Economics: Meaning, definition, and branches5 min read


Introduction

Economics is the social science that studies firms, households, price, wage, income, industry, and commodity either particularly or in aggregate. Economics deals with basically two forces i.e. demand and supply where consumers deal with demand and producers deal with supply. The place where consumer and supplier interact is called Market.

Definitions of Economics

Adam Smith (1776) defined “economics as the science that enquires into nature and causes of the wealth of nation.”

Alfred Marshall (1890) defined “economics as the study of mankind in the ordinary business of life. It inquires how a man earns income and how he uses it. Thus, it is on one side, the study of wealth and on another side, the most important part, the study of welfare.”

Branches of Economics

1. Microeconomics

1.1. Meaning

Microeconomics is the branch of economics that deals with an individual unit of an economy before the existence of macroeconomics. Economics was predominantly called as microeconomics though macro-views exist before John Maynard Keynes (1936).

Microeconomics is popularly known as price theory or slicing theory. Microeconomics is called price theory because all the variables studied under microeconomics are directly or indirectly studied in relation to price. In other words, microeconomics is primarily concerned with determination of all prices such as price of products, factor prices, price and output determination in different markets such as monopoly, perfect competition, monopsony, oligopoly, and so on. Microeconomics is also called slicing theory because microeconomics splits up the entire economy into smaller parts to carry out the intensive study, such as individual consumer, individual market and so on.

According to K.E. Boulding, “Microeconomics is the study of particular firm, particular household, individual price, individual wage, individual income, individual industry and particular commodity.”

1.2. Agents of Microeconomics

1.2.1. A consumer

A person who possess resources and deals with demand is called consumer. Microeconomics, as deals with individual unit of economy, deals with individual consumer. Microeconomics deals with rational consumer. Rational consumer is the consumer who makes prudent and logical decisions that provide him or her with the highest amount of personal utility. A rational consumer always scrutinizes all the available alternatives and chosen the best alternative that maximizes his or her utility. A rational consumer is guided by an objective to maximize satisfaction by purchasing the commodity in least possible price. A rational consumer always interacts with a producer.

Note: A consumer must be real, normal, and social means that economics deals with real person not with fictitious one, economics always deals with normal person not with lunatic or mentally unsound person, and economics studies one who lives in society.

1.2.2. A producer

A person or a firm who possess goods and services and deals with supply is known as producer. Microeconomics, as deals with single unit of an economy, deals with individual producer. Microeconomics always deals with rational producer. A rational producer is one who always tries to maximize his or her profit, that is, a rational producer is guided by an objective of profit maximization. The global rationality of the producer is to maximize profit. Thus, the producer wants to sell the product at the highest price that he or she can charge.

1.2.3. Market

Market is the place where consumer and producer interacts with each other. It is the place where demand and supply forces interact with each other. Microeconomics deals with that type of market where only one specific goods or services are sold and purchased such as share market. Hence, microeconomics is primarily based on partial equilibrium approach or Marshallian approach which considers only a part of the market, ceteris paribus, to attain equilibrium (Koutsoyiannis, 1975).

1.2.4. A product

A product is the idea, concept, commodity, services and so on that has value and can be traded in the market at specific price. Microeconomics deals with particular product and analyzes the only one product’s sales, profit, cost, and so on. Hence, microeconomics deals with only one product and studies each and every segment of that product.

Therefore, microeconomics is called slicing theory as it splits up the entire economy into individual unit and make a minute study of that individual unit.

2. Macroeconomics

Macroeconomics is the branch of economics that deals with aggregate firm, household, commodity and so on and studies economy as a whole. The concept of macroeconomics was propounded by John Maynard Keynes in 1936 in his book “The General theory of employment, interest and money”. The introduction of macroeconomics as a distinct branch of economics has been considered as a milestone in economic evolution.

According to KE Boulding, “Macroeconomics is the study of aggregate and overall of system.”

Macroeconomics is also known as income theory because macroeconomics predominantly studies other variables with respect to level of output or national income. Macroeconomics is also called lump-sum method or theory of aggregates because the macroeconomics views every economic unit of an economy in a lump-sum or aggregate measure such as aggregate demand, aggregate supply and so on. It does not study individual unit such as a consumer, a producer, rather studies aggregate demand by consumers and aggregate supply by producers.

3. Difference between microeconomics and macroeconomics

Bases Microeconomics Macroeconomics
Meaning Microeconomics is the branch of economics that deals with the behavior of an individual economic agent such as a consumer, a producer and so on. Macroeconomics is the branch of economics that deals with the behavior of an entire economy.
Founder Adam Smith is the father of economics and the founder of microeconomics. John Maynard Keynes is the founder of macroeconomics as a separate branch of economics.
Scope Microeconomics covers various issues like demand, supply, factor pricing, price and output determination, and so on. Macroeconomics covers issues like national income, unemployment, balance of payment and so on.
Variables Microeconomics studies individual variables such as a consumer. Macroeconomics studies aggregate variables such as national income.
Significance Microeconomics is used in determining the price of product, price of factors within the economy. Macroeconomics is used in policy making and maintaining stability and deals with inflation, unemployment and so on.
Limitation Microeconomics is based on unrealistic assumption such as full employment and perfect competition. Macroeconomics is based on introspection which is not always accurate.

 

References

Keydifferences. (2014). Difference between micro and macro economics. Retrieved from https://keydifferences.com/difference-between-microeconomics-and-macroeconomics.html

Koutsoyiannis, A. (1975). Modern Microeconomics. Macmillan: London.

Poudel, Trilochan. (2014). Microeconomics [Class Handout]. Sainik Awasiya Mahavidyalaya, Bhaktapur.

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