Form or Types of Economy

There are 2 types of economy:

  1. Micro Economics
  2. Macro Economics


1. Micro Economics –

The term Micro is derived from the Greek word 'MICROS' which means small. It relates to the microscopic study of individual units such as individual firm, particular household, individual income, prices, wages, etc. It is that branch of Economics which deals with the study of behaviour and action of individual economic units. It is also called as ‘Individualistic Approach’ or ‘Price theory.’

According to Leftwitch, Micro Economics is concerned with economic activities of economic units such as consumers, resource owners, and business firms.


Importance of Micro Economics –

Importance/merits of Microeconomics are as follows: -

  1. Price Determination: it explains how the prices of different commodities and various factors of production are determined.
  2. Free Market Economy: microeconomics helps in understanding the functioning of a free market economy. A free market economy is an economy where the economic decisions regarding the production of goods, such as ‘What to Produce? How much to Produce? How to Produce’ etc.’
  3. Foreign Trade: it helps in explaining various aspects of foreign trade, such as the effects of tariffs on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a particular country etc.
  4. Business Decisions: microeconomic theories are helpful to businessmen in taking crucial business decisions. These decisions are related to the determination of the cost of production, determination of price of goods, maximization of output and profit etc.
  5. Useful to Government: it is useful to the government in framing economic policies such as taxation policy, public expenditure policy etc. These policies help the government to attain its goals of efficient allocation of resources and promoting the economic welfare of the society.


Limitations/Demerits of Microeconomics –

Some limitations of microeconomics are as follows: -

  1. It cannot give idea of the functioning of the economy as a whole. What is true for small/individual units, need not be true for the whole economy.
  2. It assumes full employment, i.e., all resources are fully used in the production process. It is unrealistic.
  3. Adopting a laissez-faire policy is unrealistic in the real world, where we see government interference in economic activity.
  4. Knowledge of the economy as a whole is very important for people as it encompasses all economic factors. But microeconomics focuses only on a small or a particular part of the economy.
  5. The scope of microeconomics is very narrow and limited. it does not include the current microeconomic problems like inflation, deflation, business cycles, national income etc.


2. Macro Economics –

The term Macro is derived from the Greek word ‘MACROS’ which means big or large.

It is the study of aggregates or average covering the entire economy such as total investment, total consumption, total savings, aggregate supply, aggregate demand, general price level, cost structure etc.

According to Boulding, “Macroeconomics deals not only with individual quantities as such but with aggregates of these quantities; not with individual income but with national income; not with individual prices, but with price level; not with individual output but with national output.”

It is the Bird’s Eye View of the entire economy.


Subject matter of Macroeconomics –

Macroeconomics focuses on the study of an economy as a whole, including topics like national income, inflation, unemployment, and economic growth. It examines the performance, structure, and behaviour of national and global economies. 

  1. National Income: This includes concepts like GDP (Gross Domestic Product), national income, and how these are measured and distributed. 
  2. Economic Growth: Macroeconomics explores the factors that contribute to long-run economic growth and how to promote it. 
  3. Inflation: Macroeconomists study the causes and effects of inflation, including its impact on purchasing power and the overall economy. 
  4. Unemployment: Macroeconomics analyses the different types of unemployment and the policies that can be used to reduce it. 
  5. Business Cycles: Macroeconomics examines the cyclical fluctuations in economic activity, including periods of expansion and contraction. 
  6. Aggregate Demand and Supply: Macroeconomics analyses the forces that determine aggregate demand and supply in an economy. 
  7. Monetary and Fiscal Policy: Macroeconomics studies the role of monetary policy (controlled by central banks) and fiscal policy (controlled by governments) in managing the economy. 
  8. International Trade and Finance: Macroeconomics examines the impact of international trade and financial flows on national economies. 
  9. Economic Fluctuations: Macroeconomics investigates the causes and consequences of short-term fluctuations in economic activity. 


Importance of Macroeconomics -

Importance/merits of Macroeconomics are as follows: -

  1. It gives the clear picture of the economy. It is useful for understanding the economy as a whole.
  2. It is extremely from the viewpoint of economic policy. It helps us analyse because of central problems like poverty, unemployment, Balance of Payments (BOP), inflation, under production etc. and also suggests some remedial measures to deal with such problems.
  3. For the developing countries, it helps to follow appropriate policy to speed up the process of economic development by adopting various measures such as population control and capital formation. It also helps in planning for Rapid Economic Growth.
  4. The study of Macroeconomics is very important for evaluating the overall national income.
  5. Monetary problem can be understood, analysed and dealt properly.
  6. It helps in analysing the fluctuations in the economy, its causes and remedial measures.
  7. It enables us to study the nature and size of material welfare of the people.


Limitations of Macroeconomics –

Some limitations of macroeconomics are as follows: -

  1. Macroeconomics deals with aggregates, which refer to individual totals. However, overall results may differ from individual behaviour.
  2. It does not study the different effects of the aggregate on different sectors of the economy.
  3. It ignores the contribution of Individual units.
  4. If each data unit is different, it becomes difficult to judge.
  5. The aggregate tendency may not affect all sectors equally.
  6. Aggregate values cannot be used when individual items need to be considered separately.
  7. Macroeconomic tools are quite useful and applicable in assessing the problems of individually advanced countries, but it is not useful for less developed countries.


Economics can also be divided as:


1. Positive Economics Vs Normative Economics


Positive Economics –

  1. It is concerned with ‘What Is’.
  2. Positive economics is an objective branch of study that allows conclusions to be made using verifiable facts.
  3. It explains the causes and consequences without passing any moral judgements on the desirability of ends.


