Here is a compilation of term paper topics on ‘Economics’ especially written for commerce and management students.
Term Paper Topics on Economics
Contents:
- Term Paper on the Definition of Economics
- Term Paper on the Meaning of Micro Economics
- Term Paper on the Importance and Uses of Micro Economics
- Term Paper on the Meaning of Macro Economics
- Term Paper on Why a Separate Study of Macro Economics: Macro Economic Paradoxes
- Term Paper on the Interdependence between Micro and Macro Economics
- Term Paper on the Concept of Demand for Goods
- Term Paper on the Supply of Goods
Term Paper Topic
# 1. Definition of Economics:
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It is necessary to define the subject which we want to study. Definition of a subject facilitates the understanding of its meaning, nature, characteristics and limitations. Therefore, it is necessary to begin the study of economics with its definition.
But it is difficult to provide a universally accepted definition of economics because the economists are divided on the question of definition of economics. J.N. Keynes remarked, “Political economy is said to have been strangled itself with definitions.” Mrs. Barabara Wooten has said, “Where six economists are gathered, there are seven definitions.”
Though the dispute of definition of economics has not yet come to an end, even an analytical study of all the available definitions is necessary to arrive at a conclusion.
Available definitions of economics can be divided into four parts:
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I—Wealth Definitions.
II—Welfare Definitions.
III—Scarcity Definitions.
IV—Growth Definitions.
I. Wealth Definitions:
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Early classical economists defined economics as the science of wealth. Adam Smith, J.B. Say, F.A. Walker and other contemporary economists of 18th and early 19th centuries are the economists who defined economics as that part of knowledge which is related with wealth.
According to Them:
1. “Political Economy is a study of the nature and causes of the wealth of nations.”—Adam Smith
2. “Economics is the science which treats of wealth.” —J.B. Say
3. “Economics is that body of knowledge which relates to wealth.” —FA. Walker
Salient Features of Wealth Definitions:
Important features of wealth definitions may be summarised as follows:
1. Central point of the subject matter of economics is wealth.
2. Wealth occupies more important place than man.
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3. Wealth is the only base of human pleasure.
4. An ordinary man is an economic man who performs economic activities motivated by his ‘self’ only.
5. Individual prosperity adds to national wealth and prosperity.
Criticisms of Wealth Definitions:
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Wealth definitions have been sharply criticised on following grounds:
1. Wealth has been more emphasised than man. These definitions have confined economics to ‘gespel of mamon’, ‘science of bread and butter’, ‘a dismal science’.
2. These definitions imagined an ‘economic man.’ According to these economists, wealth is the only motivating force for all human activities. But this is wrong. A man is motivated by social feelings also, apart from wealth.
3. These definitions use the term ‘wealth’ in a narrow sense. According to these definitions, wealth includes only material goods. The fact is that wealth means all the goods and services that have utility, scarcity and transferability.
II. Welfare Definitions:
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Alfred Marshall was the first economist to set at rest the criticisms of wealth definitions. He emphasised that man is not for wealth but wealth is for man. The view of Prof. Marshall was supported by Prof. Pigou, Cannon and Clark, etc.
According to Him:
“Economics is a study of mankind is the ordinary business of life. It examines that part of social action which is most closely connected with the attainment and with the use of material requisites of wellbeing.”
On the basis of above definition, it can be concluded that according to Prof. Marshall Economics is the study of material welfare of mankind.
Salient Features of Welfare Definitions:
1. Economics is the Study of Ordinary Business of Life:
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Economics is the study of ordinary business of life. Ordinary business of life relates to those activities which are performed by an ordinary man for earning and using his income.
2. Economics is a Social Science:
Economics is a social science. It studies the economic problems of those individuals only who live in a well organised society.
3. Economics Studies only the Economic Activities:
Economics studies only those economic activities that promote material welfare of human being. Thus, non- economic activities are not included in the scope of economics.
