Micro Economics is known as income theory | Aster Classes

Chapter 1 – Introduction to Micro and Macro Economics [Latest edition]

Q.1. Choose the correct option:

The branch of economics that deals with the allocation of resources.

a) Micro economics

b) Macro economics

c) Econometrics

d) None of these

a, b and c

a and b

only a

None of these

2. Concepts studied under Microeconomics.

a) National income

b) General price level

c) Factor pricing

d) Product pricing

b and c

b, c and d

a, b and c

c and d

3. Method adopted in micro economic analysis.

a) Lumping method

b) Aggregative method

c) Slicing method

d) Inclusive method

a, c and d

a, b and d

only c

only a

4. Concepts studied under Macroeconomics.

a) Whole economy

b) Economic development

c) Aggregate supply

d) Product pricing

a, b and c

b, c and d

only d

a, b, c and d

Q.2. Complete the correlation:

1. Micro economics: Slicing method : : Macroeconomics : Lumping Method


2. Micro economics: Tree: : Macroeconomics : Forest

3. Macro-economic theory : Income and employment : : Micro economics : Price theory

4. Makros : Macroeconomics : : Mikros : Micro economics


5. General equilibrium: Macroeconomics :: Partial equilibrium : Micro economics

Q.3 Identify and explain the concept from the given illustration.

1. Gauri collected the information about the income of a particular firm.

Solution: – Micro economics (study of individual units)

Explanation:

Microeconomics is the study of the behavior of small individual economic units, like individual firms, individual price, individual household etc.

2. Ramesh decided to take all decisions related to production, such as what and how to produce?

Solution: – Concept: Free market Economic

Explanation:

A free market economic where the economic decisions regarding the function of goods, such as ‘What to produce? How much to produce? How to produce? etc.’ are taken at individual levels. There is no intervention by the Government or any other agency.

3. Shabana paid wages to workers in her factory and interest in her bank loan.

Sol: -Concept: Theory of factor pricing

explanation:

In macroeconomics land, labour, capital, entrepreneur are the factors that contribute to the production process, micro economics helps in determining the factors rewards for land, labour, capital and entrepreneur in the form of rent, wages, interest, and profit respectively.

Q.4. Answer the following 

1. Explain the features of Micro Economics. 

The following are the features of microeconomics.

i. Individual units – Microeconomics is a study that basically focuses on the behavior of individual units such as individual consumers and producers.

ii. Price theory – Microeconomics is also called the price theory, as it helps in determining the prices of both the commodities and factors of production in their respective markets.

iii. Slicing method – Microeconomic analysis adopts the slicing method. Under this method, the entire economy is divided into smaller units and then each unit is analyzed individually in detail.

iv. Partial equilibrium – Microeconomics uses a partial equilibrium approach. The equilibrium points are identified assuming “other things remain constant” (ceteris paribus). It ignores the interdependence of economic variables.

v. Microscopic approach – Just as a microscope enables us to see a larger view of smaller things, microeconomics shows a magnified view of an individual unit. It analyses small units in detail. It examines how these individual units perform economic activities and reach equilibrium.

vi. Marginalism principle – Marginal means change in the total due to an additional unit. The additional unit is known as the marginal unit. Microeconomics is based on the principle of marginalism as important economic decisions are based on the marginal unit.  

vii. Analysis of market – Microeconomic studies deals in the study of different market structure namely, perfect competition, monopoly, monopolistic competition, oligopoly. It analyses how prices and output are determined in the market.

viii. Based on assumptions – Microeconomic analysis is based on certain assumptions such as laissez-faire, full employment, perfect competition, ceteris paribus, etc. Such assumptions although make the analysis simple, but may not exists in reality.

2. Explain the importance of Macroeconomics.

The importance of Macroeconomics is explained follows:

1. Functioning of an Economy: Macro economic analysis gives us an idea of the functioning of an economic system. It helps us to understand the behaviour pattern of aggregative variables in a large and complex economic system.

2. Economic Fluctuations: Macroeconomics helps to analyse the causes of fluctuations in income, output, and employment and makes an attempt to control them or reduce their severity.

