Introduction to Economics - Unit 1: Microeconomics and Macroeconomics (VOCABULARY flashcards)

Microeconomics deals with analysis of behaviour and economic actions of small and individual units of the economy (e.g., a particular consumer, a firm or a small group of units).
Adam Smith is considered to be the founder of microeconomics.
Origin of the term:
- Micro: derived from Greek word mikros, meaning "small".
- Macro: derived from Greek word makros, meaning "large".
Definition:
- Microeconomics: "the part of economic theory which studies the behaviour of individual units of an economy.”
Key focus and examples:
- Individual income, individual output, price of a commodity, etc.
Main tools:
- Demand and Supply
Alternate name:
- Also known as 'Price Theory' because it is primarily concerned with the determination of prices of commodities and factors of production.
Significance:
- Provides the foundation for understanding the functioning of an economy by analysing the behaviour of individual units.

Macroeconomics deals with the overall performance of the economy.
Origin of the term:
- Macro: derived from Greek word makros, meaning "large".
Definition:
- Macroeconomics: "the part of economic theory which studies the behaviour of aggregates of the economy as a whole.”
Key focus and examples:
- Problems like inflation, unemployment, poverty, etc.
- National income, aggregate output, aggregate consumption, etc.
Main tools:
- Aggregate Demand and Aggregate Supply
Alternate name:
- Also known as 'Income Theory' as it is primarily concerned with the determination of level of income and employment.
Significance:
- Helps analyse economy-wide phenomena and policy implications affecting the entire economy.

Bases
- Micro: Studies the behaviour of individual units of an economy.
- Macro: Studies the behaviour of aggregates of the economy as a whole.
Meaning
- Micro: Focus on small units (individuals, firms).
- Macro: Focus on aggregates (national income, total output).
Tools
- Micro: Demand and Supply.
- Macro: Aggregate Demand and Aggregate Supply.
Basic Objective
- Micro: Aims to determine the price of a commodity or factors of production.
- Macro: Aims to determine income and employment level of the economy.
Degree of Aggregation
- Micro: Limited degree of aggregation (e.g., market demand is derived from aggregating individual demands).
- Macro: Highest degree of aggregation (entire economy).
Basic Assumptions
- Micro: Assumes macro variables (national income, consumption, savings, etc.) are constant.
- Macro: Assumes micro variables (decisions of households and firms, prices of individual products) are constant.

Production, distribution and disposition of goods and services are the basic economic activities.
Scarcity of resources forces decisions on how to allocate resources.
Central Problems faced by every economy:
- What to produce
- How to produce
- For whom to produce
These problems are called central problems because they are the most basic problems around which all other problems revolve.

Allocation of resources refers to the problem of assigning scarce resources in such a manner so that maximum wants of the society are fulfilled.
This concept sits under Microeconomics as it deals with how resources are allocated among alternative uses.

This problem involves selection of goods and services to be produced and the quantity to be produced of each selected commodity.
Example reasoning: more sugar can be produced only by reducing production of other goods; more war goods implies less civil goods, and vice versa.
Basis for decision:
- Importance of various goods.
Two aspects of the problem:
- (i) What possible commodities to produce: Decide which consumer goods (e.g., rice, wheat, clothes) and which capital goods (e.g., machinery, equipment) to produce; also decide between civil goods (e.g., bread, butter) and war goods (e.g., guns, tanks).
- (ii) How much to produce: Decide the quantity of each selected commodity (consumer vs capital goods; civil vs war goods).
Often summarized as: "What to Produce and in what Quantity."

Refers to the selection of the technique to be used for production of goods and services.
Different techniques use different combinations of inputs; broadly classified as:
- Labour Intensive Techniques (LIT): more labour, less capital (machines, etc.).
- Capital Intensive Techniques (CIT): more capital, less labour.
Example: Textiles can be produced with lots of labour and little capital or with less labour and more capital.
Determining factors:
- Availability of factors (labour vs capital) and their relative prices guide the choice of technique.
Objective of technique choice:
- To raise the standard of living and provide employment to people.
Practical consideration:
- In India, LIT is often preferred due to abundant labour; in the USA, England, etc., CIT is preferred due to capital abundance and relatively scarce labour.

This problem relates to the distribution of produced goods and services among individuals within the economy.
It answers: which category of people will ultimately consume the goods? Whether to produce more for the poor or for the rich.
Connection to production: distribution of income arises because production is the result of the combined efforts of factors of production, and the output is distributed as factor incomes (rent, wages, interest, and profit) according to contribution.
The problem can be categorized into two main heads:
- (i) Personal Distribution: how national income is distributed among different groups of people.
- (ii) Functional Distribution: the share of different factors of production in the total national product.

What to Produce: What goods and services to produce and in what quantities.
How to Produce: Selection between Labour Intensive and Capital Intensive Techniques.
For whom to Produce: Distribution of produced goods among individuals within the economy (personal distribution) and distribution among factors of production (functional distribution).

Microeconomics provides the tools (Demand and Supply) to analyze individual units like households and firms, which aggregate to determine macro outcomes through aggregated demand and supply.
Macroeconomics uses aggregates such as National Income, Aggregate Output, and Aggregate Consumption to analyze economy-wide performance like inflation and unemployment.
The three central problems are the core lens through which both micro and macro analyses address resource allocation and distribution in the presence of scarcity.

Microeconomics: the study of the behaviour of individual units of an economy; also called Price Theory.
Macroeconomics: the study of the behaviour of aggregates of the economy as a whole; also called Income Theory.
Allocation of resources: assigning scarce resources to maximize society’s wants; a microeconomic concern.
Central Problems of an Economy: What to produce, How to produce, For whom to produce.
Labour Intensive Technique (LIT): production uses more labour relative to capital.
Capital Intensive Technique (CIT): production uses more capital relative to labour.
Personal Distribution: how national income is distributed among different groups of people.
Functional Distribution: how the total national product is distributed among factors of production.