4. Dominance of Man:
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Welfare definitions have emphasised upon the importance of man. According to Prof. Marshall, man is not for wealth, wealth is for man. According to him, wealth is only a means and not an end. End is human welfare.
5. Economics is Both a Science and an Art:
According to Prof. Marshall, economics is a science as well as an art. Economics is a positive science because it studies the principles of human life in a systematic manner. It is a normative science also because it attempts at attaining material welfare. It is an art also because it develops the methods of attaining human welfare.
Criticisms of Welfare Definitions:
For a long time, welfare definitions of economics were accepted without criticisms and it was being felt that the problem of defining economics has come to an end. But this situation could not continue forever. In 1932, Prof. Lionel Robbins broke new grounds in defining economics in his book ‘The Nature and Significance of Economic Science’.
Some of the important criticisms of welfare definitions are as follows:
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1. The Classification of Human Activities into Economic and Non-Economic is Impracticable:
Welfare definitions classify human activities into economic and non- economic. Prof. Robbins was of the view that such distinction of human activities is illusory and impracticable because all human activities have an economic aspect.
2. The Classification of Material and Immaterial Welfare is Impracticable:
According to welfare definitions, economics is the science of material welfare. Prof. Robbins criticised this view on the ground that it is wrong to differentiate between material and immaterial welfare. He was of the view that human welfare is associated with both the material and immaterial means of welfare.
3. Economics is a Human Science, and not only a Social Science:
According to Prof. Marshall, economics is only a social science but the critics are of the view that it is a human science also not only a social science. Many laws of economics apply on those people also who do not live in well-organised society.
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4. Illusory Meaning of Ordinary Business of Life:
According to Prof. Robbins, human activities cannot be classified as ordinary and extraordinary. Secondly, the study of economics cannot be confined to ordinary business of the life only because the activities of extra-ordinary business of life such as war, monopoly, imperfect competition etc., are essentially the subject matter of economics.
5. Welfare Definitions make Economics a Normative Science:
Prof. Robbins criticised welfare definitions on the ground that these definitions have made economics a normative science. He believed that it is not proper to relate economics with welfare. He remarked, “Whatever economics is concerned with, it is not concerned with the causes of material welfare as such.” According to him, economics is a positive science.
6. Narrow Scope of Economics:
Prof. Robbins criticised welfare definitions on the ground that these definitions have narrowed the scope of economics by excluding non-economic, immaterial and unsocial activities.
III. Scarcity Definitions:
Prof. Lionel Robbins not only criticised welfare definitions but also proceeded to give a new definition to economics. He gave his definition in his book ‘Nature and Significance of Economic Science’ published in 1932. According to him, “Economics is a science which studies human behaviour as a relationship ends and scarce means which have alternative uses.”
The views of Prof. Robbins were fully supported by many famous economists including Eric Roll, Cairn-cross, Friedman and Stigler etc.
Salient Features of Scarcity Definitions:
1. Human Wants are Unlimited:
Human wants are unlimited and the intensity of all the wants is different. Though a particular want can be satisfied at a particular time but as soon as one wants is satisfied, another crop up. Thus, a man is always surrounded by his wants. He can never satisfy all of his wants. Therefore, the need arises to choose between more and less urgent wants. It gives rise to the economic problems.
2. Means to Satisfy Human Wants are Scarce:
The resources available with every person are limited therefore; he is to choose rationally between limited resources and unlimited wants. A man has to decide which want to satisfy and which to leave. Then he is to decide which want should be satisfied first and which after some time. He has to see how best he can use his limited resources.
3. Scarce Resources have Alternative Uses:
The problem of unlimited wants and scarce resources becomes more serious because of the fact that scarce resources have alternative uses. These resources can be put to several alternative uses. If we want to use the given resources for a particular use, all other alternative uses of these resources will have to be given up. It gives rise to the problem of choice and a man has to choose the best possible uses of his resources.
