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Modern Approach and Methods of Economic Investigation

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VCABM Hiwara
VCABM Hiwara

This document discusses microeconomics and macroeconomics as the two divisions of modern economic theory. It defines microeconomics as the study of individual decision-making units like firms and consumers and their role in determining prices. Macroeconomics is defined as the analysis of aggregates for the entire economy, such as GDP, employment, and inflation. The document also outlines the deductive and inductive methods used in economic investigation, with deduction reasoning from general assumptions to specific conclusions and induction using experiments and data to derive general principles.

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TOPIC-2 Modern Approach Micro-economics and Macro-economics Methods of Economic Investigation Deduction & Induction
Modern Approach : This approach divides subject matter of economics into two divisions i.e., micro economics and macro economics. The terms micro and macro economics were first coined and used by Ragnar Frisch in 1933. 1. Micro-Economics or Price Theory: The term micro- economics is derived from the Greek word micro, which means small or a millionth part. It is also known as price theory. It is an analysis of the behaviour of small decision-making unit, such as a firm, or an industry, or a consumer, etc. It studies only the employment in a firm or in an industry. It also studies the flow of economic resources or factors of production from the resource owners to business firms and the flow of goods and services from the business firms to households. It studies the composition of such flows and how the prices of goods and services in the flow are determined.
Limitations of Micro-Economics: Micro-economic analysis suffers from certain limitations: It does not give an idea of the functioning of the economy as a whole. It fails to analyse the aggregate employment level of the economy, aggregate demand, inflation, gross domestic product, etc. It assumes the existence of full employment in the whole economy, which is practically impossible.
2. Macro-Economics or Theory of Income and Employment: The term macro-economics is derived from the Greek word macro, which means large. Macro- economics is an analysis of aggregates and averages pertaing to the entire economy, such as national income, gross domestic product, total employment, total output, total consumption, aggregate demand, aggregate supply, etc. Macro-economics looks to the nation's total economic activity to determine economic policy and promote economic progress.
Importance of Macro-Economics: It is helpful in understanding the functioning of a complicated economic system. It also studies the functioning of global economy. With growth of globalisation and WTO regime, the study of macro-economics has become more important. It is very important in the formulation of useful economic policies for the nation to remove the problems of unemployment, inflation, rising prices and poverty. Through macro-economics, the national income can be estimated and regulated. The per capita income and the peoples living standard are also estimated through macro- economic study.
Limitations of Macro-Economics: Individual is ignored altogether. For example, in macro-economics national saving is increased through increasing tax on consumption, which directly affects the consumer welfare. The macro-economic analysis overlooks individual differences. For instance, the general price level may be stable, but the prices of food grains may have gone up which ruin the poor. A steep rise in manufactured articles may conceal a calamitous fall in agricultural prices, while the average prices were steady. The agriculturists may be ruined.
Methods of Economics Investigation : There are two methods of economic investigation that are used in economic theory i.e., and 1) Deductive method 2) Inductive Method
1. Deductive Method: This method involves reasoning or inference from the general to the particular or from the universal to the individuals. It is also known as the abstract, analytical, hypothetical or apriori method. Deduction involves four steps: (1) Selecting the problems (2) Formulating the assumptions (3) Formulating the hypothesis through the process of logical reasoning whereby inferences are drawn and (4) Verifying the hypothesis.
2. Inductive Method: This method is also known as Concrete method, historical method or realistic method. It involves reasoning from particulars to the general or from the individual to the universal. This method derives economic generalizations on the basis of experiments and observations. In this method detailed data are collected on certain economic phenomenon and effort is then made to arrive at certain generalizations which follow from the observations collected. Go to Lecture No. 3

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Modern Approach and Methods of Economic Investigation

  • 1. TOPIC-2 Modern Approach Micro-economics and Macro-economics Methods of Economic Investigation Deduction & Induction
  • 2. Modern Approach : This approach divides subject matter of economics into two divisions i.e., micro economics and macro economics. The terms micro and macro economics were first coined and used by Ragnar Frisch in 1933. 1. Micro-Economics or Price Theory: The term micro- economics is derived from the Greek word micro, which means small or a millionth part. It is also known as price theory. It is an analysis of the behaviour of small decision-making unit, such as a firm, or an industry, or a consumer, etc. It studies only the employment in a firm or in an industry. It also studies the flow of economic resources or factors of production from the resource owners to business firms and the flow of goods and services from the business firms to households. It studies the composition of such flows and how the prices of goods and services in the flow are determined.
  • 3. Limitations of Micro-Economics: Micro-economic analysis suffers from certain limitations: It does not give an idea of the functioning of the economy as a whole. It fails to analyse the aggregate employment level of the economy, aggregate demand, inflation, gross domestic product, etc. It assumes the existence of full employment in the whole economy, which is practically impossible.
  • 4. 2. Macro-Economics or Theory of Income and Employment: The term macro-economics is derived from the Greek word macro, which means large. Macro- economics is an analysis of aggregates and averages pertaing to the entire economy, such as national income, gross domestic product, total employment, total output, total consumption, aggregate demand, aggregate supply, etc. Macro-economics looks to the nation's total economic activity to determine economic policy and promote economic progress.
  • 5. Importance of Macro-Economics: It is helpful in understanding the functioning of a complicated economic system. It also studies the functioning of global economy. With growth of globalisation and WTO regime, the study of macro-economics has become more important. It is very important in the formulation of useful economic policies for the nation to remove the problems of unemployment, inflation, rising prices and poverty. Through macro-economics, the national income can be estimated and regulated. The per capita income and the peoples living standard are also estimated through macro- economic study.
  • 6. Limitations of Macro-Economics: Individual is ignored altogether. For example, in macro-economics national saving is increased through increasing tax on consumption, which directly affects the consumer welfare. The macro-economic analysis overlooks individual differences. For instance, the general price level may be stable, but the prices of food grains may have gone up which ruin the poor. A steep rise in manufactured articles may conceal a calamitous fall in agricultural prices, while the average prices were steady. The agriculturists may be ruined.
  • 7. Methods of Economics Investigation : There are two methods of economic investigation that are used in economic theory i.e., and 1) Deductive method 2) Inductive Method
  • 8. 1. Deductive Method: This method involves reasoning or inference from the general to the particular or from the universal to the individuals. It is also known as the abstract, analytical, hypothetical or apriori method. Deduction involves four steps: (1) Selecting the problems (2) Formulating the assumptions (3) Formulating the hypothesis through the process of logical reasoning whereby inferences are drawn and (4) Verifying the hypothesis.
  • 9. 2. Inductive Method: This method is also known as Concrete method, historical method or realistic method. It involves reasoning from particulars to the general or from the individual to the universal. This method derives economic generalizations on the basis of experiments and observations. In this method detailed data are collected on certain economic phenomenon and effort is then made to arrive at certain generalizations which follow from the observations collected. Go to Lecture No. 3