Micro & Macro Analysis

1. Unit 1
Introduction
Dr. Babasaheb Jadhav
Associate Professor

2. Outline of the Unit:
• Definition
• Nature and Scope
• Types of Economic Analysis: Micro Vs Macro, Positive Vs
Normative, Short Run Vs Long Run
• Concept of Scarcity
• Marginal & Incremental Costs

3. Meaning of Economics:
The English term 'Economics' is derived from the
Greek word 'Oikonomia'. Its meaning is 'household management'.
Aristotle, the Greek Philosopher termed Economics as a science of
‘household management’
Wealth Definition (1776): Adam Smith defined ‘Economics as a Science
of Wealth’. Some other economists like J. B. Say, F. A Walker, J. S. Mills
and other also declared economics as a science of wealth.
Economics is a social science concerned with the production, distribution,
and consumption of goods and services.
Welfare Definition (1890): Alfred Marshall stated that “Economics is
the study of mankind in the ordinary business of life, its examines that part
of individual and social action which is most closely connected with the
attainment and with the use of material requisites of wellbeing”.
Scarcity Definition (1932): According to Lionel Robbins “Economics is
the science which studies human behaviour as a relationship between ends
and scare means which have alternative uses”.

4. Types of Economics:
1. Micro Economics
2. Macro Economics
Nature & Scope of Economics:
1. Subject matter of economics- The study of grounds of material interests
or as the science of wealth
2. Economics is a science- Economics is a science since its laws have
widespread soundness
3. Economics is an art- The practical application of scientific techniques is
the Art of Economics
4. Economics is a positive science- It seeks to explain what has actually
happened but not what is ought to happen
5. Economics is a normative science- With contrast to the Positive Science,
Normative Science deals with the "what is ought to happen" cases

5. Meaning of Managerial Economics:
Managerial economics deals with the application of the economic concepts,
theories, tools, and methodologies to solve practical problems in a business.
In other words, managerial economics is the combination of economics
theory and managerial theory.
It is a branch of economics that deals with the application of microeconomic
analysis to decision-making techniques of businesses and management units.
According to E. F. Brigham and J. L. Pappar, Managerial Economics is
“the application of economic theory and methodology to business
administration practice.”
Milton H. Spencer and Lonis Siegelman define Managerial Economics as
“the integration of economic theory with business practice for the purpose of
facilitating decision making and forward planning by management.”
To conclude Managerial Economics refers to the application of economic
theory and methods of decision sciences to arrive at the optimal solution to
the various decision making problems faced by the managers of business
firms.

6. Nature & Scope of Managerial Economics:
Business Decision Making Problems
Economic Theory: Decision Sciences:
Microeconomics Optimisation
Techniques,
Macroeconomics Differential Calculus,
Statistical Estimation,
Linear Programming,
Game Theory etc.
Managerial Economics:
Use of Economic Theory & Techniques of Decision Sciences for
Business Decision Problems
Optimal Solution to Business Decision Problems

7. Types of Business Decisions:
1. Price and output decisions
2. Demand estimation
3. Choice of a technique of production
4. Advertising decision
5. Long-run production decisions
6. Investment decisions

8. Managerial Decision Making Process:
Establishing the Objectives
Defining the Problem
Identifying Possible Alternative Courses of Action
Evaluating Alternative Courses of Action and Choosing the
Best
Implementing and Monitoring the Decisions

9. Functions/Roles & Responsibilities of Managerial
Economist:
1. Demand estimation and forecasting
2. Preparation of business/sales forecasts
3. Analysis of the market survey
4. Analysing the issues and problems of the concerned
industry
5. Assisting the business planning process of the firm
6. Discovery of new and possible fields of businesses
7. Advising on pricing, investment and capital budgeting
policies
8. Evaluation of capital budgets
9. Building micro and macro economic models
10. Directing economic research activity

10. Types of Economic Analysis:
Micro Vs Macro Economics:
BASIS FOR
COMPARISON
MICROECONOMICS MACROECONOMICS
Meaning
The branch of economics
that studies the behavior of
an individual consumer, firm,
family is known as
Microeconomics.
The branch of economics that
studies the behavior of the
whole economy, (both national
and international) is known as
Macroeconomics.
Deals with
Individual economic
variables.
Aggregate economic variables.
Business
Application
Applied to operational or
internal issues.
Environment and external
issues.
Tools
Individual Demand and
Supply.
Aggregate Demand & Supply.
Assumption
It assumes that all macro-
economic variables are
constant.
It assumes that all micro-
economic variables are
Theory of Product Pricing, Theory of NI, Aggregate

11. BASIS FOR
COMPARISON
MICROECONOMICS MACROECONOMICS
Scope
Covers various issues like
demand, supply, product
pricing, factor pricing,
production, consumption,
economic welfare, etc.
Covers various issues like
national income, general price
level, distribution, employment,
money etc.
Importance
Helpful in determining the
prices of a product along
with the prices of factors of
production (land, labor,
capital, entrepreneur etc.)
within the economy.
Maintains stability in the general
price level and resolves the
major problems of the economy
like inflation, deflation,
unemployment, disequilibrium
and poverty as a whole.
Limitations
It is based on unrealistic
assumptions i.e. In
microeconomics it is
assumed that there is a full
employment in the society
which is not at all possible.
It has been analyzed that 'Fallacy
of Composition' involves, which
sometimes doesn't proves true
because it is possible that what
is true for aggregate may not be
true for individuals too.

