SSC CGL Economics Study Material – Branches of Economy
SSC CGL Economics Study Material – Branches of Economy
Branches of Economy –
Firstly, we will know about meaning of economy, then we will discuss about its branches.
Economics is a vast subject. So it is not easy to give a precise definition or meaning of economics as its scope and the area it covers are very large. Ever since, it emerged as a separate branch of study in social science, various scholars and authors have tried to give its meaning and objectives. It should be noted that with development of time and civilization the definition of economics has undergone modification and change.
Branches of Economics-
The study of Economics is divided into two distinct branches. They are
(i) Micro Economics
(ii) Macro Economics
Micro Economics –
The word “micro” means very small. so micro economics implies study of economics at a very small level. What does this exactly mean? In a society comprising of many individuals collectively every single individual makes just a small part. So the economic decisions taken by a single individual become the subject matter of micro economics.What are the economic decisions an individual takes? We can cite some examples in this regard.
(a) In order to satisfy various wants an individual buys goods and services. To buy goods and services the individual has to pay some price from his limited amount of income. So the individual has to make a decision with regard to quantity of the good to be purchased at given price. He/she has to also decide the combination of different goods to buy given his/her income so that he/she can get maximum satisfaction as a buyer.
(b) An individual also sells goods and services as a seller. Here he has to take decision regarding the quantity of good to be supplied at a given price so that he/she can earn some profit.
(c) All of us pay price to buy a good? How does this price get determined in the market? Micro economics provides answer to this question.
(d) In order to produce a good an individual producer has to take decision as to howto combine the various factors of production so that maximum output can be produced at minimum cost.
All these are some important areas of study under micro economics.
- Assumes full employment condition in an economy, which is unrealistic.
- Deals with the part of economy instead of whole economy.
Macro Economics –
The word macro means very large. In comparison to an individual, the society or the country or economy as a whole is very large. So the economic decisions taken at the level of the economy as whole are subject matter of macroeconomics. Take the example of the economic decisions taken by the government. We all know that the government represents the whole country, not just any individual. So the decisions taken by the government are meant for solving the problems of the whole society. For example government makes policies with respect to collection of taxes, expenditure on public goods and welfare activities etc. which affect the whole economy. “How do such policies work” is the subject matter of macroeconomics.
In micro economics we study the behavior of an individual as a buyer and seller. As buyer the individual spends money on goods and services which is called his/her consumption expenditure. If we add consumption expenditure of all individuals then we get idea of aggregate consumption expenditure of the whole society. Similarly aggregating incomes of individuals becomes total income of the country or national income. So study of these aggregates such as national income, total consumption expenditure of the country etc.comes under macroeconomics.Another example of macroeconomic issue is the study of inflation or price rise.Inflation or price rise does not affect an individual only, but it affects the whole economy.So knowing its causes and effects as well as controlling it, come under the study of macroeconomics.Similarly, problem of unemployment, economic growth and development etc. concern with the whole population of the nation and hence are covered under the study of macroeconomics.
However, macroeconomics has certain limitations, which are as follows:
- Ignores the welfare of individuals in an economy.
- Takes into account only aggregate variables, which may not clearly define economic conditions.
The main differences between micro and macroeconomics-
- Small segment of economy vs whole aggregate economy.
- Microeconomics works on principle that markets soon create equilibrium. In macroeconomics, the economy may be in a state of disequilibrium (boom or recession) for a longer period
- There is little debate about the basic principles of micro-economics. Macroeconomics is more contentious. There are different schools of macroeconomics offering different explanations (e.g. Keynesian, Monetarist, Austrian, Real Business cycle etc.).
- Macroeconomics places greater emphasis on empirical data and trying to explain it. Micro economics tends to work from theory first.
Other differences between microeconomics and macroeconomics-
The main difference is that micro looks at small segments, and macro looks at the whole economy. But, there are other differences.
Equilibrium – Disequilibrium
Classical economic analysis assumes that markets return to equilibrium (S=D). If demand increases faster than supply, this causes price to rise and firms respond by increasing supply. For a long time, it was assumed that the macro economy behaved in the same way as micro economic analysis. Before, the 1930s, there wasn’t really a separate branch of economics called macroeconomics.
Great Depression and birth of Macroeconomics
In the 1930s, economies were clearly not in equilibrium. There was high unemployment, output was below capacity, and there was a state of disequilibrium. Classical economics didn’t really have an explanation for this dis-equilibrium, which from a micro perspective, shouldn’t occur.
In 1936, J.M.Keynes produced his The General Theory of Employment, Interest and Money, this examined why the depression was lasting so long. It examined why we can be in a state of disequilibrium in the macro economy. Keynes observed that we can have a negative output gap (disequilibrium in the macro-economy) for a prolonged time. In other words, microeconomics
principles of markets clearing, didn’t necessarily apply to macroeconomics. Keynes wasn’t the only economist to investigate this new branch of economics. For example, Irving Fisher examined the role of debt deflation in explaining the great depression. But, Keynes’ theory was the most wide ranging explanation, and played a large role in creating the new branch of macro-economics.
Since 1936, macroeconomics developed as a separate strand within economics. There have been competing explanations for issues such as inflation, recessions and economic growth.
Similarities between Micro and Macro Economics-
Although it is convenient to split up economics into two branches – microeconomics and macroeconomics, it is to some extent an artificial divide.
- Micro principles are used in macroeconomics. If you study impact of devaluation, you are likely to use same economic principles, such as the elasticity of demand to changes in price.
- Micro effects macroeconomics and vice versa. If we see a rise in oil prices, this will have a significant impact on cost-push inflation. If technology reduces costs, this enables faster economic growth.
- Blurring of distinction. If house prices rise, this is a micro economic effect for housing market. But, housing market is so influential that it could also be considered a macro-economic variable, and will influence monetary policy.
- There have been efforts to use computer models of household behaviour to predict impact on macro economy.
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