The recipients need not ever “produce” such products themselves. They could contract with ever “produce” such products themselves. They could contract with ot

otheher r fifirmrms s to to prprododucuce e ththe e gogood od at at lolow w prpricices es anand d ththen en chcharargege consumers what the traffic would bear (so as to maximize monopoly consumers what the traffic would bear (so as to maximize monopoly pro

profitfit). ). The The diffdiffereerence nce betbetweeween n thethese se two two priprices ces is is the the “mo“monopnopolyoly markup,” which functions like a tax. In this example it is clear that the markup,” which functions like a tax. In this example it is clear that the true beneficiary of monopoly power is the one who exercises it; both true beneficiary of monopoly power is the one who exercises it; both producers and consumers end up losing.

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Modern monopolies are a bit less transparent, for two reasons. First, Modern monopolies are a bit less transparent, for two reasons. First, even though governments still grant monopolies, they usually grant even though governments still grant monopolies, they usually grant them to the producers. Second, some monopolies just happen without them to the producers. Second, some monopolies just happen without gove

governmrnment ent crecreatiating ng thethem, m, altalthouhough gh thethese se are are usuausually lly shoshort-rt-livelived.d. Ei

Eithther er waway, y, ththe e prprococeeeeds ds of of ththe e momononopopoly ly mamarkrkup up (o(or r tatax) x) araree commingled with the return to capital of the monopoly firms. Similarly, commingled with the return to capital of the monopoly firms. Similarly, lab

labor or momononopopoly ly is is ususuaually lly exexererciscised ed by by ununioionsns, , whwhicich h arare e abable le toto charge a monopoly markup (or tax), which then becomes commingled charge a monopoly markup (or tax), which then becomes commingled with the wages of their members. The true effect of labor monopoly on with the wages of their members. The true effect of labor monopoly on the competitive wage is seen by looking at the nonunion segment of the competitive wage is seen by looking at the nonunion segment of th

the e ececononomomy. y. HeHerere, , wawageges s enend d up up lolowewer r bebecacaususe e ththe e ununioion n wawagege causes fewer workers to be hired in the unionized firms, leaving a causes fewer workers to be hired in the unionized firms, leaving a larger labor supply (and a consequent lower wage) in the nonunion larger labor supply (and a consequent lower wage) in the nonunion segment.

segment.

Artificially high urban wages attract migrants from rural areas. If the Artificially high urban wages attract migrants from rural areas. If the wage does not adjust downward to equate supply and demand, the wage does not adjust downward to equate supply and demand, the rate of urban

rate of urban UNEMPLOYMENTUNEMPLOYMENT will rise until further migration is deterred.will rise until further migration is deterred.

Still other examples are in banking and drugs. When the “margin” in Still other examples are in banking and drugs. When the “margin” in banking is set too high, new banks enter and/or branches of old ones banking is set too high, new banks enter and/or branches of old ones proliferate until further entry is deterred. Artificially maintained drug proliferate until further entry is deterred. Artificially maintained drug prices led, in several Latin American countries (Argentina, Chile, and prices led, in several Latin American countries (Argentina, Chile, and Uru

Uruguaguay y befbefore ore thetheir ir majmajor or libliberaeralizalizatiotions ns of of recrecent ent decdecadeades), s), to to aa pharmacy on almost every block.

pharmacy on almost every block.

The great

The great unifyinunifying g principprinciples of les of micromicroeconomeconomics are, ics are, ever and ever and always,always,

supply and demand. The normative overtone of microeconomics comes

from the fact that competitive supply

from the fact that competitive supply price represents value as seen byprice represents value as seen by

suppliers, and competitive demand price represents value as seen by

demanders. The motivating force is that

demanders. The motivating force is that of humanof human

Bei

Beingsngs, , alwaalways ys gragravitavitatinting g towtoward ard chochoiceices s and and arrarrangangemeements nts thathatt

reflect their tastes. The miracle of it all is that on the basis of such

simple and straightforward underpinnings, a rich tapestry of analysis,

insights, and understanding can be woven. This brief article can only

give its

give its readereaders a rs a glimpsglimpse—hopee—hopefully a fully a tempttempting one—of the ing one—of the richnerichness,ss,

beauty, and promise of that tapestry.