12. Positive Vs Normative:
Positive Economics Normative Economics
Classical & Modern Economists
describes economics as a positive
science
Neo-classical economists describes
economics as a normative science
Positive economics studies what is Normative economics studies what
ought to be
Statements can be empirically
verified
Statements may or many not be
It is universal and values does not
differ person to person
It is related to personal belief and value
judgement may differ from person to
person
It depends upon scientific logic or
facts
It depend upon ethical logic or values
It is objective and quantitative in
nature
It is subjective and descriptive in nature
It studies cause and effect
relationship
It studies outcome which is right or
wrong
It deals with how economic
are solved
It deals with how economic problems
should be solved
Positive analysis is independent of Normative analysis is dependent on

13. Short Run Vs Long Run:
Short Run Long Run
Short run means all the factors of
production are fixed
Long run means all the factors of
production are not fixed
A time period when at least one
such as plant size cannot be changed
The time production in which all the
factors or production can be
Resources used by firm can be
changed
All resources are fixed
Short run decisions are easily Long run decisions are not easily
reversed
Short run costs have fixed factors of
production
Long run costs have no fixed factors
production
The number of firms in an industry is
fixed
The number of firms in an industry
not fixed
Fixed costs are already paid and are
unrecoverable
Fixed costs have yet to be decided on
and paid, and thus are not truly
"fixed."
Quantity of labor is variable but the
quantity of capital and production
Quantity of labor is variable but the
quantity of capital and production

14. Needs Vs Wants:
Basis for
Comparison
Needs Wants
Meaning
Needs refers to an
individual's basic
requirement that must be
fulfilled, in order to
survive.
Wants are described as the
goods and services, which
an individual like to have.
Nature Limited Unlimited
What is it?
Something you must
have.
Something you wish to
have.
Represents Necessity Desire
Survival Essential Inessential
Change
May remain constant
time.
May change over time.
Non-
fulfillment
May result in onset of
disease or even death.
May result in
disappointment.

15. Concept of Scarcity:
Scarcity refers to the basic economic problem, the gap between
that is, scarce resources and theoretically limitless wants.
This situation requires people to make decisions about how to allocate
resources efficiently, in order to satisfy basic needs and as many
additional wants as possible.
Any resource that has a non-zero cost to consume is scarce to some
degree, but what matters in practice is relative scarcity.
Scarcity is also referred to as "paucity."
Scarcity refers to a gap between limited resources and theoretically
limitless wants. The notion of scarcity is that there is never enough (of
something) to satisfy all conceivable human wants, even at advanced
states of human technology. Scarcity involves making a sacrifice-giving
something up, or making a trade-off-in order to obtain more of the
scarce resource that is wanted.
The problem of scarcity is regarded as the fundamental economic
problem arising from the fact that, while resources are finite, society's
demand for resources is infinite. Scarcity is a relative rather than an
absolute concept - water is more scarce in the desert and less scarce

16. SCARCITY: THE BASIC ECONOMIC PROBLEM
Scarcity: is the economic problem of having seemingly
unlimited human needs and wants, in a world of limited resources.
Why does it exist?
It exists because wants are unlimited and resources are limited
MEANS : ECONOMIC RESOURCES
Factor 1: Land
Land means all natural resources on or under the ground, which
includes water, forests, wildlife, mineral deposits etc.
Factor 2: Labour
Labor is all the human time, effort, talent used to make products.
Factor 3: Capital
Capital is a producer’s physical resources. Workers invest in human
capital — knowledge and skills
Factor 4: Entrepreneurship
Entrepreneurship — vision, skill, ingenuity, willingness to take risks etc.

17. ECONOMIC BEHAVIOUR OF PEOPLE:
Economic behavior is nothing but people’s choice making behavior.
Economic behavior is essentially economizing behavior.
Why do people economize?
The need for economizing arises because of the following basic facts
economic life of the human beings:
• Human wants, desires and aspirations are endless
• Resources are limited and scarce
• People are of optimizing nature
FEATURES OF SCARCITY DEFINITION:
• Human wants are unlimited
• Limited means to satisfy human wants
• Alternative uses of scarce resources
• Efficient use of scarce resources : Wants and needs to be ranked in
order of priorities.
• Need for choice and optimization : Choose between most urgent
less urgent.

18. The Three Basic Economic Questions that Society Must Answer:
• What? How? Who?
BASIC ECONOMIC PROBLEMS:
• What to produce (Theory of value): This problem is mainly due to
choice between the commodities.
• How to produce (Theory of Production): This problem is the problem
of choice of techniques.
• Whom to produce (Theory of distribution): How the total output/
national output should be distributed is the problem of economy.
• Are the resources used economically (Theory of welfare): In a world of
scarcity, resources needs to be efficiently utilized. Resources may be
fully utilized but may not be efficiently.
• Are the resources fully employed? (Theory of employment): In this
problem it is studied that are the available resources fully utilized.
• Is the economy growing (Theory of economic growth): In this
problem it is studied that whether the economy is growing or not.
With its resources it needs to keep on expanding & developing.

19. Marginal and Incremental Costs:
Marginal cost is the additional cost incurred in the production of one
more unit of a goods or service.
Marginal cost is the additional cost incurred for the production of an
additional unit of output.
Example:
Output Total cost Marginal cost
10 400 00
11 700 300
12 800 100
13 1000 200
14 1500 500

20. The Incremental Cost refers to the additional cost that a company
incurs in undertaking certain actions such as expanding the level of
production or adding a new variety of product to the product line etc.
Example:
If a company responds to greater demand for its products by
increasing production from 9,000 units to 10,000 units, it will incur
additional costs to make the extra 1,000 units. If the total production
cost for 9,000 units was Rs. 45,000, and the total cost after adding the
additional 1,000 units increased to Rs. 50,000, the cost for the
additional 1,000 units is Rs. 5,000. The incremental cost, or cost of
adding one unit, would be Rs. 5.

21. THANK YOU