• explain the meaning of micro economics;
• distinguish between micro economics and macro economics;
• explain the scope of micro economics;
• explain how micro economic theories are constructed;
• explain how graphical diagrams are used in the study of economics.

Let us take an example to understand the meaning of these two concepts more clearly. The human body consists of various organs and cells each of which has some function to perform and they are a/so interrelated. When we study a particular cell or organ, it will be termed as micro study. Such studies help us in understanding the mechanism and functioning of the human body. A study of the human body as a whole will be termed as a macro study. Similarly in an economy, production, consumption and investment are its vital process They are interrelated. In each of these processes thousands and thousands of individu and institutions are engaged. They are called economic agents and are grouped as househol firms etc. A study of the economic activities and behaviour of these economic age individually or as a group and their interrelationship will be called a micro economic stu On the other hand, the study of the problems and aggregates relating to the economy as a whole will be called macro economic study.

Micro economics and macro economics are two parts of economics but they are not mutu exclusive. In other words, they are interrelated. All micro economic studies can help better understanding and analysis of the macro economic variables. Such studies also help in the formulation of economic policies and programmes.

Let us take a few examples to understand their relationship. If we know how the pric a commodity is determined and understand the role of buyers and sellers in the proces price determination, it would help us in analysing the changes that takp place in the gen price level in the economy. A study of the process of price determination and the rol buyers and sellers in this process is a micro economic study whereas the study of general price level in the economy is a macro economic study. Similarly, if we war assess the performance of an economy, we will have to find out the performance of < sector of the economy and to find out the performance of each sector we will have to out the performance of each production unit individually or in groups. A study of i group of production units or of each sector is a micro economic study whereas the stud the performance of the economy as a whole is a macro economic study. Thus micro econoi and macro economics are two interrelated parts of economics.

The study of economic behaviours of these economic units is the subject matter of micro economics. How do the individuals or households as consumers allocate their incomes between alternate uses? How do the producers or firms allocate their resources in the production of different goods and services? How is the price of a good determined? How is the price of a factor of production determined? These are some of the questions that are studied in micro economics. For example, a consumer has only limited income but his wants are unlimited. Wants are satisfied by goods and services. He has to allocate his income on the purchase of the goods and services. His objective is to get maximum satisfaction. How should he spend his income to achieve this objective and how should he react to changes in prices of goods and other changes that may take place from time to time? The study of the actions and reactions of a consumer is a subject matter of micro economics. Similarly the objective of a producer or a firm is generally to earn maximum profits. What should he produce and in how much quantity? How should he react to the actions of the consumers? A study of the actions and reactions of the consumers and producers is also the subject matter of micro economics. Further more, the actions and reactions of the consumers and producers influence of price of a commodity. The study of such influences is also a subject mati.J'- of micro economics. You will study some of these questions in subsequent lessons.

The study of the economic behaviour of various economic units and their interactions lea to the formulations of various micro economic theories such as the theory of consume behaviour, the theory of firm, the theory of price, the theory of wages, the theory of rent, i theory of interest and the theory of profit etc. An understanding of these theories helps to understand the various problems that may confront us in our day to day life. For exam^ why does the price of milk rise in summers, or why is the price of petrol more than the pi of milk or why does the Government give subsidies to farmers or why does the Govemm sell some essential goods through fair price shops etc.

It is not possible to study the economic behaviour of each of the numerous economic agents and also each of their interactions. From each group of economic agents a study of the behaviour of some is made and on the basis of this study some conclusions are drawn. These conclusions are nothing but a generalisation of the behaviour of that group. These generalisations are then tested and then formulated as economic law or theory.

There are two methods of formulating economic theories : (a) deductive method, and ^b) inductive method

For formulating an economic theory by deductive method, following steps are taken :

In formulating an economic theory by inductive method the following steps are taken :

While formulating an economic theory, the terms used must be properly defined to aviod any confusion.

• There are two methods of constructing an economic theory : (a) Deductive method and (b) Inductive method.
• For formulating an economic theory by deductive method the steps required are : (a) selecting the problem, (b) specifying the assumptions, (c) deducing the hypothesis and (d) testing of hypothesis.
• For formulating an economic theory by inductive method the steps taken are : (a) selecting the problem, (b) collection, classification and analysis of data and (c) establishing the relationship between variables through logical reasoning.

You will come across such diagrams in the next three lessons which deal with micro economics problems.

We draw two straight lines intersecting each other at right angle (90°) as shown in figure ; 4.1 X' X line and YY' line intersect at point 0. X'X line is called the horizontal axis or X-axis and YY' line is called the vertical axis or Y-axis. Point 0 is also read as zero. Each axis represents one variable. To the right of point 0 on X-axis the positive values of the variable are shown, starting from zero at point 0. To the left of point 0 on X-axis negative values of the variables are shown. Similarly oiTthe Y-axis. upward of point 0 the positive values of the variables are shown starting from zero at point 0. And downward of point 0 tlie negative values of the variables are shown. On each axis equal distance should represent

equal values of the variable represented along that axis.

In the figure 14,1 OA distance is showing the quantity of the variable as 1 unit, AB is equal to OA and shows another unit of the variable. Thus OB shows two units of the variable Similarly Y-axis is also divided in equal part. Each part shows equal quantity of the variable. Into how many parts each axis should be divided and how much quantity of the variable each part represents depends upon the total quantity of the variable that is to be shown on the axis.