4. Economics is a Human Science:
According to Prof. Robbins, economics is a human science. It studies the activities of all the persons, whether they are or they are not a part of society.
5. Economics is a Positive Science:
According to Prof. Robbins, economics is a positive science. According to him, economics is the science of resources and is not concerned with ends.
6. Analytical:
Scarcity definitions of economics are analytical. According to these definitions, economics studies the aspects related with choice and human activities. It is not confined to the study of some particular types of activities.
Criticisms of Scarcity Definitions:
Scarcity definitions have been criticised by many economists.
Important criticisms of these definitions are as under:
1. Economics is not only a Positive Science:
According to Prof. Robbins, economics is a positive science. But many economists like, Souter, Parson and Macfic etc., regard economics as a positive and normative science both.
2. Economics cannot be Neutral between Ends:
According to Prof. Robbins, economics is neutral between ends but it is not a real implication. Economics is concerned with human behaviour and therefore, it cannot be neutral between ends.
3. Economics without the Concept of Welfare and Measuring Rod of Money:
The definition of Prof. Robbins has been criticised on the ground that it establishes economics without the concept of welfare and measuring rod of money. The reality is that all the human activities are motivated to get welfare. Similarly, the science of economics is incomplete without measuring rod of money.
4. Economics is not only a Value Theory:
According to Prof. Robbins, economics is the study of allocation of resources. Thus, according to Robbins, economics has been confined only to a theory of value but the scope of economics is much wider than the allocation of resources and price theory. It should include the study of national income and employment also.
5. Economics is not only Micro Analysis:
According to Prof. Robbins, economics is concerned with individual behaviour of satisfying unlimited wants with scarce resources having alternative uses. Thus, economics has been confined to micro analysis only. But it is not true.
6. Robbins has Restricted and Widened the Scope of Economics:
Prof. Robbins has widened the scope of economics by giving his definition in terms of the problem of scarcity and choice. The problem of choice applies on all the human activities but all these cannot be included in the scope of economics.
7. Economics is not only a Science but an Art also:
According to Prof. Robbins, economics is only a science which aims at formulating economic principles only. But this is not a reality. These principles should be implemented properly for the welfare of human beings. Thus, economics is an art also.
8. Robbins has Imagined a Very Rational Man:
According to the definition of Prof. Robbins, a man allocated his scarce resources most efficiently so that he may satisfy most of his wants. Thus, Prof. Robbins imagines that a man always behaves rationally. But the practical experience of life does not prove this imagination.
IV. Growth Definitions:
Modern economists define economics in following manner:
“Economics is the study of how man and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future among various people and groups of society.”
Thus, modern economists regard economics much more broadly. According to them, economics is concerned with suggesting the ways and means in which the available resources can be allocated rationally and in which these resources can be further increased so that maximum satisfaction of wants may be assured.
Comparison between the Definitions of Marshall and Robbins:
Which of the definitions of Prof. Marshall and Prof. Robbins is better is an alive controversy. Both the definitions are based upon different views.
A comparison of these definitions reveals the following facts:
1. The definition of Prof. Robbins is more scientific than that of Prof. Marshall because it provides a scientific base to the study of economics in the form of scarcity and choice.
2. The definition of Prof. Robbins is more logical than that of Prof. Marshall because it highlights a reality of life that human wants are unlimited and the resources to satisfy these wants are limited, that too with alternative uses.
3. According to Prof. Marshall, economics is only a social science but according to Prof. Robbins, economics is a human science.
4. According to Prof. Marshall, economics studies only the economic activities while according to Prof. Robbins, economics studies both the economic and non-economic activities.
5. According to Prof. Marshall, economics aims at increasing human welfare while according to Prof. Robbins economics is not concerned with human welfare.
6. According to Prof. Marshall, economics is both the science and art. According to Prof. Robbins economics is only a positive science and not an art.
