Major Areas of microeconomics Importance of Micro Economics

Major Areas of Economics-Micro economics explains -Importance of Micro Economics

Major Areas of Economics-financial economics

Major Areas of Economics

The field of economics is divided into two major parts:

 Microeconomics and macroeconomics.

Microeconomics: Microeconomics comes from the Greek word mikros, meaning “small. It looks at the small picture.

Microeconomics analyses the behavior of the individual consumers, business firms and governments that make up the economy, and investigates the workings of individual markets.

It provides basic theory to economic activity. It looks at the choices that are made, and how they interact with each other when they come together to trade specific goods and services. Microeconomics basically covers two sections of the society: consumers and producers.

Macroeconomics: Macroeconomics also comes from the Greek word makros, meaning large, take an overall view of the economy.

It looks at the big picture. Macroeconomics analyzes the performances of the economy as a whole.

It attempts to explain the behavior of the economy as a whole, 

looking at such issues as inflation, unemployment and growth. It provides the foundation for government intervention in the economy.

Importance of Micro Economics

Micro economics plays a vital role in the study of modern economic theory. It is important in the following ways :

It helps to understand the working of the economy: It helps us in understanding the working of a free enterprise economy. It gives us an idea about how major economic decisions are taken in a market economy.

Helpful in the efficient employment of resources: It suggests economizing, that is how efficiently the scarce available resources can be utilized in production process in an economy.

Helps in International Trade: Micro economics is used to explain gains from internal trade, external trade, foreign exchange, balance of payment, disequilibrium and in the determination of exchange rate.

Basis of welfare economics:

The entire structure of micro economics has been built on the basis of price theory which is an important constituent of micro economics.

It suggests the conditions of efficiency and explains how it can be achieved. It helps in improving the standard of living of the population.

Helpful in understanding the consequences of taxation: Imposition of tax leads to reallocation of resources from one place to another.

Micro economics explains how imposition of different types of direct and indirect taxes lead to attainment of social welfare.

Tool for evaluating economic policies:

It helps the states and Central government to frame economic policies like price policy, taxation policy etc.

It also explains the condition of efficiency in production and consumption.

Construction and use of models:

Micro economics constructs and uses simple models in order to understand the actual economic phenomenon.

It uses abstract models to explain the economic phenomenon.

microeconomics online course -Financial economics-Economic Systems

Financial economics-Economic Systems

•A market economy- Is one in which market forces are allowed to guide the allocation of resources within a society.

•A centrally planned economy- Is an economy in which decisions on resource allocations are guided by the state.

•Mixed Economies- These are economies in which resources are allocated partly through price signals and partly on the basis of intervention by the State.

The Role of Economics in the real world?

•Economics provides a framework for understanding consumer behavior, government policies, and business developments within a country and abroad. It provides a rich context for making decisions in our business, professional, and financial life is applicable in a wide range of fields.

Government policies-

•Economics enables us to get a better understanding of the objectives, methods and limitations of government economic policy.

e.g.

•How does government policy help reduce environmental pollution?

•How does the tax system affect the incentives for people to work, for families to spend and save, and for firms to invest?

• How do government budget deficits and debt affect the economy?

•The effects of free international trade on Sri Lankans’ standard of living.

•How do the actions and policies of the Central Bank of Sri Lanka affect interest rates and the money supply, and thence the rate of price inflation, the external value of the Sri Lankan Rupee, and international capital flows?

Why we need to study Economics as a subject?

Economics is essential to understand the world in which we live and work and helps us to answer questions like:

1. What determines the prices of the goods and services on which we spend our income, and the prices of the stocks and bonds in which we invest our savings?

2. How does education affect the lifetime earnings of people?

3.Why do some people earn so much and others so little?

4. Why do some jobs pay high wages while other jobs pay low wages?

5.How do firms operating in different market environments, decide what quantities to produce of their product’s outputs.

6.What prices to charge for these outputs, and what quantities of labour and capital inputs to employ

Introduction to microeconomics

What is Economics -Definition of Economics

“Economics is the study of people in the ordinary business of life”

- Alfred Marshall

“Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses”

 - Lionel Robbins

“Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people” 

- Paul A. Samuelson

What is Economics:

•Economics is about choice and it is at the heart of all decision making.

•It is a social science as are psychology and anthropology and it is the study of how a society manages its scarce resources. It is about how people choose to use resources.

•Social sciences examine and explain human interaction. Economics explains how people interact within markets to get what they want to accomplish certain goals.

•It is often described as the study of how we use our limited resources to satisfy our unlimited material wants.

What is Economics:Scarcity and Choice

•Scarcity- It is a situation that arises when people have unlimited wants in the face of limited resources ( Non-renewable resources).

•As a result Economists are now trying to use Renewable resources.

•Sustainable development- The needs of the present are met without compromising the need’ s of future generations

•Choices-Involve how much time is devoted to work, to school, and to leisure.

•They also involve how many rupees are spent and saved, and how to combine resources to produce goods and services. The government should make choices with regard to expenditure with the utilization of tax revenue.

•Individuals, businesses and governments are all faced with making choices in situations where resources are scarce.

•More formally, economics is concerned with the material well-being of human societies.

Factors of production/Resource and Resource allocation

These are resources that are used in the production process to make goods

•Land- Gifts of nature

•Labour- Human resources

•Capital- All man made aids for further production

•Entrepreneurs- Manage and take risks in the business when introducing a new product.

Resource allocation

•Resources are limited and it is impossible to produce goods and services to satisfy all needs and wants of people.

•Economists have to decide the ways in which resources are allocated to different industries and occupations.

The three questions in Economics, Marginal Analysis and Opportunity costs

•All Economic choices could be arrived at succinctly by asking three big questions about the goods and services we produce.

•1. What to produce?

•2. How to produce?

•3. For whom to produce?

•The manner in which the basic problems of an economy are solved depends on the nature of the economic system or the economy ( free market economy, planned or mixed economy).

•Marginal Analysis is used in order to choose the best alternative from the alternatives available. Choices are made by evaluating the costs and benefits of each alternative.

•The opportunity cost in decision making is the value of the next best alternative that is foregone.