In figure 14.1 we have divided the OX and OY axis into 5 equal parts and each represents 1 unit of the variable represented on each axis. The distance OE on X-axis shows 5 units of the variable. Similarly the distance Oe on Y-axis shows 5 units of the variable represented on this axis.

Let us take an example. The table 14.1 shows the different prices of pen and the number of pens purchased at each price. So price of the pens is one variable and the number of pens purchased is another variable.

This table also shows that changes in the price of pen effect the number of pens purchased. So price of pen is called an independent variable and is generally shown on OY axis. Number of pens purchased, as shown in the table, depends upon on the price of pen. So number of pens is called dependent variable and is shown on OX-axis. Thus Y-axis represents price per pen and X-axis represents the number of pens as shown in figure 14.2. X-axis has been divided into 5 equal parts, each part shows 10 pens. Y-axis has been divided into 5 parts, each part shows Re. 1. Thus points marked 0, 10, 20, 30, 40, 50 on OX-axis show-zero pen, 10 pens, 20 pens, 30 pens, 40 pens and 50 pens respectively. Points marked 0, 1, 2. 3. 4, 5 on Y-axis show price as zero. Re. 1, Rs. 2, Rs.3, Rs. 4 and Rs. 5 respectively. For example, the distance from zero to 40 on OX-axis shows that the number of pen purchased is 40. Similarly the distance from zero to 3 on OY-axis shows that the price of pen is Rs. 3.

Notice that this curve is downward falling from left to right. This shows that there is an inverse relationship between price (independent variable) and number of pens purchased (dependent variable). As price falls, more pens are purchased.

You may ask at this stage : will such a curve be always a straight line ? No, that is not so. We may have the following two other types of curve which are also downward falling from left to right. Figure 14.3 shows a curve downward falling from left to right but mstea being a straight line, it is bending towards the point of origin i.e. point 0. Such a cur called a convex curve. Figure 14.4 shows a curve which falling downward from left to but bending away from point 0. It is called a concave curve.

Read the table 14.1 carefully you will notice that for every fall in price by Re. 1, the increase in the number of pens purchased is 10. This means that the ratio of change in price and change in the number of pens purchased is constant and is 1:10. In such a case you will get a straight line curve. Consider table 14.2 given below :

For each fall in the price of pen by Re. 1 the increase in number of pens purchased different The ratio of change in price and in the number of pens purchased is given in column (3). This ratio is not constant, it is falling. When such a situation is shown on the graph vou ret a curve similar to the one shown in figure 14.3. Now consider table 14.3

This table shows that ratio of change in the price of pen and change in the number of pens purchased is increasing. When this table is shown on a graph, you will get a curve similar to the one shown in figure 14.4. Such a diagram was also drawn in lesson No. 2 (the production possibility curve or PCC).

It is not necessary that the curve showing the relationship between two variables may alwa> s be downward falling from left to right. It will be so only when there is inverse relationship between two variables.

If there is direct relationship between two variables i.e. when one increases the other also increases and vice versa, then the curve that you will get will be upward rising from left to right. Consider table 14.4.

As the price of pen rises the number of pens supplied by the sellers is increasing. If you plot this table on a graph paper you will get the following curve (See figure 14.5).

Point A shows the price of pen as Rs. 2 per pen and the quantity supplied as 20 pens. Pou B shows the price as Rs. 3 and tlie quantity supplied as 30 pens and so on. This curve SS is upward rising from left to right. Remember that to find out the direction of the curve i we always start from the left. When a curve is downward falling from left to right it is als called negatively sloped. When a curve is upward rising from left to right, it is also callei positively sloped.

So far we have taken only such examples which require only one variable to he represcntci on one axis. More than one variable can also be represented on a single axis ifthesi variables are expressed in same units. Consider the table 14.5

In this table there are three variables. Price of pen is the independent variable. Demand of pen and supply of pen are the two dependent variables. Both demand and supply of pen are expressed in numbers, both can be represented on one axis.

Now plot the data given in the table 14.5 on the graph paper. You will get the following ficure 14.6

100 200 300 400 500

Point P is a point on both the curves, so it represents two set of combinations. Fir.-;t. vvlini price is Rs 3 market demand for pen is 300. Second, when price is Rs.3 market supply lor pen is 300.

At tins stage tills much knowledge about the graphical diagrams used in economics is sufficient for you.

• Graphical diagrams help in studying the relationship between two variables such as price and demand, price and supply etc.
• Two straight lines are drawn intersecting each oilier at right angles. The point of intersection is called the point of origin 'O'. The horizontal line is called OX axis and represents one variable. The vertical line is called OY axis and represents another variable.
• For each given combination of two variables we get one point on tlie graph. Similary each point can be read as a combination of two variables. If we join all such points, we get a curve.
• If the curve is downward falling from left to riglit. it shows that the two variables are inversely related.
• If the curve is upward rising from left to right, it shows that the two variables are directly related.
• If the ratio of changes in two variables is constant the curve would be a straight line. If the ratio of change is falling then the curve would be convex to the origin. If the ratio of change is rising the curve would be concave to the origin

(i) micro economics (ii) micro (iii) micro (iv) unlimited (v) limited

(i) limit (ii) inductive and deductive methods (iii) testing of hypothesis

(i) true (ii) False (iii) False (iv) False (v) False (vi) True (vii) True

1. Read section 14.3

2. Read section 14.4

3. Read section 14.5

4. Read section 14.6 (b)

5. Read section 14.6 (b)

6. Read section 14.6 (b and c)

7. Read section 14.5