7. The definition of Prof. Marshall is classificatory while the definition of Prof. Robbins is analytical.
Thus, it may be concluded that no definition of these two can be regarded as better. Theoretically, the views of Prof. Robbins are more justified but practically the views of Prof. Marshall are more practical.
Term Paper Topic # 2. Meaning of Micro Economics:
The subject-matter of economics has been divided into two parts Micro Economics and Macro Economics. These terms were first coined and used by Ragnar Frisch and have now been adopted by the economists all the world over. The term Micro Economics is derived from the Greek word mikros, meaning “small” and the term Macro Economics is derived from the Greek word makros, meaning “large.”
Thus Micro Economics deals with the analysis of small individual units of the economy such as individual consumers, individual firms and small aggregates or groups of individual units such as various industries and markets. On the other hand, Macro Economics concerns itself with the analysis of the economy as a whole and its large aggregates such as, total national output and income, total employment, total consumption, aggregate investment.
Thus, according to K.E. Boulding, “Micro Economics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities.”
About Macro Economics he remarks, “Macro Economics deals not with individual quantities as such but with aggregates of these quantities not with individual incomes but with the national income; not with individual prices but with the price level; not with individual outputs but with the national output.”
From this some idea about the distinction between Micro and Macro Economics can be obtained but a full analytical distinction between the two is made clear.
Term Paper Topic # 3. Importance and Uses of Micro Economics:
Micro Economics occupies a vital place in economics and it has both theoretical and practical importance. It is highly helpful in the formulation of economic policies that will promote the welfare of the masses. Till recently, especially before Keynesian revolution, the body of economics consisted mainly of Micro Economics.
Despite the popularity of Macro Economics these days, Micro Economics retains its importance, theoretical as well as practical. It is Micro Economics that tells us how a free-market economy with its millions of consumers and producers works to decide about the allocation of productive resources among thousands of goods and services.
As Professor Watson says, “Micro Economic theory explains the composition or allocation of total production, why more of some things are produced than of others.” He further remarks that Micro Economic theory has many uses. The greatest of these is depth in understanding of how a free private enterprise economy operates.
Further, it tells us how the goods and services produced are distributed among the various people for consumption through price or market mechanism. It shows how the relative prices of various products and factors are formed, that is, why the price of cloth is what it is and why the wages of an engineer are what they are and so on.
Moreover, as described above, Micro Economic theory explains the conditions of efficiency in consumption and production and highlights the factors which are responsible for the departure from the efficiency or economic optimum. On the basis of this, Micro Economic theory suggests suitable policies to promote economic efficiency and welfare of the people.
Thus, not only does Micro Economic theory describe the actual operation of the economy, it has also a normative role in that it suggests policies to eradicate “inefficiency” from the economic system so as to maximize the satisfaction or welfare of the people. The usefulness and importance of Micro Economics has been nicely stated by Professor Lerner.
He writes, “Micro Economic theory facilitates the understanding of what would be a hopelessly complicated confusion of billions of facts by constructing simplified models of behaviour which are sufficiently similar to the actual phenomena to be of help in understanding them.”
These models at the same time enable the economists to explain the degree to which the actual phenomena depart from certain ideal constructions that would most completely achieve individual and social objectives. They thus help not only to describe the actual economic situation but to suggest policies that would most successfully and most efficiently bring about desired results and to predict the outcomes of such policies and other events. Economics thus has descriptive, normative and predictive aspects.
Micro Economic analysis is also usefully applied to the various applied branches of economics such as Public Finance, and International Economics. It is the Micro Economic analysis which is used to explain the factors which determine the distribution of the incidence or burden of a commodity tax between producers or sellers on the one hand and the consumers on the other.
Further, Micro Economic analysis is applied to show the damage done to the social welfare or economic efficiency by the imposition of a tax. If it is assumed that resources are optimally allocated or maximum social welfare prevails before the imposition of a tax, then it can be demonstrated by Micro Economic analysis that what amount of the damage will be caused to the social welfare by levying direct or indirect taxes.
