valuable commodities & distribute them among different people.
According to Adam smith, “Economic was concerned with” An entity into the nature & cause of wealth of nations.”
According to Lord J.M. Keynes, “Economics studies hoe the levels of income & employments in a community are determined.
More recently the theory of economics is the theory of economic growth has come to occupy an important place in the study of economics with reference to under development economics. It studies how the national income grows over years of monsoons needs economic stability besides economic growth. Thus a study of economics growth and of economic stability forms an integral important part of the study of economics. A good and adequate definition of economics must cover them.
The word micro means a millionth part. It is some important part or component of the whole economy that we are analysis. So, microeconomics is the study of choice made by individuals and business and the influence of government on those choices. In, the circular flow of economic activity in the community micro-economics studies the flow of economic resources or factors of production from the resources owners to business firms & the flow of goods and services from the business firm to households. It studies the composition of such flows and how the prices of goods & services in the flow & determined.
The word macro means it is some important part or component of the whole economy that we are analysis. So, macroeconomics is the study of the effects on the national economy and the global economy of the choices that individuals business and government make.
In macro economics, we study, as if were the forest whereas in micro – economics we study the trees. Macro – economics is concerned with aggregates and averages of the entire economy, such as national income, aggregate output, total employments, total consumption, savings and investment, aggregate demand, aggregate supply, general’s levels of prices etc.
Tuesday, October 19, 2010
Micro – economics and Macro – economics
Economics is the study of how societies use scarce resources to produce valuable commodities & distribute them among different people.
There have so many distinguish between micro & macro economics. The distinguish between micro & macroeconomics is given in the bellow:
1. Micro economics deals with individual economics problem. On the other hand macro economics deals with social & national problem.
2. Firm manager’s deals with micro economics. Government deals with macro economics.
3. Micro economics concern with maximum allocation of resources. Won the other hand macro economics concern with full utilization of resources.
4. Micro economics deals with maximum of profit. On the other hand macro economics deals with maximization of out put.
5. Social output employments price levels are given in micro economics. On the other hand all of these are variable in macro economics.
6. Definition.
7. Micro economics is the study of individual price, quantities and market. On the other hand macro economics is the study of the behavior of entire economy.
8. Micro economics effect internal environment & macro economics affects external environment.
9. Micro economics is called the price theory. Macro economics is called the theory of income and employment.
10. Micro economics is theoretical rather that practical. Macro economics is practical rather than theoretical.
11. It explains the composition or allocation of total production why more of some things is produced than of others. It explains the level of total production and why the level rises and falls.
12. Example micro economics as it were the tree where macroeconomics is forest. Example macro economics as it were the forest where microeconomics is tree.
There have so many distinguish between micro & macro economics. The distinguish between micro & macroeconomics is given in the bellow:
1. Micro economics deals with individual economics problem. On the other hand macro economics deals with social & national problem.
2. Firm manager’s deals with micro economics. Government deals with macro economics.
3. Micro economics concern with maximum allocation of resources. Won the other hand macro economics concern with full utilization of resources.
4. Micro economics deals with maximum of profit. On the other hand macro economics deals with maximization of out put.
5. Social output employments price levels are given in micro economics. On the other hand all of these are variable in macro economics.
6. Definition.
7. Micro economics is the study of individual price, quantities and market. On the other hand macro economics is the study of the behavior of entire economy.
8. Micro economics effect internal environment & macro economics affects external environment.
9. Micro economics is called the price theory. Macro economics is called the theory of income and employment.
10. Micro economics is theoretical rather that practical. Macro economics is practical rather than theoretical.
11. It explains the composition or allocation of total production why more of some things is produced than of others. It explains the level of total production and why the level rises and falls.
12. Example micro economics as it were the tree where macroeconomics is forest. Example macro economics as it were the forest where microeconomics is tree.
Three economic problems
By matching sellers & buyers or supply & demand in each market, a market economy simultaneously solves the three problems of what, how and for whom. Here is an outline of market equilibrium of prices & production:
1. What goods and service will be produced is determined by the dollar votes of consumers not every 2 or 4 years at the polls, but in their daily purchase decisions. The money that they pay into payrolls, rents and dividends that house holds receive as income.
2. How things are produced is determined by the competition among different producers. The best way for producers to meet price competition and maximize profits is to keep costs at a minimum by adopting the most efficient methods of production. Sometimes change is incremented and consists of little more than thinking with the machinery adjusting the input mix to gain a cost advantages, which can be very important in a competitive market.
3. For whom things are produced who is consuming and how much – depends, in large part, on the supply and demand in the markets for factors of production. Factor markets determine wage rates, land rates, interest rate and profits. Such prices are called factors prices. by adding up all the revenues from factors, we can calculate the persons market income. The distribution of income among the population is thus determined by the quantity of factor services and the prices of the factors.
1. What goods and service will be produced is determined by the dollar votes of consumers not every 2 or 4 years at the polls, but in their daily purchase decisions. The money that they pay into payrolls, rents and dividends that house holds receive as income.
