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Introduction to Microeconomics vs Macroeconomics

Microeconomics vs. Macroeconomics 
2 category Of Economics: Microeconomics & Macroeconomics 
wc.iety manages its scares resources 
• Focuses on i Of 
the economy 
• how households and firms ma 
decisions and how they interact 
In specific markets 
• at the economy as 
•Economy wide phenomena 
e.g. Inflation 
Unem ploy ment 
Econom g
Points or 
Study matters 
Deals with 
word micro has derived fro 
a Greek word •Mikros• which means 
small. It is also called Price tirory. 
It studies 
its main objective is to analyse 
princ iples, problems arul 
goal Of or 
It deals with how consunwrs 
producers rnake their decisions 
otirr variables. 
It uses nvthod of partial 
i_e_ m in one 
word nucro has been 
derived from a Greek word 
'Makros• which means hrge. It 
is also called of 
It an as a 
investigates problems 
policies related to 
and expansön with productive 
It deals wäh how different 
ecom»rnic such as 
foreign sector make tik•ir 
It uses the nrthod of general 
equilibrium, i.e. equilibrium in 
all markets of an
nujor microeconomic 
VarOus are: 
I ) Tlrory of Consunrr' s 
md Dernarul 
2).T1rory• of Producer's Behaviour 
and Supply 
3). of Price Determinatk»n 
utxler Different Market Conditions 
4) Tlrory of fxtor prking 
5) of ecom»mic welfare 
determination and allocation of 
The tnajor necroecor»mic 
variables are 
urrmploy•ment, etc. 
Various theories are: 
1) Theory ofNatk»rul Irwonr 
2) Theory Of MotEY 
3) Theory Of Level 
& Inflation 
4) Theory of Enploy•nrnt 
5) Theory of International Trade 
6) theory Of distritNti0n 
7) Theory of ecomrnk' growth 
Its main problem is determinatk»n 
in the
SNO Positive Economics 
It deals with what is what wxs. 
It is based on cause and effect of 
It can be verified with actual data 
In this value of judgments are not 
Normative Economics 
It deals with what ought to be. 
It is based on ethics. 
It cannot be verified with actual data. 
In this value of ludgments are given.
Central Problems of an Economy: 
Basic economic problem is the problem of choice which is created by the scarcity of 
resources. It is also called problem of economising the resources, i.e., the problem offuller 
and efficient utilisation of the limited resources to satisfy maximum number of wants. 
Main causes of central problems are unlimited human wants, limited economic resources 
and alternative uses of resources.

Allocation of resources:- 

(i) What to produce and how much to produce? 

(ii) How to produce? 

(iii) For whom to produce? 

What to produce: – An economy have unlimited wants and limited means having alternative use. Economy can’t produce all type of goods like consumer goods, producer goods etc. So, Economy has to make a choice what type of goods and services are to be produced and in what quantities. 

How to produce: – It is the problem of choice of technique of production. There are two techniques of production. 

• (a) Labour Intensive Technique: – It is the technique of production when labour is used more than capital. 

• (b) Capital Intensive Technique: – In this technique capital is used more than Labour.  

For whom to produce: – It is the problem related to distribution of produced goods among the different group of the society. 

It has two aspects:- 

1. Personal distribution 

2. Functional distribution 

Personal distribution: – When the National Income is distributed according to the ownership of the factors of production. 

Functional distribution: – When the national Income/Production is distributed among different factors of production like Land, Labour, capital and Entrepreneurship for providing their service in term of rent, wages, interest and profit respectively  

Production possibility frontier or production possibility curve 

This shows all possible combinations of two set of goods that an economy can produce with available resources and given technology, assuming that all resources are fully and efficiently utilized. 

Production Possibility Frontier or Curve Features  

  1. Slopes downward from left to right because if production of one commodity is to be increased then production of other commodity has to be sacrificed as there is scarcity of resources. 
  2. Concave to the origin because of increasing marginal opportunity cost or (MRT)  

Marginal Rate of Transformation (MRT) – It is the amount of one commodity that is to be sacrificed to increase the production of other commodity by one unit. It can also called Marginal Opportunity Cost.  

It is defined as the additional cost in terms of number of units of a good sacrificed to produce an additional unit of the other good.  

Good x 
Stra$ ine 
MOC Constant 
Good x 
Convex PPF 
Good X 
The Production possibility culve wfll shift under following two conditions: 
(a) Change in resources, 
(b) Change in technology of production for both the goods

Production Possibility Curve and Central Problems:- 

The production possibility curve solves five problems –  

  1. what and how much to produce,  
  2. how to produce,  
  3. full utilisation of resources,  
  4. economic efficiency and  
  5. economic growth.  

Production possibility curve is unable to solve the economic problem ‘for whom to produce’. 

Ways to solve fundamental problems in captalistic and planned economies:- 

In a market oriented or capitalist economy, the fundamental problems are solved by the market mechanism.  

In a planned economy, all the economic decisions regarding what, how and for whom to produce are solved by the state through planning. Economic planning replaces the price mechanism. The market is regulated by the state. The prices of the various products are fixed by the state which are called administrated prices.  

February 2024