The imposition of a tax on a commodity (i.e., indirect tax) will lead to the loss of social welfare by causing deviation from the optimum allocation of resources, while the imposition of a direct tax (for example, income tax) will not disturb the optimum resource allocation and therefore will not result in loss of social welfare.
Further, microeconomic analysis is applied to show the gain from international trade and to explain the factors which determine the distribution of this gain among the participant countries. Besides, Micro Economics finds application in the various other problems of international economics.
Whether devaluation will succeed in correcting the disequilibrium in the balance of payments depends upon the elasticities of demand and supply of exports and imports. Furthermore, the determination of the foreign exchange rate of a currency, if it is free to vary, depends upon the demand and supply of that currency.
We thus see that Micro Economic analysis is very useful and important branch of modern economic theory.
Term Paper Topic # 4. Meaning of Macro Economics:
The word Macro is derived from the Greek word ‘makros’ meaning ‘large’ and therefore macroeconomics is concerned with the economic activity in the large. Macro Economics analyses the behaviour of the whole economic system in totality or entirety.
In other words, Macro Economics studies the behaviour of the large aggregates such as total employment, the national product or income, the general price level in the economy. Therefore, Macro Economics is also known as aggregative economics. Macro Economics analyses and establishes the functional relationship between these large aggregates.
Thus Professor Boulding says, “Macro Economics deals not with individual quantities as such but with the aggregates of these quantities; not with individual incomes but with the national income; not with individual prices but with the price level; not with individual outputs but with the national output.”
In his other famous work “Economic Analysis”, he similarly remarks, “Macro Economics, then, is that part of the subject which deals with great aggregates and averages of the system rather than with particular items in it and attempts to define these aggregates in a useful manner and to examine their relationships.”
Professor Gardner Ackley makes the distinction between the-two types more clear and specific when he says, “Macro Economics concerns itself with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of the national income, with the “general price level.” Micro Economics, on the other hand, deals with the division of total output among industries, products and firms and the allocation of resources among competing uses. It considers problems of income distribution. Its interest is in relative prices of particular goods and services.”
Macro Economics should be carefully distinguished from Micro Economics. It should be noted that Micro Economics also does deal with some “aggregates” but not of the type with which Macro Economics is concerned. Micro Economics examines the behaviour of an industry in regard to the determination of its product-price, output and employment, and an industry is an aggregate of the various firms producing the same or similar product.
Likewise, Micro Economic theory seeks to explain the determination of price of a product through the interaction of the market demand and market supply for a product. Market demand for a product is the aggregate of the individual demands of all consumers wishing to buy the product and the market supply of a product is the aggregate of the productions of many firms producing that product. Similarly, demand for and supply of labour in an industry of a city through which Micro Economics explains wage determination are aggregative concepts.
But the aggregates with which macroeconomics is concerned are of somewhat different variety. Macroeconomics concerns itself with these aggregates which relate to the whole economy. Macro Economics also discusses the sub-aggregates of the large aggregates relating to the whole economy, but these sub-aggregates, unlike the aggregates of Micro Economics which examines aggregates relating to a particular product, a particular industry or a particular market, cut across various products and industries. For example, the total production of consumer goods (i.e., total consumption) and the total production of capital goods (i.e., total investment) are two important sub-aggregates dealt with in Macro Economics but these aggregates are not confined to a single product or a single industry but instead they refer to all industries producing consumer goods and all industries producing capital goods.
Moreover, the sub-aggregates, add up to an aggregate for the whole economy. For instance, total consumption and total investment, two important sub-aggregates in Macro Economics, together constitute the total national product. Likewise, the total wage income (i.e., total share of labour) and total profits (defined as total property income) add up to the national income.
Professor Ackley thus says, “Macro Economics also uses aggregates smaller than for the whole economy but only in a context which makes them sub-divisions of an economy-wide total. Micro Economics also uses aggregates, but not in a context which relates them to an economy-wide total.”
