Module 1 Introduction
Unit Structure : 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Objectives Distinction between Microeconomics and Macroeconomics Circular flow of Economic activities Gross National Product (GNP) Net National Product (NNP) Personal Income Disposable Income Summary Questions
1. To study the distinction between Microeconomics and Macroeconomics 2. To study the Circular Flow of Economic Activities 3. To understand the concept of Gross National Product (GNP) 4. To understand the concept of Net National Product (NNP) 5. To understand the concept of Personal Income 6. To understand the concept of Disposable income
1.1 DISTINCTION BETWEEN AND MACROECONOMICS
1.1.1 Meaning :Microeconomics studies economic behaviour of individual economic entities and individual economic variables. The economic entities may be individuals or small group of individuals. It is the study of individual economic units such as individual firms and households, individual prices, wages, income, individual industries and individual commodities. Macroeconomics is concerned with the nature, relationships and behaviour of such aggregate quantities and averages as national income, total consumption, savings and investment, total employment, general price level, aggregate expenditure and aggregate supply of goods and services. As macroeconomics deals with aggregate quantities of the economy as a whole, it is also called as aggregative economics. 1.1.2 Subject matter :Microeconomics seeks to explain how an individual consumer
2 distributes his disposable income among various goods and services. How he attains the level of maximum satisfaction and how he reaches the point of equilibrium. Microeconomics is also concerned with how individual firms decide `what to produce‘, `how to produce‘, and `at what cost to produce‘ to minimise the cost of production. To be specific, theory of consumer‘s behaviour, theory of firms or theory of production, theory of product pricing, theory of factor pricing ( or distribution theory )and the theory of economic welfare constitute the body of microeconomics. Theories of National Income, consumption, saving and investment, theory of employment, theories of economic growth, business cycles and stabilization policies, theories of money supply and demand and theory of foreign trade broadly constitute the subject matter of macroeconomics. Macroeconomic theories seek to answer questions such as how is the level of National Income of a country determined? What determines the levels of overall economic activities in a country? What determines the level of total employment? How is the general level of price determined? etc. 1.1.3 Uses :Microeconomic theory explain the behaviour of various individual elements and bring out the nature of interrelationship and interdependence between them. Microeconomic theories contribute a great deal in formulating the economic policies and can also be applied to examine the appropriateness of economic policies. One of the most important uses of microeconomic theories is to provide basis for formulating propositions that maximise social welfare. It also suggests ways and means to correct mal-allocation of resources and to eliminate efficiency. The main justification for macroeconomics lies in the need for generalising the behaviour of and relationships between economic aggregates. To study the system as a whole and to explain the behaviour of aggregate quantities and the relationship between them is extremely difficult. Macroeconomic approach has made it possible. It ignores the details pertaining to the individual economic agents and quantities and compresses the unmanageable economic facts to a manageable size and makes them capable of interpretation. Macroeconomic theories are used in formulating public policies. They provide clarity to the macroeconomic concepts and quantities and bring out the relationship between macro variables of the economy...