3. National Income: Study of macroeconomics has brought forward the immense importance of the study of national income and social accounts. Without a study of national income, it is not possible to formulate correct economic policies.

4. Economic Development: Advanced studies in macroeconomics help to understand the problems of developing countries such as poverty, inequalities of income and wealth, differences in the standards of living of the people etc. It suggests important steps to achieve economic development.

5. Performance of an Economy: Macroeconomics helps us to analyze the performance of an economy. National Income (NI) estimates are used to measure the performance of an economy over time by comparing the production of goods and services in one period with that of the other period.

6. Study of Macro economic Variables: To understand the working of the economy, a study of macro-economic variables is important. Main economic problems are related to the economic variables such as behaviour of total income, output, employment, and general price level in the economy.

7. Level of Employment: Macroeconomics helps to analyze the general level of employment and output in an economy

3. Explain the scope of Macroeconomics.

The scope of Macroeconomics is explained follows:

1. Theory of Income and Employment – Macro economic analysis explains which factors determine the level of national income and employment and what causes fluctuations in the level of income, output, and employment. To understand how the level of employment is determined, we have to study the consumption function and investment function. Theory of Business Cycles is also a part and parcel of the Theory of Income and Employment.

2. Theory of General Price Level and Inflation – Macro economic analysis shows how the general price level is determined and further explains what causes fluctuations in it. The study of general price level is significant on account of the problems created by inflation and deflation.

3. Theory of Growth and Development – Macroeconomics consists of the theory of economic growth and development. It explains the causes of underdevelopment and poverty. It also suggests strategies for accelerating growth and development.

4. Macro Theory of Distribution – Macro theory of distribution deals with the relative shares of rent, wages, interest, and profit in the total national income.

Q.5. State with reason whether you agree or disagree with the following statement:

1. The scope of micro economics is unlimited.

Agree

Disagree

I disagree with the above statement.

Explanation:

The scope of micro economics is limited.

The scope of micro economics is limited to only individual units. It doesn’t deal with nationwide economic problems such as inflation, deflation, the balance of payments, poverty, unemployment, population, etc.

micro economics is mainly confined to price theory and resource allocation.

It does not study the aggregates relating to the whole economy.

This approach does not study national economic problems such as unemployment, poverty, inequality of income, etc. Theory of growth, the theory of business cycles, monetary and fiscal policies etc. are beyond the limits of micro economics

2. Macroeconomics deals with the study of individual behavior.

Agree

Disagree

I Disagree with the above statement.

Explanation:

Macroeconomics does not deal with the study of individual behaviour it deals with the whole economy.

Macro-economic analysis gives us an idea of the functioning of an economic system. 

It helps us to understand the behaviour pattern of aggregative variables in a large and complex economic system.

3. Macroeconomics is different from microeconomics.

Agree

Disagree

Yes, I agree with the above statement. 

Reasons:

(i) Macroeconomics is the study of entire economy whereas on the other hand, microeconomics is a study of the particular segment of an economy.

(ii) Macroeconomics studies aggregate demand, aggregate supply, national income, general price level, etc. On the other hand, micro economics studies individual demand, individual supply, individual income, price determination of particular product, etc.

(iii) Macroeconomics follows general equilibrium analysis. On the other hand, microeconomics follows partial equilibrium analysis.

(iv) Macroeconomics uses a lumping method. On the other hand, microeconomics uses slicing methods. Therefore, macroeconomics is different from microeconomics.

4. Microeconomics uses slicing methods.

Agree

Disagree

Yes, I agree with the statements. 

Reasons:

Microeconomics: It is that part of economics that deals with the individual units of the economy. 

It takes into account the demand and supply of individual units.

It uses a slicing method because it divides the economy into slices, parts or individual units for the purpose of in-depth study.

5. Micro Economics is known as income theory.

Agree

Disagree

No, I Disagree with the above statement.

Reason: –

Microeconomics: It is that part of economics that deals with the individual units of the economy.

No, microeconomics is not known as the income theory, rather, it is known as the price theory.

because as it focuses on determining the prices of commodities and factors of production in the market.