2. How things are produced is determined by the competition among different producers. The best way for producers to meet price competition and maximize profits is to keep costs at a minimum by adopting the most efficient methods of production. Sometimes change is incremented and consists of little more than thinking with the machinery adjusting the input mix to gain a cost advantages, which can be very important in a competitive market.
3. For whom things are produced who is consuming and how much – depends, in large part, on the supply and demand in the markets for factors of production. Factor markets determine wage rates, land rates, interest rate and profits. Such prices are called factors prices. by adding up all the revenues from factors, we can calculate the persons market income. The distribution of income among the population is thus determined by the quantity of factor services and the prices of the factors.
Demand schedule & demand curve
Demand schedule: Both common sense human research and careful scientific observation show that, the amount of a commodity people buy depends on its price. The higher the price of an article4, if other things held constant the fewer units consumers are willing to buy. The lower its market price the more units of it are bought. For example at $5 per box consumer will buy $8 million boxes per year. At a lower price $4 the quantity bought in $10 million boxes. At yet a lower price (p) equal to $3 the quantity demanded q is still greater at $12 million and so forth.
Demand Curve: The geographical represent action of the demand curve shows the relationship between the quantity demand of a good and their prices when all other influences on consumers planned purchases remain the same.
We graph the demand schedule as a demand curve with the quantity demanded on the horizontal axis and the price on the vertical axis. The points on the demanded curve tabled a through represent the rows of the demand schedule.
It is that quantity and price are inversely related, that is Q goes up when P goes down. The survey slopes downward going from left to right. This important property is also known as the law of downward – sloping demand.
Demand Curve: The geographical represent action of the demand curve shows the relationship between the quantity demand of a good and their prices when all other influences on consumers planned purchases remain the same.
We graph the demand schedule as a demand curve with the quantity demanded on the horizontal axis and the price on the vertical axis. The points on the demanded curve tabled a through represent the rows of the demand schedule.
It is that quantity and price are inversely related, that is Q goes up when P goes down. The survey slopes downward going from left to right. This important property is also known as the law of downward – sloping demand.
Movements along curves and shift of curve
A point on the demanded curve shows the quantity demanded at a given price. So a movement along the demanded curve shows a change in the quantity demanded. The entire demand curve shows demand.
If the price of a good change but every thing else remaining the same there is a movement along the demand curve. Because the demand curves slope downward a fall in the price of good increases the quantity demanded of it.
A shift of the demand curve shows a change in demand. If the price of a good remaining constant but some other influence on buyers plans changes, there is a change in demand for that good. We illustrate a change in demanded as a shift of the demand curve.
The law of demand simply expresses the relation between quantity of a commodity demanded and its price. The law states the demand varies inversely with price, if the price falls. Demand will extend and if the price rises, demand will decline. The law of demand indicates this inverse relationship between price and quantity demand.
The law can also be stated thus,’’ a rise in the price of a commodity or service is followed by a reduction in demand and a fall in price is followed by an increase in demand, if conditions of demand remain constant.
The qualitying phrase ‘the conditions of demand remaining constant ‘’ is very important. Demand is subject to several influences, which will be discussed presently and the operation of any of those influences may counteract the law.
In Marshall’s words “The greater the amount to be sold the smaller must be the price at which it is offered in order that it may find purchases, or in other words the amount demand increases with a fall in price and diminishes with a rise in price. Demand thus is a function of price varies with price & can be expressed as D = F (P).
Here, D is demand and
Price elasticity of demand
Goods vary enormously in their price elasticity or sensitivity to price change. When the price elasticity of a good is high, we say that the good has ‘elastic’ demand, which means that its quantity demanded responds greatly to price change. When the price elasticity of a good is low, it is ‘inelastic’ and its quantity demanded responded little to price change.
For necessities like food, fuel, shoes and prescription drugs demand tends to be inelastic. Such items are the staff of life and cannot easily be forgone when their price rise. By contrast, you can easily substitute other goods when luxuries.
Economic factors determine the size of price elasticity’s for individual goods. Elasticity tends to be higher when the goods are luxuries. When substitutes are available and when consumers have more time to adjust their behavior.
Affecting elasticity of demand
(1) Necessaries and conventional necessaries: Elasticity of demand tends to be low for necessary goods such as food and shelter.
(2) Demand for luxuries: The demand for luxuries is elastic for lower earnings people. If price low they will tends to buy more. But for the rich people these things are conventional necessaries price is not matter for them.
(3) Proportion of that expenditure: If consumption goods absorb only a small proportion of total expenditure, it will be in elastic and vice-versa; e.g. - salt the demand will not be much affective by a change in price.
(4) Substitutes: When the price of tea rises, we may curtail its purchase and take to coffee, and vice – versa. But it is true that, we cannot satisfy until we get our favorite brand.
(5) Goods having several uses are elastic: Coal is such commodity when cheep, it will be uses for several purpose. Such as cooking, heating, industries and its demand increase. When price goes up it will be use only urgent uses.
