(Continuation of notes partially dictated at the class room on the topic” Scope of economics)

5. Public Finance.

A modern state which is welfare state undertakes a number of economic activities spending
huge amounts of money to provide facilities to public. To meet these expenditures the state
raises money through:

i. Taxation &

ii. Public borrowing.

The various financial operations of the state which include, expenditure, public revenue and
ublic borrowing of the stae influence the consumption, exchange and distribution of wealth in
the country. Therefore the financial operations of the staateare treated as a part of subject
matter of economics and are studied under the branch called public finance.

Public finance deals with:

i. The source of public revenue.

ii. Principles of taxation.

iii. Items of public expenditure and

iv. Principles governing public expenditure and public borrowing or public debt.

v. Budgetting etc.

6. Economic planning:

Economic planning is undertaken by all economies- under developed and developed. The
underdeveloped countries adopt economic planning for promoting economic development and
growth.Developed countries undertake economic planning to maintain their stability.

Economic planning affects production , exchange and distribution of wealth in the country..
Therefore economic planning is also considered as apart of subject matter of economics nd it is
studied under the branch called Economic planning.. Under this object of economic planning,
the techniques of economic planning etc re studied.

Conclusion:

The above divisions of economics are not water tight compartments of economic. They overlap.
For instance when we study production of goods and services, we alsostudy consumption of
goods and services. Similarlly when we study production and consumption we alo study
exchange of goods and services. Therefore various branches of economics are inter related.

II. Modern approach for study of subject matter of economics.

Modern economists have evolved a ne approach to study economics. Under this approach
economics is studied under two parts. They are:

i. Micro-economics,

ii. Macro-economics.

These terms were first used by Prof, Ragner Frisch of Osla University of Sweedaen in 1933.

Micro-economics:

The word Micro has been derived from the Greek word “ MIKOS” which means small. Therefore
Micro-economics is the study of only a smallpart of economics and not he whole economics as
such. It is the study of of the small individual units of economics. The definition given by Prof.
Mac Cannel makes it clear. The definition given by hism is,”Micro-economics is the study of the
specific economic units and a detail consideration of the behviour of these individual units.

According to Prof.Boulding, “ Micro-economics is a study of individual firms, households,

individual prices, wages and particular industries.’

Broomen defines Micro-economics as, “ Micro-economics seeke to explain the working of

markets for individual commodity and the behavior of the individual buyer and seller.”

According to Prof. Hansen,”Micro-economics is tht branch of economics which is concerned

with individual firms, their outputs and costs, the production and pricing of single
commodities, wages of individuals etc.”

In the words of Prof. Gardener-Ackly, “Micro-economics deals with the division of total output
among industries, products and firms and the allocation of resources among competing groups.
It considers problems of income distribution. Its interest is in relatiove prices of particulars
goods and services.”

Therefore Micro-economics studies:

i. The prices of individual commodities, say like steel prices, cement prices, sugar prices etc.

ii. Wages in individual industries say like wages in textile industry, wages in sugar industry etc.
iii The out put of individual industry like say out put of sugar industry, out put of iron and steel
industry, out put of cotton textile industry etc.

iv. Investment in individual industries like say investment in iron and steel industry, investment
in cement industry, investment in fertilizer industry and so on.

It does not study:

i.The aggregate or total demand for all commodities.

ii. The aggregate supply of all commodities.

iii. The general wage level in the country.

iv. The total out put of all industries.

v. the general price level in the country.

vi. The total employment in a;ll industries.

vii. Total Svings.

viii. Total investment in all industru=ies.

ix. National Income etc.

Subject matter of Micro-econmics:

Micro-economics deals with

i.The theory of comsumer behavior.

ii. The theory of production and costs.

iii. Theiries of rent, wages, interest and profit.

iv. The theories of economic elfare.

That is its main concers are

a. The determination of product prices.

ii. Factor prices i.e. the pices of factors of production

In short it is concerned with the determination of prices. For this reason Mocro-economics is
otherwise known as price theory.

Uses of Micro-ecoomics.

The uses of the study of Micro-economics are:

i. Micro-economics is an analysis or study of the individual units or component parts

of the economy as distinct from the whole economy. Therfore it is helpful in getting
a worm’s eye-view of a small specific unit or component of the economy.
ii. It is useful for govenments to formulating economic policies and for assessing
whether the economic policies have had the desired effect on output, employment,
income etc.
iii. It is helpful in wise allocation of scarce resoures of the country for achieving growth
with stability.
iv. A knowledge of Micro-economics is helpful for businessmen and executives to
achieve maximum output with minimum cost.

v. Its serves as basis for welfare ecomonics.

vi. It is helpful for constructing single and useful economic models or theories for
explaining complex economic problems.

vii. It is helpful for macro-economic studies.

Eg. a. The Micro-economic study of individual family budgets is helpful to determine the total
consumption in the economy which is a Macro-economic study,

b. Similarly the micro-econmic analysis of prices is helpful to know the general price level in the
conomy which is again a mcro-economic study.

Limitations of Micro-economics:

Micro-economics suffers from a number of limitations. They are:

i. Micro-economics is mainly concerned with the component parts of the economy and not
with the general working of economy. Therefore it does not give the correct picture of the
working of economy.

ii. In dealing with the individual units of the economic system, the micro-economics makes
many assumptions such as:

a. full employment of the factors of production.

 b. Free mobility of factors of production.

c. Perfect competition etc.

But it is not so in actual practice.

Therefore the the theories and laws covered under micro-economics are unrealistic and
are not of much use.

iii.It is inadequate for analysing several economic problems. For example the behaviour of
economy as a whole cannot be satistacforily explained on the basis of the behaviour of
the individual economic units of the economy.

iv. Micro-economics does not provide solution to certain economic problems like
unemployment, inflation, depression, public finance, monetory policy etc.

v. The area of study covered by Micro-economics is limited

vi. The conclusions of Micro-economics cannot be straight away applied to the study of
Macroeconomic problems because what is true of an individual economic unit may not
be always true of the aggregates.

