Q1: What is microeconomics? Bring out its significance and limitations.
– Economics is the study of allocation of scarce resources among competing ends which have alternative uses.
– Economics is broadly divided into two parts:
– Macro-economics is that branch of economic analysis that studies the behaviour of aggregates i.e. of all the units combined together.
– Macroeconomics is the study of aggregates covering the entire economy. Thus, macro-economics is related to study of aggregates like total employment, total output, total consumption, total savings, total investment, national income, aggregate demand, aggregate supply, general price level, etc.
– Since macro-economics deals with aggregates, it is also known as theory of income and employment or income analysis.
– Macro-economics studies the aggregates of the entire economy. The nature of macro-economics can be understood with the help of the following aspects:
i) DETERMINATION OF NATIONAL INCOME AND EMPLOYMENT:
– Macro-economics deals with aggregate demand and aggregate supply that determines the equilibrium level of income and employment in the economy.
– The level of aggregate demand determines the level of income and employment.
– Macroeconomics also deals with the problem of unemployment due to lack of aggregate demand. Moreover, it studies the economic fluctuations and business cycles.
ii) DETERMINATION OF GENERAL PRICE LEVEL:
– Macroeconomics studies the general level of price in an economy.
– It also studies the problem of inflation and deflation.
iii) ECONOMIC GROWTH AND DEVELOPMENT:
– Macroeconomics deals with economic growth and development.
– It studies various factors that contribute to economic growth and development.
vi) DISTRIBUTION OF FACTORS OF PRODUCTION:
– Macroeconomics also deals with various factors of production and their relative share in the total production or total national income
*SCOPE AND SIGNIFICANCE:
– Macroeconomics occupies a significant place in economic analysis and has a lot of theoretical and practical importance.
– The importance of macro-economics can be understood from the following points:
i) POLICY FORMULATION:
– Macroeconomics plays a very important role in formulating economic policies. Since Government intervention in economic affairs is indispensable in the present economic scenario, the knowledge of aggregates is of great importance in the framing as well as the implementation of economic policies of the nation.
ii) BASIS FOR MICROSTUDY:
– Macroeconomics provides the basis for microeconomic analysis as the study of aggregates helps to understand and verify the behaviours of individual units.
iii) MULTI-DIMENSIONAL STUDY:
– Macroeconomics has a very wide scope and covers multi-dimensional aspects like population, employment, income, production, distribution, consumption, inflation, etc.
– This is very helpful in controlling fluctuations in these factors.
vi) NATIONAL INCOME:
– Macroeconomics studies national income accounting which helps to understand the distribution of income among different groups of people. It is also instrumental in forecasting the level of economic activity.
v) SPECIAL GROWTH MODELS:
– Macroeconomics has been useful in developing special growth models. These growth models are applied for economic development because the economics of growth is, in essence, the study of macroeconomics.
vi) MONETARY PROBLEMS:
– Macroeconomics has special significance in studying monetary problems that adversely affect the economy.
– In fact, macroeconomics focuses on the problems of inflation and deflation and their solution by adopting monetary, fiscal and direct control measures.
– Though macro-economics is essential in economic analysis and has great practical and theoretical importance, it suffers from certain drawbacks or limitation. These are:
i) UNREALISTIC ASSUMPTIONS:
– Macroeconomics assumes that the aggregates are homogeneous. Such an assumption is, however, unrealistic.
ii) GENERAL ECONOMIC WELFARE:
– Macroeconomics deal with general welfare and disregards the welfare at individual levels though individual welfare forms an important part of economic study.
– In spite of its limitations, macroeconomics is of great practical importance and is widely used.
– It provides practical solution to economic problems.
– It is complementary to microeconomics and the study of both is vital for proper analysis of economic problems.