Term Paper Topic # 5. Why a Separate Study of Macro Economics: Macro Economic Paradoxes:
Now an important question which arises is why a separate study of the economic system as a whole or its large aggregates is necessary. Can’t we generalise about the behaviour of the economic system as a whole or about the behaviour of large aggregates such as aggregate consumption, aggregate saving, and aggregate investment from the economic laws governing the behaviour patterns of the individual units found by Micro Economics.
In other words, can’t we obtain the laws governing Macro Economic variables such as total national product, total employment and total income, general price level, etc. by simply adding up, multiplying or averaging the results obtained from the behaviour of the individual firms and industries? The answer to this question is the behaviour of the economic system as a whole or the Macro Economic aggregates is not merely a matter of addition or multiplication or averaging of what happens in the various individual parts of the whole.
As a matter of fact, in the economic system what is true of parts is not necessarily true of the whole. Therefore, the application of micro-approach to generalise about the behaviour of the economic system as a whole or Macro Economic aggregates is incorrect and may lead to misleading conclusions.
Therefore, a separate macro-analysis is needed to study the behaviour of the economic system as a whole in respect of various Macro Economic aggregates. When laws or generalisations are true of constituent individual parts but untrue and invalid in case of the whole economy, paradoxes seem to exist.
Various examples of macro-paradoxes (that is, what is true of parts is not true of the whole) can be given from the economic field. We shall give two such examples of saving and wages, on the basis of which Keynes laid stress on evolving and applying macroeconomic analysis as separate and distinct approach from Micro Economic analysis. Take saving first. Saving is always good for an individual, since they save for some purpose such as for old age, for education of their children, for purchasing durable things like houses and cars etc. in the future, for accumulation of money to start or expand business, for lending to others including banks to earn interest. But saving is not always good for the society as a whole.
If an economy is in the grip of depression and unemployment caused by the deficiency of aggregate effective demand, then the increase in savings by individuals (which are beneficial for them individually) will lead to the further fall in aggregate demand of the society and as a result the depression and unemployment will further increase. Thus saving which is always a virtue for individuals becomes, at times of depression and unemployment, a vice for the society. This has been called a paradox of thrift.
Another common example to prove that what is true for the individual may not be true for the society as a whole is the wage-employment relationship. Classical and neoclassical economists, especially A.C. Pigou, contended that the cut in money wages at times of depression and unemployment would lead to the increase in employment and thereby eliminate unemployment and depression.
Now, it is true that a cut in money wages in an individual industry leads to more employment in that industry. It is quite common place conclusion of Micro Economic theory that, given the demand curve for labour, at a lower wage more men will be employed. But for the society or economy as a whole this is highly misleading. If the wages are cut all-round in the economy, as was suggested by Pigou and others on the basis of wage-employment relationship in an industry, the aggregate demand for goods and services in the society will decline, since wages are incomes of the workers which constitute majority in the society.
The decline in aggregate demand will mean the decrease in demand for goods of many industries. Because the demand for labour is a derived demand, i.e. derived from the demand for goods, the fall in aggregate demand for goods will result in the decline in demand for labour which will create more unemployment rather than reduce it.
We thus see that the laws or generalisations which hold good for the behaviour of an individual consumer, firm or industry may be quite invalid and misleading when applied to the behaviour of the economic system as a whole. There is thus a fallacy of composition. This is so because what is true of individual components is not true of their collective whole. As mentioned above, these are called Macro Economic paradoxes and it is because of these paradoxes that a separate study of the economic system as a whole is essential.
We therefore conclude that a separate and distinct macro-economic analysis is essential if we want to understand the true working of the economic system as a whole. From this it should not be understood that microeconomic theory is worthless and should be abandoned.