Macro-economics.

The term Macro is derived from greek word “MAKROS” which means large. Therefore macro-
economics is the study of the large part of economy. i.e. the whole economy. In other words it
is the study of the economc behaviour of the economy as a whole and not of the individual
economic units of the economy.

In the words of Prof. Boulding,” Macro-economics deals not with individual quantities as such,
but:

i. With the aggregates of these quantities.

ii. Not with individual incomes but with the national income.
iii. Not with the individual prices but with price levels.
iv. Not with individual outputs, but with the national outputs.
v. It does not study demand for individual commodities but the demand of all
commodities.
vi. It does not study the supply of individual commodities but with the study of aggregate
supply of commodities..
vii. It studies the general price level not with the price of individual industries.
viii. It studies the total savings and total investments of all industries and not the savings
and investments of individual industries.
ix. The total output in all industries is studied in macro-economics and not the output in
individual industries.

Therefore macro-economics is the study of the aggregates and averages. Hence macro-
economics is also known as aggregate economics.

Subject-matter of Macro-economics.

Mocro-economics deals with:

i. Total comsumption.
ii. Total investment.
iii. Total output.
iv. Total or national income.
v. Business cycles.
vi. Inflaton & deflation
vii. Economic growth etc.
viii. It is mainly concerned with the analysis of income and employment in the economy as a
whole. It is therefore also known as theory of income nd employment.

Uses of Macro-economy

Macro-economics is of immence use. It is helpful in many respects. The main uses are:
i. In general Macro-economics deals with the working of the economic system as a whole.
Therefore it is helpful in getting a bird’s eye -view of the entire economy.
ii. The aggregate picture of the economy as a whole given by macro-economics is more
useful than that given by micro-economics in studying the problems of the whole economy.
iii. As macro-economics does not assume full employment, free mobility of factors of
production etc, the economic picture of the economy given by macro-economics is more
realistic.
iv. The aggregate and realistic picture of the economy as a whole given by macro-
economics is very useful in studying the problems of the whole economy. In fact the economic
decision of the government of any country are based on Macro-economic analysis.
v. For the formulation of the government policies, macro-economics is very helpful.
vi. It is helpful in building economic models or theories for controlling business cycles or
trade cycles
vii. It helps us to know the effects of inflation and deflation.
viii. Study of macro-economic is useful for study of micro-economics.
Eg. An individual producer, while fixing the prices of his products (Micro-economics) should
know the general price in the economy (Macro-economics)

Limitations of Macro-economics.

The limitations of macro-economics are:

i.Its excessive generalisation from individual experience to the economic system as a whole is a
drawback because what is true of an individual component may not necessarily be true of the
whole econmy always.
ii. It has the danger of excessive thinking in terms of aggregates which are not homogeneous.
iii. Sometimes the study of individual units in micro-econimics becomes more useful than the
study of aggregates in macro-economics.
iv. Macro-economic tools are quite useful in assessing and solving problems of only developed
coumtries and not of the less developed countries.

Difference between Micro-economics and Macro-economics.

Sl. Micro-economics Macro-economics

No.
1. It is a study of individual economic It is the study of economic behaviour of the
units and not the economy as a economy as a whole and not the individul units
whole. of the economy.
2 It studies the economic behaviour of It is the study of the whole economy. That is it
the individual units in detail. studies the economy as a whole in general.
3 It is mainly a study of price theory. It is mainly a study of income and employment.
4 The area of study covered here is The area of study covered here is wide.
limited.
5 Here the study is based on It is not based upon such assumptions
assumptions such as full employment,
free mobility of factors of production,
perfect completition etc.
6 As this study is based on assumptions, As macro-economics does not depend on such
the picture of economics given by assumptions, the picture of economics given by
micro-economics is not complete or macro-economics is more realistic.
realistic.
7. The picture of individual units given The aggregate picture of the economic system
by micro-economics is not found that given here is more useful for solving the
 useful to solve the economic economic problems of the country as a whole.
problems of the country as a whole.

8 This analysis the equilibrium of This analysis the equilibrium of the whole
individual units of economic system. economy. That is it adopts the general
That is it adopts the partial equilibrium technique.
equilibrium technique.
9 This studies the individual parts of the It studies the aggregate of various economic
economy and therefore it uses the units like aggregate output, aggregate or total
method called the method of slicing. employment, aggregate or total income etc.
Hence it uses the method called the method of
lumping.

Integration of Micro-economics and Macro-economics.

It is true that macro-economics is more useful than Micro-economics. But this does
not mean that macro-economics must be adopted and micro-economics should be given
up. In fact neither the mcro-economics nor the micro-economics analysis alone can
adequately explain the working of the economic system. This is because what is true of an
individual unit of the conomy may not be true of the economy as a whole and similarly
what is true of the economy as a whole may not be true of an individual unit of the
economy.

For example savings by an individual is good. But savings by the nation as a whole is
not good (?).
In the same manner general price level in the economy might have remained
constant over a specified period. But the price of some specific units might have
fluctuated violently during the same period.
Therefore to conclude that both the approaches are inter-related and
complementary to each other is correct. They are like two faces of the same coin..
In the words of Paul A. Samuelson,”There is realy no opposition between micro and
macro-economics. But both are absolutely vital. You are less than half educated if you
understand the one while being ignorant of the other.”Therefore both the approaches are
necessary for a perfect study of economics. For the study of the problem of individual
units micro-economics is useful and for the study of the economi problems of the
economy as a whole, macro-economics is useful.