Normative Economics –

  1. It is the systematic knowledge relating to ‘What Ought to Be’.
  2. It analyses causes, effects of a problem, passes moral judgements on the rightness and wrongness of things, and also prescribes a solution to the problem.


Economics is both Positive and Normative, as it explains the things as they are and also what they ought to do.

For Example:

  1. As Positive Economics, it tells us there is unemployment and also explains its causes and consequences.
  2. As Normative Economics, it observes how such problems of unemployment should be overcome.

So, it tells us not only how things are but also how things should be. The subject analyses the various causes and consequences of a problem and also prescribes measures to tackle the problem. That is why, it is both positive and normative.


2. Static Economics Vs Dynamic Economics


Static Economics –

  1. The word ‘Static’ is derived from ‘Statike’ which means bringing to standstill or no movement.
  2. According to J.B. Clark, “a static state is characterised by the absence of 5 kind of changes, i.e.,
  3. Supply of Capital
  4. Size of Population
  5. Methods of Production
  6. Forms of business organisations
  7. Wants of people


Importance of Static Economics –

Importance/merits of Static Economics are as follows: -

  1. It is simple and easy method of economic analysis.
  2. Traditional economics assume static condition for the purpose of investigation.
  3. This analysis helps in comparing one position of equilibrium with that of another.
  4. It helps in problem solving.
  5. Most area of economic theory is based on economic statistics. Example: theory of free trade, comparative cost analysis, marginal analysis etc. are very much static in nature.
  6. It provides us with understanding regarding behaviour of variable in economy.
  7. It also helps in studying various types of allocative problems in the economy.
  8. It also forms basis called, Dynamic Analysis.


Limitations of Static Economics –

Some limitations of static economics are as follows: -

  1. Unrealistic: Economic static is away from reality. Economic conditions are rarely static in reality. Markets, preferences, and technologies constantly change, making static analysis often unrealistic.
  2. Absence of study of Dynamics: Static economics cannot study economic growth, business cycles, or the impact of policy changes over time. It is unable to study the effects of investment, technological progress, and changes in consumer behaviour.
  3. Policy Implications: The Policies derived from static analysis may be ineffective or even harmful if they do not account for dynamic factors such as time element, expectations, and adaptive behaviours of economic agents.
  4. Lack of Equilibrium Focus: Static economics study often neglect to focus on equilibrium conditions, and ignore how economies actually reach equilibrium. This can lead to misunderstandings about the processes driving economic stability or instability.
  5. Simplification of Complex Systems: Static study may oversimplify complex economic interactions, excluding important variables and their operations that play crucial roles in dynamic systems. It also excludes the influence of external forces and if they are related to close economy.


Dynamic Economics –

  1. Modern economic analysis is dynamic analysis.
  2. The word dynamic means “cause to move”.
  3. It is the study of economic change.
  4. It takes into account all kinds of changes.
  5. According to JR Hicks, “Economic Dynamic refers to that part of Economic Theory in which every quantity must be dated.


Importance of Economic Dynamic –

Importance/merits of economic dynamic are as follows: -

  1. Economic dynamics is more realistic than Economic Static because it does not deal with unrealistic assumptions.
  2. It considers time element and occupies a very important role.
  3. This method is based on several economic theories such as savings, interest, investment etc.
  4. It is more flexible in its approach.
  5. It is more useful in the fields of business cycle.


Limitations of Economic Dynamic –

Some limitations of economic dynamic are as follows: -

  1. It is a complex method as very few economies are equipped with technology to use data which make this economy less popular.
  2. This method is not fully developed. The lack of data has restricted its growth.


3. Partial Equilibrium Analysis Vs General Equilibrium Analysis


Partial Equilibrium Analysis –

  1. It is called microeconomic analysis.
  2. It is the study of equilibrium position of an individual firm, industry o group of industries.
  3. According to Stigler, “Partial equilibrium is one which is based on only a restricted range of data. For example: price of single project, the price of all other project being held as fixed during the analysis.”


Importance –

Importance/Merits of Partial Equilibrium Analysis are as follows: -

  1. It is simple analysis.
  2. It is useful in predicting the consequences of changes in the behaviour of an individual economic unit.
  3. It is helpful in solving several problems at micro level.


Limitations –

Some limitations of Partial Equilibrium Analysis are as follow: -

  1. It is based on unrealistic assumptions.
  2. It gives the partial picture of the economy as it doesn’t deal with the entire economy.
  3. It deals with individual economic units, hence, the application of partial economic analysis is very limited.
  4. It completely ignores the independence of market.


General Equilibrium Analysis –

  1. It is an extensive study of number of economic variables, their inter-relationship and their interdependence for understanding the working of entire economic system as a whole.
  2. According to Stigler, “The theory of general equilibrium is the theory of inter-relationship among all parts of economy.”


Importance –

Importance/merits of General Equilibrium Analysis: -

  1. It helps in studying entire economy as a whole.
  2. It is highly useful in the analysis of inter-sectoral changes and their effect on the economy.
  3. It is used in several branches of economy such as welfare economics, monetary economics etc.
  4. It helps in understanding the problem of market and process of pricing.
  5. It gives the true picture of economic equilibrium.


Limitations –

Some limitations of General Equilibrium Analysis are as follows: -

  1. It is based in unrealistic assumptions. (Full Employment).
  2. It has less practical experience.
  3. It is complicated study.
  4. It is static in nature.


4. Long-Run Vs Short-Run

In long run, quantity of labour, quantity of capital and production process are variable.

In short run, quantity of labour is variable but quantity of capital and production process are fixed.