As a matter of fact, microeconomics and macro-economics are complementary to each other rather than being competitive. The two types of theories deal with different subjects; one deals mainly with the explanation of relative prices of goods and factors and the other mainly with the short-run determination of income and employment of the society and its long-run growth. The study of both micro and macroeconomics is therefore necessary.
Term Paper Topic # 6. Interdependence between Micro and Macro Economics:
Actually Micro and Macro Economics are interdependent. The theories regarding the behaviour of some Macro Economic aggregates (but not all) are derived from theories of individual behaviour. For instance, the theory of investment, which is a part and parcel of the Macro Economic theory, is derived from the behaviour of individual entrepreneur.
According to this, an individual entrepreneur in his investment activity is governed by the expected rate of profit on the one hand and rate of interest on the other. And so is the aggregate investment function. Similarly, the theory of aggregate consumption function is based upon the behaviour patterns of individual consumers. It should be noted that we are able to draw aggregate investment function and aggregate consumption function because in this respect the behaviour of the aggregate is in no way different from the behaviour patterns of individual components.
Moreover, ‘ we can derive the behaviour of these aggregates only if either the composition of aggregates is constant or the composition changes in some regular way as the size of aggregates changes. From this it should not be understood that behaviour of all Macro Economic relationships is in conformity with behaviour patterns of individuals composing them. As we saw above, saving investment relationship, wage-employment relationship for the economic system as a whole are quite different from the corresponding relationships in case of individual parts.
Micro Economic theory contributes to Macro Economic theory in another way also. The theory of relative prices of products and factors is essential for explanation of the determination of general price level.
Even Keynes used Micro Economic theory to explain the rise in prices as a result of the increase in the money supply of the country. According to Keynes, when as a result of the increase in money supply and consequently the aggregate demand, more output is produced, the cost of production rises. With the rise in the cost of production, price rises.
According to Keynes, cost of production rises because of:
(1) The law of diminishing returns operates, and
(2) Ages and prices of raw materials may rise as the economy approaches full employment.
Now, the influences of cost of production, diminishing returns, etc., on the determination of prices are the parts of microeconomics.
The Dependence of Micro Economic on Macro Economics:
Not only does macroeconomics depend upon to some extent on Micro Economics, Micro Economics also depends upon to some extent on Macro Economics. The determination of the rate of profit and the rate of interest are well-known Micro Economic topics, but they greatly depend upon the Macro Economic aggregates.
In Micro Economic theory, the profits are regarded as reward for uncertainty bearing but Micro Economic theory fails to show the economic forces which determine the magnitude of profits earned by the entrepreneur and why there are fluctuations in them. The magnitude of profits depends upon the level of aggregate demand, national income, and the general price level in the economy.
We know that at times of depression when the levels of aggregate demand, national income and price level are low, the entrepreneurs in the various fields of the economy suffer losses. On the other hand, when aggregate demands, incomes of the people, the general price level go up and conditions of boom prevail, the entrepreneurs earn huge profits.
Now, take the case of the rate of interest. Strictly speaking the theory of the rate of interest has now become a subject of Macro Economic theory. Partial equilibrium theory of interest which belongs to Micro Economic theory would not reveal all the forces which take part in the determination of the rate of interest.
Keynes showed that the rate of interest is determined by the liquidity preference function and the stock (or supply) of money in the economy. The liquidity preference function and the stock of money in the economy are Macro Economic concepts. No doubt the Keynesian theory has also been shown to be indeterminate, but in the modern theory of interest Keynesian aggregative concepts of liquidity preference and stock of money play an important role in the determination of the rate of interest.
Moreover, in the modern interest theory (that is, LM and IS curves model) along with liquidity preference and the supply of money, the other two forces which are used to explain the determination of interest are saving and investment functions which are also conceived in aggregative or macro terms.
It is thus clear from above that the determination of the profits and rate of interest cannot be explained without the tools and concepts of Macro Economics. It follows that though Micro Economics and Macro Economics deal with different subjects, there is great interdependence between them.
