Khandelwal Vaish Girls Institute of Technology

Subject/Discipline: Economics
Paper: Eco-51T-101: Principles of Microeconomics
Instructor: Ganesh Kumawat, Asst. Professor

Scope of Economics
Before 1930, there was only one ‘economics.’ Ragnar Frisch coined the words ‘micro’ and ‘macro’
in 1933 to denote the two branches of economic theory, namely, microeconomics and
macroeconomics.
There are two main branches of economics, microeconomics and macroeconomics. Microeconomics
concerns individual decision making and its collective effect on the allocation of a society’s scarce
resources.
Subject Matter of Microeconomics
The word ‘Micro’ is derived from the Greek word ‘mikros’ meaning small. Microeconomics deals
with small segments of the society. Microeconomics is defined as the study of behaviour of individual
decision-making units, such as consumers, resource owners and firms. It is also known as Price
Theory since its major subject-matter deals with the determination of price of commodities and
factors.

Microeconomics

Theory of Theory of Welfare

Consumer Market Economics
Behaviour
Theory of Theory of
Producer Distribution

Microeconomic theory takes the total quantity of resources as given and seeks to explain how they
are allocated to the production of particular goods. It is the allocation of resources that determines
what goods shall be produced and how they shall be produced. The allocation of resources to the
production of various goods in a free-market economy depends upon the prices of the various goods
and the prices of the various factors of production. Therefore, to explain how the allocation of
resources is determined, microeconomics proceeds to analyse how the relative prices of goods and
factors are determined. Thus, the theory of product pricing and the theory of factor pricing (or the
theory of distribution) fall within the domain of microeconomics. Prices of the products depend upon
the forces of demand and supply. The demand for goods depends upon the consumers’ behaviour
pattern, and the supply of goods depends upon the conditions of production and cost and the behaviour
pattern of the firms or entrepreneurs. Thus, the demand and supply sides have to be analysed in order
to explain the determination of prices of goods and factors.
Importance of Microeconomics
 Microeconomics helps in formulating economic policies.
 Microeconomics explains the working of a capitalist economy
  Microeconomics describes how, in a free enterprise economy, individual units attain
equilibrium position.
 It helps the government in formulating price policies, efficient employment of resources by
the entrepreneurs, make conditional predictions and business forecasts.
Subject Matter of Macroeconomics
The word ‘Macro’ is derived from the Greek word ‘makros’ meaning large. Macroeconomics deals
with aggregative economics. Macroeconomics is defined as the study of overall economic
phenomena, such as problem of full employment, GNP, savings, investment, aggregate consumption,
aggregate investment, economic growth, etc. It is also known as Theory of Income and Employment
since its major subject-matter deals with the determination of income and employment. The study of
macroeconomics is used to solve many problems of an economy like, monetary problems, economic
fluctuations, general unemployment, inflation, disequilibrium in the balance of payment position, etc.

Importance of Macroeconomics
Macroeconomics has emerged as the most challenging branch of economics. In the words of
Samuelson, “... no area of economics is today more vital and controversial than macroeconomics.”
 It gives an overall view of the growing complexities of an economic system. It provides
powerful tools to explain the working of the complex economic systems.
 It provides the basic and logical framework for formulating appropriate macroeconomic
policies (e.g., for inflation, poverty, unemployment, etc.) to direct and regulate economy
towards desirable goals.
 It helps in analysing the reasons for economic fluctuations and provide remedies.
Difference between microeconomics and macroeconomics
 Nature of Economics
Under the nature of economics following issues are considered
1. Is economics a science?
2. If economics is a science, is it positive science or normative science?
3. Is economics an art?
4. Is economics both science and art?
Is economics a science?
Science is the systematic and complete study of knowledge which explains the cause-and-effect
relationship. Economics is a science because
 Economics uses scientific methods to study cause and effect relationship between two or more
variables and to construct economic theories and laws.
 Economics has power to explain the economic events correctly and sufficiently.
 Economics has power to prediction of economic phenomenon by using statistical and
mathematical tools.
 Economics study systematically the economic activities like consumption, production,
exchange, distribution etc.
 Economics laws have validity and based on human behaviour and applied on all people.
 Economics study cause and effect relationship.
If economics is a science, is it positive science or normative science?
If economics is a science the question arise that whether economics is a positive science or normative
science. When considering economic issues, we must carefully distinguish questions of fact from
questions of fairness. Positive economics describes the facts of an economy, while normative
economics involves value judgments.
1. Economics as Positive Science: Economics as positive science studies the relationship between
causes and effects It explain that what is it? Why is it? and how is it? Economics does not relate
the goodness or badness, correctness or wrongness of economic functions. It is based on
rationality. Robbins support economics as purely a positive science. According to him economics
should be neutral or silent between ends i.e., there should be no desire to learn about ethics of
economic decisions.
Positive economics answer the factual questions which also known as positive questions.
Examples are:
 India is an overpopulated country.
 A fall in the price of a good leads to a rise in its quantity demanded.
 Prices have been rising in India.
 Minimum Wage Law increases unemployment.
2. Economics as Normative Science: Normative economics explains the policy related facts like
what ought to be? what should be done in given situation? It highlights the goodness and badness
of economic functions. Alfred Marshall and Pigou have considered the normative aspect of
economics. Examples are:
 Government should guarantee a minimum wage for every worker.
 Government should stop Minimum Support Price to the farmers.
 India should not take loans from foreign countries.
 India should spend more money on defence.
 Difference between Positive Economics and Normative Economics

Is economics an art?
Economists do not have same opinion whether economics is an art. Adam Smith, David Ricardo, J.S.
Mill, Alfred Marshall and A.C. Pigou etc. say that economics is an art. While Walras, J. Schumpeter,
Senior etc. do not consider economics as an art.
Generally getting any work done with efficiency is known as art. Art provides us applied knowledge.
Art not only analyses the problem but it solves it also. Prof. Keynes says - Art is that branch of
knowledge which shows the best way for the satisfaction of certain objectives.
Economics is Science as well as Art?
It is clear from above analysis that economics is both science and art. As a science Economics is both
positive science and normative science. Economics studies both theoretical and applied aspects of a
subject. The theoretical aspect relates with the scientific nature of economics while the applied aspect
relates with the art.