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Lecture 1

Economics is the study of how individuals, businesses, and governments allocate resources to meet their needs, focusing on production, distribution, and consumption of goods and services. It is divided into microeconomics, which examines individual decision-making units, and macroeconomics, which looks at the economy as a whole, including aggregates like income and employment. The emergence of macroeconomics was significantly influenced by the Great Depression, leading to new theories about economic functioning and the interdependence of sectors, primarily through the work of John Maynard Keynes.

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17 views13 pages

Lecture 1

Economics is the study of how individuals, businesses, and governments allocate resources to meet their needs, focusing on production, distribution, and consumption of goods and services. It is divided into microeconomics, which examines individual decision-making units, and macroeconomics, which looks at the economy as a whole, including aggregates like income and employment. The emergence of macroeconomics was significantly influenced by the Great Depression, leading to new theories about economic functioning and the interdependence of sectors, primarily through the work of John Maynard Keynes.

Uploaded by

Ishan Saha
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What is Economics

• Economic is a study about how individuals, businesses and governments make


choices on allocating resources to satisfy their needs.

• These groups determine how the resources are organised and coordinated to
achieve maximum output.

• It is mainly concerned with the production, distribution and consumption of


goods and services.

• Economics is divided into two important sections, which are: Macroeconomics


& Microeconomics
What is Microeconomics
• Microeconomics examines the behaviour of individual decision-making
units—business firms and households.

• When we study the consumption behaviour or equilibrium of a


consumer; the production pattern & equilibrium of a firm, the entire
analysis is ‘micro’ in nature……because we study a UNIT and not the
SYSTEM in which it is operating.
The key factors of microeconomics are as follows:
• Demand, supply, and equilibrium
• Production theory
• Costs of production
• Labour economics
What is Macroeconomics?
• The term Macro in English has its origin in the Greek term Makros which means large. In
the context of macroeconomics, ‘large’ means economy as a whole.

• Macroeconomics is defined as that branch of economics which studies economic


issues or economic problems at the level of an economy as a whole.

• Macroeconomics deals with the economy as a whole; it examines the behaviour of


economic aggregates such as aggregate income, consumption, investment, and the
overall level of prices.

• – Aggregate behaviour refers to the behaviour of all households and firms together.
Microeconomics
&
Macroeconomics
Emergence of Macroeconomics (1 of 3)
• Macroeconomics, as a separate branch of economics, emerged
after the British economist John Maynard Keynes published his
celebrated book The General Theory of Employment, Interest and
Money in 1936.

• The dominant thinking in economics before Keynes was that all


the labourers who are ready to work will find employment and all
the factories will be working at their full capacity.

• This school of thought is known as the classical tradition.


Emergence of Macroeconomics (2 of 3)
• However, the Great Depression of 1929 and the subsequent years saw
the output and employment levels in the countries of Europe and North
America fall by huge amounts.

• It affected other countries of the world as well.

• Demand for goods in the market was low, many factories were lying
idle, workers were thrown out of jobs.

• In USA, from 1929 to 1933, unemployment rate rose from 3 % to 25 %


Emergence of Macroeconomics (3 of 3)
• Over the same period aggregate output in USA fell by about 33 per cent.
These events made economists think about the functioning of the economy
in a new way.
• The fact that the economy may have long lasting unemployment had to be
theorized about and explained.
• Keynes’ book was an attempt in this direction.
• Keynes’ approach was to examine the working of the economy in its entirety
and examine the interdependence of the different sectors.
• The subject of macroeconomics was born.
• Keynes is often referred to as the founder of modern macroeconomics.
The Great Depression – What happened ?

• Stock Markets crashed!


• 9000 banks filed for bankruptcy
• Banks that survived stopped giving loans.
• People cut down spending
• Large amounts of inventories started piling up
• Businesses stopped production….layoffs!( 25%
unemployment)
• Purchasing power declined
• Decline in world trade & economic retaliation.
Importance of Macroeconomics
• To understand the working of the economy:

➢ Macroeconomic variables like Total Income, Total


Output, Employment and General Price level help us
in analysing the functioning of the economy.
Importance of Macroeconomics
In Economic Policies –

Macro economic study helps us to find a solution to complex


economic problems of modern times.
Example:
1. General Unemployment,
2. National Income data helps in forecasting the level of economic
activity & to understand the distribution of income among different
groups of people in the economy.
Importance of Macroeconomics
• In Economic Growth –

• To plan for economic growth, it is necessary that the macro economic


variables like income, output and employment are evaluated.
• In Monetary Problems –

• Frequent changes in the value of money affects the economy


adversely!!
Importance of Macroeconomics
• In Business Cycles –

• Macro economics began to be studied only after the


Great Depression. Thus, its importance lies in analyzing
the causes of economic fluctuations and in providing
remedies.

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