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Branches of Economics 

Introduction 

Economics is referred to as 'Queen of Social Sciences'. It is derived from the Greek word 'Oikonomia' which means management of a household. It deals with the economic aspect of human behaviour hence it is necessary for everyone's life from a single individual to an entire country. Economics plays a major role in understanding the financial status of an individual or a country. Economics is divided into two branches which are Micro Economics and Macro Economics.


Micro Economics

Micro is derived from the Greek word 'Mikros' which means small or a millionth part. It studies the economic actions and behaviour of an individual consumer, individual producer or a firm, the price of a particular commodity or a factor, etc. There are several definitions given by several scholars of economics. One of these is by Maurice Dobb who defines it as "Micro Economics is, in fact, a microscopic study of the economy."


Features of Micro Economics

  1. Study of Individual Units - Micro Economics is the study of the behaviour of small individual economic units, as an individual firm, individual price, individual household, etc. 
  2. Price Theory - Micro Economics deals with the determination of the prices of goods and services as well as factors of production. Hence, it is known as price theory. 
  3. Partial Equilibrium - Equilibrium is the balance between two factors. Micro Economic analysis deals with partial equilibrium position of an individual economic unit like an individual consumer, individual firm, individual industry, etc. It isolates an individual unit from other forces and studies its equilibrium independently. 
  4. Based on Certain Assumption – Micro Economics begins with the fundamental assumption, “Other things remaining constant” (Ceteris Paribus) such as perfect competition, laissez-faire policy, pure capitalism, full employment, etc. These assumptions make the analysis simple. 
  5. Slicing Method – Micro Economics uses slicing method. It splits or divides the whole economy into small individual units and then studies each unit separately in detail. For example, the study of individual income out of national income, the study of individual income out of national income, the study of individual demand out of aggregate demand, etc. 
  6. Use of Marginalism Principle – The concept of Marginalism is the key tool of microeconomic analysis. The term ‘marginal’ means change brought in total by an additional unit. The marginal analysis helps to study a variable through the changes. Producers and consumers make economic decisions using this principle. 
  7. Analysis of Market Structure – Micro Economics analyses different market structures such as Perfect Competition, Monopoly, Monopolistic Competition, Oligopoly, etc.
  8. Limited Scope – The scope of Micro Economics is limited to only individual units. It doesn’t deal with the nationwide economic problems such as inflation, deflation, the balance of payments, poverty, unemployment, population, economic growth, etc. 


Importance of Micro Economics

  1. Price Determination – Micro Economics explains how the prices of different products and various factors of production are determined. 
  2. Free Market Economy – Micro Economics helps in understanding the working of a free market economy. A free-market economy is that economy where the economic decisions regarding the production 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. Foreign Trade – Micro Economics helps in explaining various aspects of foreign trade like effects of a tariff on a particular commodity, determinati0on of currency exchange rates of any two countries, gains from international trade to a particular country, etc. 
  4. Economic Model Building – Micro Economics helps in understanding various complex economic situations with the help of economic models. It has made a valuable contribution to economics by developing various terms, concepts, terminologies, tools of economic analysis, etc.
  5. Business Decisions – Micro Economics theories are helpful to businessmen for taking crucial business decisions. These decisions are related to the determination of cost of production, determination of prices of goods, maximization of output and profit, etc. 
  6. Useful to Government – It is useful to the government in framing economic policies such as taxation policy, public expenditure policy, price policy, etc. These policies help the government to attain its goals of efficient allocation of resources and promoting the economic welfare of the society. 
  7. Basis of Welfare Economics – Micro Economics explains how best results can be obtained through optimum utilization of resources and its best allocation. It also studies how to affect social welfare. 


Macro Economics 

Macro is derived from the Greek word 'Makros' which means a large part. It deals with the entire economy like total employment, national income, national output, total investment, total consumption, total savings, general price level interest rates, inflation, trade cycles, business fluctuations, etc. Like Micro Economics, several definitions are been given by scholars for Macro Economics. One of these is Prof. Carl Shapiro who said that "Macro Economics deals with the functioning of the economy as a whole."


Features of Macro Economics 

  1. Study of Aggregates – Marco Economics deals with the study of the economy as a whole. It is concerned with aggregate concepts such as national income, national output, national employment, general price level, business cycles, etc. 
  2. Income Theory – Macro Economics studies the concept of national income, its different elements, methods of measurement and social accounting. Macro Economics deals with aggregate demand and aggregate supply. It explains the causes of fluctuations in the normal income that lead to business cycles i.e. inflation and deflation. 
  3. General Equilibrium Analysis – Macro Economics deals with the behaviour of large aggregates and their functional relationship. General Equilibrium deals with the behaviour of demand, supply and prices in the whole economy. 
  4. Interdependence – Macro analysis takes into account interdependence between aggregate economic variables such as income, output, employment, investments, price level, etc. For example, changes in the level of investment will finally result in changes in the levels of income, levels of output, employment and eventually the level of economic growth. 
  5. Lumping Method – Lumping method is the study of the whole economy rather than its part. According to Prof. Boulding, “Forest is an aggregation of trees but it does not reveal the properties of an individual tree.” This reveals the difference between Micro Economics and Macro Economics. 
  6. Growth Models – Macro Economics studies various factors that contribute to economic growth and development. It is useful in developing growth models. These growth models are used for studying economic development. For example, Mahalanobis, growth model emphasized basic heavy industries. 
  7. General Price Level – Determination and changes in general price are studied in Macro Economics. The general price level is the average of all prices of goods and services and currently being produced in the economy. 
  8. Policy-oriented – According to Keynes, Macro Economics is a policy-oriented science. It suggests suitable economic policies to promote economic growth, generate employment, control of inflation, and depression, etc. 


Importance of Macro Economics 

  1. Functioning of an Economy – Macro Economics 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 – Macro Economics helps to analyse the cause of fluctuations in income, output and employment and attempts to control them to reduce their severity. 
  3. National Income – Study of Macro Economics has bought 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 Macro Economics 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 – Macro Economics helps us to analyse 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, the study of Macro-Economic variables are important. Main economic problems are related to total income, output, employment and general price level in the economy. 
  7. Level of Employment – Macro Economics helps to analyse the general level of employment and output in an economy. 

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