Introduction to Micro and Macro Economics Study Notes

Economic Branch Classifications

Microeconomics: Deals with the allocation of resources and the study of individual units such as firms, households, and factor/product pricing. It is derived from the Greek word Mikros.
Macroeconomics: Focuses on the entire economy, including national income, general price levels, and aggregate supply. It is derived from the Greek word Makros.

Key Comparative Relationships

Microeconomics corresponds to the Slicing method, a Partial equilibrium analysis, and is known as Price Theory. It is compared to a single Tree (worm’s eye view).
Macroeconomics corresponds to the Lumping method, a General equilibrium analysis, and is known as Income Theory. It is compared to a Forest (bird’s eye view).

Individual Case Applications

Slicing Method: Used when collecting information about a specific unit, such as the income of a particular firm from the wider economy.
Free Market Economy: An economic system where individual producers make decisions regarding what, how, and how much to produce without government intervention.
Factor Pricing: The determination of rewards for the factors of production: land (rent), labour (wages), capital (interest), and entrepreneur (profit).

Features of Microeconomics

Assumptions: Based on ceteris paribus (other things remaining constant), including perfect competition and laissez-faire policy.
Slicing Method: Slices the economy into small individual units for detailed study.
Marginalism Principle: Analyzes economic decisions based on the change brought to the total by an additional unit.
Market Structures: Examines forms like monopoly, monopolistic competition, and oligopoly.

Core Theories and Importance

Theory of Income and Employment: Factors determining National Income and causes of business cycle fluctuations.
Theory of General Price Level: Analysis of inflation and deflation.
Macro Theory of Distribution: Focuses on the relative share of rent, wages, interest, and profit in total national income.

Functional Performance

Economic Development: Suggests steps to address poverty and standard of living differences in developing countries.
Policy Orientation: Assists in formulating economic policies to promote growth and generate employment.
Interdependence: Recognizes the functional relationship between variables like income, output, and investment.

Equilibrium Types

Partial Equilibrium: Analyzes the equilibrium position of a single individual unit or market in isolation, ignoring other variables.
General Equilibrium: Deals with the economic system as a whole, studying the interrelationships between all macro variables simultaneously.

Study Methods

Slicing Method: A microscopic study of an individual slice (e.g., household or firm).
Lumping Method: A macroscopic study of the aggregate (e.g., National Income or Total Consumption).

Definitions of Macroeconomics

J. L. Hansen: Branch of economics considering relationships between large aggregates like total savings and volume of employment.
Prof. Carl Shapiro: Deals with the functioning of the economy as a whole.