(6) Joint Demand: Demand for Jointly demanded goods is less elastic.
(7) Level of price: If price decrease the demand will be increase and vice-versa.
(8) Level of income: Demand on the part of the poor is more elastic than on the part of the rich.
(9) Market imperfections: Owning to ignorance about market trends the demand for goods may not increase when its price falls.
(10) Technological factor: Low prices elasticity may be due to technological reasons.
(11) Time period: The elasticity of demand is greater in the long run than in the short run.
(2) Demand for luxuries: The demand for luxuries is elastic for lower earnings people. If price low they will tends to buy more. But for the rich people these things are conventional necessaries price is not matter for them.
(3) Proportion of that expenditure: If consumption goods absorb only a small proportion of total expenditure, it will be in elastic and vice-versa; e.g. - salt the demand will not be much affective by a change in price.
(4) Substitutes: When the price of tea rises, we may curtail its purchase and take to coffee, and vice – versa. But it is true that, we cannot satisfy until we get our favorite brand.
(5) Goods having several uses are elastic: Coal is such commodity when cheep, it will be uses for several purpose. Such as cooking, heating, industries and its demand increase. When price goes up it will be use only urgent uses.
(6) Joint Demand: Demand for Jointly demanded goods is less elastic.
(7) Level of price: If price decrease the demand will be increase and vice-versa.
(8) Level of income: Demand on the part of the poor is more elastic than on the part of the rich.
(9) Market imperfections: Owning to ignorance about market trends the demand for goods may not increase when its price falls.
(10) Technological factor: Low prices elasticity may be due to technological reasons.
(11) Time period: The elasticity of demand is greater in the long run than in the short run.
Indifference curve
In the next figure we can see that, we measure units of clothing on one axis and units of food on the other. Each of our four combinations of goods is represented by its points, A, B, C, D. but these four are by
No means the only combinations among which we are indifference. Another batch, such as 1 unit of good and 4 unit of clothing might be ranked as equal to 4 unit of food and 1 unit of clothing and B or C. the curved contour of figure linking up the four points, is an indifference curve. The points on the curve represent consumption bundles among which the consumer in indifferent all are equally desirable. When a consumer has fixed money income all of which she spends is conformed to market price of two goods, she is constrained to move along a straight line called the budget line or budget constraint. The consumer will move along this budget line until reaching the highest attainable indifference curve. At this point the budget line will touch, but not cross an indifference curve, Hence equilibrium is at the point of tangency, where the slope of the budget line exactly equals the slope of the indifference curve.
The indifference curve is just one of a whole family of such curves. The curves labeled are three other indifference curves. We refer to as being as a higher then . By a person preference, we can draw conclusions about the shape of indifference curve.
Diminishing return
The law of diminishing returns holds that we will get less and less extra output when we add additional doses of an input while holding other input fixed. In other words, the marginal product of each unit of input will decline as the amount of that input increase, holding all other inputs constant.
The law of diminishing returns expresses a very basic relationship. As more of an input such labor is added to a fixed amount of land, machinery & other inputs the labor has less & less of the other factors to work with the land gets more crowded, the machineries overloaded and the marginal product of labor declines.
The law of diminishing returns can be shushed out of the putting ourselves in the boots of a farmer performing an agricultural experiment illustrated by table. Given a fixed amount of land and other inputs assume that we use no labor inputs at all with zero labor input there is no corn output. Now add 1 unit of labor to the same fixed amount of land 2000 bushels of corn is produced. The second unit of labor adds only 1000 bushels of additional output, which is less than what the first unit of labor added.
The law of diminishing returns expresses a very basic relationship. As more of an input such labor is added to a fixed amount of land, machinery & other inputs the labor has less & less of the other factors to work with the land gets more crowded, the machineries overloaded and the marginal product of labor declines.
The law of diminishing returns can be shushed out of the putting ourselves in the boots of a farmer performing an agricultural experiment illustrated by table. Given a fixed amount of land and other inputs assume that we use no labor inputs at all with zero labor input there is no corn output. Now add 1 unit of labor to the same fixed amount of land 2000 bushels of corn is produced. The second unit of labor adds only 1000 bushels of additional output, which is less than what the first unit of labor added.
Fixed cost, variable cost & total cost
Total variable cost: variable cost represents expenses that very with the level of output such as raw materials, wages and fuel and included all cost that is not fixed always by definition. It is cost of the firms variable inputs. Because to changes its output a firm must change the quantity of variable inputs total variable cost changes as output changes.
Total cost: Total cost is the combination of fixed & variable cost. It represents the lowest total expense needed to produce each level of output.
TC = FC +VC
Average cost is the total cost divided by the total number of units produced.
1. Average fixed cost
2. Average variable cost
3. Average total cost.
Average fixed cost: Average fixed cost is total fixed cost per unit of output.
Average variable cost: Average variable cost total cost per unit of output.
Average total cost: Average total cost is total cost per unit of output.
ATC = AFC + AVC
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