Introduction To Economics (Basics)

Basics Of Economics

''Economics is an inquiry into the nature and causes of the wealth of nations.''

                                                                                    - Adam Smith's

Economics is founded by Sir Adam Smith's in the year 1776. The first book of economics was published by the Sir Adam Smith's named as "The Wealth Of The Nations" in 9th March, 1776. In modern times, scope of economics significantly increased where peoples of the world uses economics instrument to analyse the data of the country whether it is in agricultural sector, service sector or any other sector.

Let's discuss the concept of economics broadly:-

 Economics

• Wealth
• Welfare
• Scarcity
• Growth

1. Wealth - The founder of economics i.e. Sir Adam Smith's defines the economics as a wealth in 1776.
2. Welfare - The concept of welfare were given by a great economist Alferd Marshall.
3. Scarcity -  The concept of economics were given by the famous economist Lionel Robbins.
4. Growth - The concept of growth given by the american economist Paul Samuelson.

What are the definitions of economics given by the different authors?

According to British Economist (Alfred Marshall), economics is - 'the study of mankind in the ordinary business of life.'

British Economist- Lionel Robbins defines the economics as - 'a science which studies human behaviour as a relationship between ends and scare means which have alternative uses.'

Indian economist J.K. Mehta defines the economics as - "a science which studies human behaviour as a means to the end of want lessness."

Meaning  Of Macroeconomics 

The term Macro in English has its origin in the Greek term Makros which means Largem In the context of macroeconomics, 'large' means economy as a whole. Thus, macroeconomics is defined as that branch of economics which studies economic issues or economic problems at the level of an economy as a whole. It studies such economic questions that concerns directly with the welfare of all residential peoples of a country. These questions are like of enjoyment  for the residents, growth of level of output in the economy of a country, the problem of price rise (called inflation) or the problem of depression (lack of demand for goods and services across different sectors of the economy) and so on. Macroeconomics also studies how government can improve the state of economy of a country.

HOW MACROECONOMICS DIFFERS FROM MICROECONOMICS?

                   (1) Basis of the study:                                                                                               Microeconomics studies problems of scarcity and choice at the level of an individual, a household, a firm or an industry.

Macroeconomics studies problems of scarcity and choice at the level of an economy as a whole.

Illustration 

Microeconomics  studies how a consumer exercises his choice of goods and services so that he maximizes his satisfaction with a given income.

Macroeconomics studies how the national resources are used (for the production of defence goods or consumer goods) so that the welfare of all residents maximized.

(2) Economic Variables

Microeconomics uses microeconomics variables such as consumer's demand or producer's supply.

Macroeconomics, on the other hand,uses macroeconomic  variables such as aggregate demand (referring to demand for all the hoods and services in the economy) and aggregate supply (referring to supply of all the goods and services in the economy).

(3) Economic Agents

Economic agents refer to the individuals and institutions who take economic decisions. Individual economic agents include consumers and producers. They focus on the maximisation of personal gains. Institutional economic units include state or statutory bodies [like RBI (Reserve Bank of India), SEBI (Securities and Exchange Board of India) and TRAI (Telecom Regulatory Authority of India)]. They focus on the maximisation of social welfare. At the micro level, economic decisions are taken largely by the individual economic agents, while at the macro level institutional agents play a significant role.

(4) Degree of Aggregation

In microeconomics, there is a limited degree of aggregation of economic variables, compared to macroeconomics.

Illustration 

Microeconomics studies equilibrium of an industry; it is an aggregation of all the firms producing a particular commodity.

Macroeconomics studies equilibrium of the economy as a whole; it is an aggregation of all economic units in the economy. 

However, important it is to note that with a view to examine structural change in the economy, macroeconomics also studies the level of economic activity in agricultural sector, industrial sector and services sector, separately.

(5) Different Set of Assumptions

Microeconomics  and macroeconomics are based on a different set of assumptions. Certain variables are assumed to be constant in microeconomics, whereas these variables are assumed to be changing in macroeconomics;

similarly, certain variables that are assumed to be constant in the variables of macroeconomics are assumed to be changing in the variables of the microeconomics.

Illustration

In microeconomics, total output and employment are taken as constant while these are important variables in macroeconomics.

In macroeconomics, distribution of output/income is taken as constant, while is is an important variable in microeconomics.

(6) Central Issue

Allocation of resources is the central issue in microeconomics. Determination of overall level of output (and employment) is the central issue in macroeconomics.

(7) Method of study

Method of study in macroeconomics is often described as 'general equilibrium analysis'. On the other hand, method of study in microeconomics is often described as 'partial equilibrium analysis '.

(8) Micro-Macro Paradox

What is logical at the micro level may not be logical at the macro level.

Illustration

- If ab individual saves more, he adds to his future prosperity.

- If all the people  in an economy save more (and spend less), demand for goods and services may decline. Consequently, investment may fall; then the production and employment level may be fall. The economy will be driven towards future poverty rather than prosperity.

Macroeconomics Variables

Macroeconomics variables are those economic variables which are studied at the level of economy as a whole. These variables are important components of the subject matter of macroeconomics. The important one's are:

• Level of employment in the economy
• National income
• Aggregate demand
• Aggregate supply
• Consumption expenditure in the economy, and 
• Investment expenditure in the economy 

As an basic information of economics you have to remember the following dates:- 

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