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)
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.
- - Inductive reasoning works the other way, moving from specific observations to broader generalizations and theories.
- - Informally, sometimes called as "bottom up" approach.
- - Conclusion is likely based on premises.
- - Involves a degree of uncertainty
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