In the explanation of many economic phenomena, both Micro and Macro Economic tools and concepts have to be applied. About interdependence between Micro Economics and Macro Economics, Professor Ackley’s remarks are worth quoting.
He says, “The relationship between Macro Economics and theory of individual behaviour is a two-way street. On the one hand, microeconomic theory should provide the building blocks for our aggregate theories. But Macro Economics may also contribute to Micro Economic understanding. If we discover, for example, empirically stable Macro Economic generalisations which appear inconsistent with Micro Economic theories, or which relate to aspects of behaviour which Micro Economics has neglected, Macro Economics may permit us to improve our understanding of individual behaviour.”
Term Paper Topic # 7. The Concept of Demand:
We study the theory of demand at two different levels — at the level of an individual consumer and at the market level. The market demand for a commodity is more important for determining the price of a commodity rather than individual demand.
The amount of a commodity that consumers wish to purchase is called the quantity demanded. The quantity demanded of a commodity is a desired flow. Various factors effect the quantity of a commodity demanded by a consumer. We study three types of demand in microeconomics: autonomous demand, joint demand and derived demand.
Most commodities are demanded for their own sake to satisfy a need or a desire. This is known as autonomous demand. Some commodities are jointly demanded such as motor car and petrol. One has no value without the other.
However, factors of production are not demanded for their own sake. The demand for a factor of production or input (such as land) is derived from the demand for a commodity (such as wheat). Thus, the demand for a factor is a derived (or, indirect) demand.
The Demand Function:
The demand function is a mathematical expression of the relationship between the quantity of a commodity demanded and its various determinants, such as the price of the commodity, the income of the buyer, the prices of relative goods (substitutes and complements), and the taste and preference of the buyer.
The market demand for a commodity also depends on the pattern of income distribution and the age composition of people.
The consumer’s demand functions show the optimal amounts of each of the goods that he desires to buy as a function of prices and income faced by the consumer.
The demand functions are expressed as:
x1 = f1 (p1, p2, m) and
x2 = f2 (p1, p2, m).
The left hand side of each equation shows the quantity of a commodity demanded. The right hand side of each equation is the function that relates the prices of two goods (p1 and p2) to income (m) to that quantity (x1 or x2). Since taste and preference cannot be measured, we have not included them in the above to demand functions.
If all variables shown on the right hand side of the above to equations change at the same time, it is not possible to know which factor exerts how much influence on x1 or x2. This is why we vary one variable at a time. This is known as the ceteris paribus assumption.
Thus if we hold p2 and m constant, then the quantity of x1 demanded becomes a function of its own price and we can express the first demand function as:
x1 = f1 (p1).
Similarly we can express the second demand function as:
x2 = f2 (p2)
If we hold p1 and m constant. This is indeed the ceteris paribus assumption, which means other things being constant. Thus x1 is a function of only p1 p2 and m remaining constant.
Term Paper Topic # 8.
Supply of Goods:
The price of a commodity is determined both by demand and supply. Demand is half the story. The willingness and ability of suppliers to provide the good are equally important factors that must be weighed by decision makers in all societies. So we will now turn to the other side of the market, which is supply.
As in the case of demand, several factors are important to suppliers. One important factor is the own price of the good. Other things being equal, the quantity supplied will vary directly with the price of the good. This relationship is called the law of supply.
The relationship between price and quantity supplied is direct or positive. We may mention at the outset that by supply we mean the quantity of a commodity that suppliers will wish to offer for sale at a particular price.
The Supply Function:
The quantity supplied of a commodity is a function of various factors including its own price. The supply function shows the relationship between the quantity supplied of a commodity and its various determinants.
It may be expressed as:
Qsx = f (Px, Py, O, W, T, t, etc.), where
Qsx = quantity supplied of the commodity,
Px = price of the commodity,
Py = prices of other commodities which compete for the same resource,
O = objective (motivation) of the producers,
W = weather (acts of God),
T = technology and
T = time period.