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Macro Economics

Macroeconomics deals not with individual quantities as such but Macroeconomics deals not with individual quantities as such but wit aggregate of these quantities, not with individual incomes but with wit aggregate of these quantities, not with individual incomes but with the national income, not with the individual prices but with the price the national income, not with the individual prices but with the price level, not with the individual outputs but with the national outputs. level, not with the individual outputs but with the national outputs. Main issues in macro economics

Main issues in macro economics

The main issues which are addressed in macroeconomics are in brief The main issues which are addressed in macroeconomics are in brief as under:

as under: It

It HeHelplps s In In UnUndederrststanandiding ng TThe he DeDetetermrmininatatioion n Of Of InIncocome me AnAndd Employment

Employment

Late J.M Keynes laid great stress on macroeconomic analysis. He, in Late J.M Keynes laid great stress on macroeconomic analysis. He, in his

his revrevoluolutiotionarnary y boobook, k, “ge“generneral al thetheoryory, , empemploymloyment ent intintereerest st andand money” brought drastic changes in economic thinking. He explained money” brought drastic changes in economic thinking. He explained th

the e foforrceces s or or fafactctoorrs s whwhicich h dedetetermrminine e ththe e lelevevel l oof f agaggrgreegagatete employment and output in the economy.

employment and output in the economy. Determination Of General Level Of Prices Determination Of General Level Of Prices

Macroeconomics analysis answers question as to how the general price Macroeconomics analysis answers question as to how the general price le

levevel l is is dedetetermrminined ed anand d whwhat at is is ththe e imimpoportrtanance ce of of varvarioious us fafactctororss which influence general price level

which influence general price level Economic Growth

Economic Growth

The macroeconomics models help us to formulate economic polices for The macroeconomics models help us to formulate economic polices for achieving long run economic growth with stability. The new developed achieving long run economic growth with stability. The new developed growth theories explained the causes of poverty in under developed growth theories explained the causes of poverty in under developed countries and suggest remedies to overcome

countries and suggest remedies to overcome Macroeconomics And Business Cycles

Macroeconomics And Business Cycles It

It is is in in tetermrms s of of mamacrcroeoeconconomomicics s ththat at caucauseses s of of flflucuctutuatation ion I I ththee na

natitiononal al inincocome me or or ananalalyzyzeded. . It It hahas s alalso so bebeen en popossssibible le nonow w toto for

formulmulate ate polpoliciicies es for for concontrotrollinlling g busbusineiness ss cyccycles les i.ei.e. . inflinflatiation on andand deflation

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Another important subject of macroeconomics is to analyze the various Another important subject of macroeconomics is to analyze the various asp

aspecects ts of of intinterernanatitiononal al trtradade e in in gogoodods, s, seservrvicices es anand d babalanlance ce of of pa

paymymenents ts prproboblelemsms, , ththe e efeffefect ct of of exexchchanange ge raratetes s on on babalalancnce e of of payment etc.

payment etc.

Income Shares From The National Income Income Shares From The National Income

Mr. M. Kalecki and Nicholas Kelder, by making the departure from Mr. M. Kalecki and Nicholas Kelder, by making the departure from Ric

Ricararde de ththeoeoryry, , hahave ve prpresesenenteted d a a mamacrcro o ththeoeory ry of of didiststriribubutition on of of income. According t these economists, the relative shares of wages income. According t these economists, the relative shares of wages and profits depend upon the ratio of investment to national income. and profits depend upon the ratio of investment to national income. Unemployment

Unemployment An

Anootthheer r mmaacrcrooeecoconnoommiiccs s iisssusue e iis s tto o eexpxpllaain in tthhe e ccaauuseses s oof f unemplo

unemployment in yment in the economy. Stagflation is the economy. Stagflation is anothanother er importimportant issueant issue of modern economics. The Keynesian and post Keynesian economists of modern economics. The Keynesian and post Keynesian economists a

arre e ppuuttttiinng g lloot t oof f eeffffoorrtts s iin n eexxppllaaiinniinng g tthhe e ccaauussees s ccyycclliiccaall un

unememploploymeyment nt anand d hihigh gh ununememplployoymement nt cocouplupled ed wiwit t infinflalatition on anandd suggesting remedies to counteract them.

suggesting remedies to counteract them. Macroeconomics Polices

Macroeconomics Polices

Fiscal and monetary policies affect the performance of the economy. Fiscal and monetary policies affect the performance of the economy. These two major types of macroeconomic policies are central in the These two major types of macroeconomic policies are central in the macroeconomic analysis of the economy.

macroeconomic analysis of the economy. Global Economic System

Global Economic System

In macroeconomic analysis, it is emphasized that a nation’s economy In macroeconomic analysis, it is emphasized that a nation’s economy is a part of global economic system. A good or weak performance of a is a part of global economic system. A good or weak performance of a nation’s economy can affect the performance of the world economy as nation’s economy can affect the performance of the world economy as a w