LECTURE: 03
BRANCHES OF ECONOMICS
There are two main branches of
economics;
1. Microeconomics
2. Macroeconomics
1. Microeconomics: is the branch of economics that studies small
economics units and parts of an economy. It explains the decisions and
interactions of individual economic units like consumer and firms.
Eg: Study of trees not the forest.
Major issues discussed in
microeconomics are;
1. Theory of consumer behavior i.e. the
nature of human wants, laws of utility and consumer demand.
2. Theory of prices i.e. interaction of forces of demand and supply in
particular markets and determination of prices.
3. Theory of production: it deals
with production of goods, combination of factors, laws of returns and other
related problems.
4. Theory of firm i.e. kinds of firms, cost of production, revenue received
and pricing strategies of firms to maximize profits.
5. Theory of distribution of income i.e. the
principle for pricing of factors of production, determination of rent, wages,
interest and profit.
2. Macroeconomics: is the branch of economics that studies working of the
economic system as whole or major economic aggregates in the economy. It
examines the problems relating to national income, national expenditure, level
of employment and general level of prices in the country.
Eg: Examine forest not the trees
Major issues discussed in
macroeconomics are;
1. Theory of income and employment i.e. measurement and determination of level of national
income and employment, national savings and investment, business cycles and
economic growth.
2. Money and banking i.e.
functions of money, supply and demand for money, value of money, functions of
commercial banks and monetary policy of central bank.
3. Public Finance i.e.
study of government income and expenditure policy, principles of taxation,
policy debt and government budget.
4. International Trade i.e.
theories of international trade, advantages and disadvantages of trade, balance
of payments, exchange rate of currencies, international organizations like IMF
and World Bank.
METHODS IN STUDY OF ECONOMICS
There are two ways that the
economists can use to study some aspects of the economy and discover the
underlying economic principles and laws.
1. Deductive Method:
In this method some major
known principle is used as base and through logical reasoning some untested
principles (called hypothesis) is derived (deduced) out of it. This process is
called ‘model building’. There
is general and fundamental principle that people want to make best use of
money. Form this, it can be drive that when price is lower people buy more of a
commodity to increase total utility. This derived principle is called law of
demand. The untested principle (hypothesis) must be subjected to systematic and
repeated examination before it can be called economic law.
- - Deductive reasoning works from the more general to the
more specific.
- - Sometimes this is informally called a "top
-down" approach.
- - Conclusion follows logically from premises (available
facts)
2. Inductive Method:
Inductive method moves from facts to theory. When facts are
gathered and systematically arranged, it becomes possible to identify some
patterns or principles underlying the observed facts. The principle which
appears to best describe the behaviour and relationship existing among the
observed facts in put in ‘generalized’ words. When such principle is accepted by all
and has been tested against facts it is called as economic law. Suppose we
repeatedly observe that in production of goods if labour is increased, total
production rises but at decreasing rate. We put this tendency of marginal
product in a general statement i.e. if more labour is applied in a business
after a certain point, marginal product falls and call it a law of diminishing
returns.
1. -
Inductive reasoning
works the other way, moving from specific observations to broader
generalizations and theories.
2. - Informally, sometimes called as "bottom
up" approach.
3. - Conclusion is likely based on premises.
4. - Involves a degree of uncertainty
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