Q.6. Write short note

1. Importance of microeconomics ?

Importance of micro economics are as follows.

Micro economics is a branch of economics that is concerned with the analysis of the behaviour of an individual economic unit or variable. Microeconomics plays a vital role in the study of modern economic theory. It is important in the following ways as described below:

Price Determination: It explains how prices of individual commodities are determined and how rewards of factors of production are determined and distributed.

Business Decision Making: Micro economic theory helps businessmen to determine their price policy, a maximum level of output, and achievement of maximum productivity from factors combination.

Business and Production planning: Micro economic policy helps in preparing and planning of business policy, expansion of business, and making investment decisions to achieve maximum output and productivity.

To understand the working of the economy: It helps us in understanding the working of a free enterprise economy. It gives us an idea about how major economic decisions are taken in a market economy.

Helpful in the efficient employment of resources: It suggests economizing, that is how efficiently the scarce available resources can be utilized in the production process in an economy.

Helps in International Trade: Microeconomics is used to explain gains from internal trade, external trade, foreign exchange, balance of payment, disequilibrium and in the determination of exchange rate.

Basis of welfare economics: The entire structure of micro economics has been built on the basis of price theory which is an important constituent of micro economics. It suggests the conditions of efficiency and explains how it can be achieved. It helps in improving the standard of living of the population.

Helpful in understanding the consequences of taxation: Imposition of tax leads to reallocation of resources from one place to another. Micro economics explains how imposition of different types of direct and indirect taxes leads to the attainment of social welfare.

Tool for evaluating economic policies: It helps the states and central government to frame economic policies like price policy, taxation policy etc. It also explains the condition of efficiency in production and consumption.

Construction and use of models: Micro economics construct and use simple models in order to understand the actual economic phenomenon. It uses abstract models to explain the economic phenomenon. 

2. Explain the concept of Macroeconomics and its features.

                                    (OR)     What are the features of Macro Economics?

Meaning: –

The term Macro is derived from Greek word “Makros” which means large. It is the branch of economics, which studies the behaviour of all economics units combined together. Macroeconomics is a study of aggregates. It is the study of the economic system as a whole. Therefore, it is also called Aggregate Economics.

Definition: –

“Macroeconomics deals not with individual quantities as such, but with aggregates of these quantities; not with individual incomes but with the national incomes; not with individual prices but with the price level; not with individual outputs but with the national output’.

Features of Macro-Economics are as follows: –

1. Study of aggregates: – Macroeconomics deals with the study of nation’s economy as a whole. It is a study of very large, economy, wide aggregates such as national output or income, total employment, aggregate demand, aggregate supply, total investment, total consumption, general price level etc.

2. Lumping method: -Macro analysis deals with the behaviour of aggregates i.e. total values of economic variables related to whole economy. It uses a method of lumping to deal with macro variables, such as aggregate demand, aggregate supply, national output etc.

3. A General equilibrium analysis:

Macro-Economic analysis is based on General Equilibrium Analysis. This analysis deals with entire economy in the context of equilibrium. It studies the behaviour of number of economic variables at a time and takes into consideration their functional relationship and interdependence in doing so. This approach assumes “Everything depends on everything else.

Since this approach deals with whole economy, it has to explain how aggregate supply and aggregate demand are brought into equality, and how equilibrium between these forces determine, not only price level, but also level of income and employment. This whole analysis involves the study of number of variables and their interactions.

4. Income analysis: – Macro-Economics is also known as the theory of income and employment or simply income analysis. Because, basic subject matter of Macro-Economic analysis is to explain what determines the level of national income and employment and what causes fluctuations in them. Further, it explains the growth of national income over a long period of time.

5. Policy-oriented: – Macro-Economics, according to Keynes is a policy-oriented science. Macro-Economic analysis helps in formulating suitable economic policies to promote economic growth, to generate employment, to control inflation, to pull the economy out of depression etc.

6. Dynamic science: – Macro-Economic studies the changes in aggregate economic variables and analyses dynamic nature of the economy. It enables us to study progress of an economy over a period of time

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