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Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics : Karnataka State Open University is located in Manasagangotri, Mysore. It is recognized as one of the best Open Universities in India imparting Distance Education. The University was established during 1996 and the library started functioning in the same year. It has a glorious record of worthy service with a multi disciplinary resource collection of more than one lakh volumes. The KSOU Library is open to the University user community for reading and reference, for which the user is required to provide a requisition to the Librarian, for the membership. The membership is given to Students, Research scholars and Faculty of the University of KSOU only.

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics : Here we are presenting you all “Some Important Karnataka Class 12 Commerce Economics Limitations Of Micro Economics ” . Download here Karnataka Class 12 Commerce Economics Limitations Of Micro Economics complete details in PDF Format.

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics :  Economics (UK English: /kəˈnɒmɪks/, /ɛkəˈnɒmɪks/;[ US English: /ɛkəˈnɑːmɪks/, /ikəˈnɑːmɪks/ is “a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services”.

Economics focuses on the behavior and interactions of economic agents and how economies work. Consistent with this focus, textbooks often distinguish between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labor, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).

Other broad distinctions within economics include those between positive economics, describing “what is”, and normative economics, advocating “what ought to be”; between economic theory and applied economics; between rational and behavioral economics; and between mainstream economics and heterodox economics.

Download here Karnataka Class 12 Commerce Economics Limitations Of Micro-Economics complete details in PDF Format.

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics : Microeconomics is the study of individual markets, that is, markets for a single product or a group of related products. Macroeconomics, in contrast, does not deal in markets at all. It is the study of the aggregate behavior of an economic system, using such measures as employment and inflation.

One limitation of both macroeconomics and microeconomics is pointed out by the Leontief input-output model, which shows that all markets are related. For example, as has happened, a change in the price or availability of oil can affect the price and availability of many other resources and products and thereby influence the aggregate economy. That’s why people say that a rise in the price of oil (microeconomics) causes inflation (macroeconomics).

Another limitation of both microeconomics and macroeconomics is that they are sciences in which it is seldom possible to conduct controlled experiments. As a result, both consist of poorly tested abstract models that are too simplified to predict real-world behavior with any accuracy.

The basic limitation is that real-world economics is far too complicated to be accurately modeled by any theory.

Microeconomics does have its uses. It would predict, for example, that if an insurer undertakes to pay the asking price for a medical product or service, the price will go up. It broadly predicts how the price consumers are willing to pay for health insurance depends on their subjectively perceived state of health. The structure of health insurance legislation depends on lawmakers’ understanding of such market interactions.

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics : Despite its importance, microeconomics analysis suffers from certain limitations, which are as follows.

  • What is true in the case of an individual unit may not be true in the case of aggregates. For example, individual thrift may be good, but social thrift is definitely harmful for the community. If the entire community starts saving more, effective demand will be reduced and employments retarded. Likewise wage cutting in a particular firm may promote employment, but general wage cutting may actually result in reducing the volume of employment in a community. The result of micro economic analysis should therefore be applied to the aggregates with caution.
  • Micro economic analysis assumes other things being equal and is based on the assumption of full employment in society. This is a highly unrealistic assumption. What exists in society normally is not full employment but under employment. As Keynes point out, “to assume full employment is to assume our difficulties away”.
  • Microeconomics instead of studying the total economy concentrates only on small parts of it. Consequently it throws no light on the collective functioning of the national economy.
  • There are certain economic problems which cannot be analyzed with the aid of microeconomics. For example, important problems relating to public finance, monetary and fiscal policies etc are beyond the scope of microeconomics.
  • Microeconomics suffers from abstractness. It fails to provide us with a description of the real world as it is. Its abstractness mostly stems from the fact that it is not in a position to take into account the entire economic data of the real world. Microeconomics may not explain why the price of sugar in Bombay is higher than its price in Delhi, but it does explain in general how the price of sugar is determined in actual practice.
  • Micro economics is based on the assumption of laissez-faire. However, I actual practice it hardly exists and practiced anywhere in the world.

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics : It is on account of these limitations and weakness that microeconomics has lost its former appeal with the economists. The present professional dissatisfaction against microeconomics can be traced back to the great depression of 1930’s when it failed to grapple with the twin problems of increasing unemployment and falling prices in the capitalist world. The main draw back of micro economics is that it fails to offer practical guidance to government in the formulation of appropriate economic policies. Micro economics, therefore, needs to be reformulated if it is to regain its former glory

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics : Some of the important limitations of microeconomics are listed below:

1. Excessive Generalisation:

Despite the immense importance of macroeconomics, there is the danger of excessive generalisation from individual experience to the system as a whole.

If an individual withdraws his deposits from the bank, there is no-harm in it, but if all the persons rushed to withdraw deposits, the bank would perhaps collapse.

2. Excessive Thinking in terms of Aggregates:

Again, macroeconomics suffers from excessive thinking in terms of aggregates, as it may not be always possible to have the homogeneous constituents. Prof. Boulding has pointed out that 2 apples + 3 apples = 5 apples is a meaningful aggregate ; 2 apples + 3 oranges = 5 fruits may be described as a fairly meaningful aggregate ; but 2 apples + 3 sky scrapers constitute a meaningless aggregate ; it is the last aggregate which brings forth the fallacy of excessive aggregative thinking.

3. Heterogeneous Elements:

It may, however, be remembered that macroeconomics deals with such aggregates as aggregate consumption, saving, investment and income, all composed of heterogeneous quantities. Money is the only measuring rod. But the value of money itself keeps on changing, rendering economic aggregates immeasurable and incomparable in real terms. As such, the sum or average of heterogeneous individual quantities loses their significance for accurate economic analysis and economic policy.

4. Differences within Aggregates:

Under this approach one is likely to overlook the differences within aggregates. For example, during the first decade of planning in India (from 1951-1961) the national income increased by 42% ; this, however, doesn’t mean that the income of all the constituents, i.e., the wage earners or salaried persons increased by as much as that of entrepreneurs or businessmen. Hence, it takes no account of differences within aggregates.

5. Aggregates must be functionally related:

The aggregates forming the main body of macroeconomic theory must be significant and mutually consistent. In other words, these should be functionally related. For example, aggregate consumption and investment expenditures—which form part of the macroeconomic theory (Y = C + I) would have no importance, if they were not functionally related to the levels of income, interest and employment. If these composing aggregates are mutually inconsistent or are not functionally related, the study of macroeconomic theory will be of little use.

6. Limited Application:

Macroeconomics deals with positive economics in the sense of an analysis or how the aggregate theoretical models work—these are far removed from policy applications. These models explain the functioning of an economy and working of things in abstract and precise terms. Their abstraction and precision make such models unsuitable for use due to changes in significant variables from time to time and from one situation to another. But these limitations may be taken more in the nature of practical difficulties in formulating meaningful aggregates rather than factors invalidating the immense importance of macroeconomic analysis.

With the commencement of Keynes’ General Theory and his basic equation, Y = C + I; interest in the study of macroeconomics has deepened. Significant breakthroughs in the computation of national income accounts (the study of which forms the very basis of macroeconomics) prove it beyond doubt that the limitations of macroeconomic studies are not insurmountable.

Karnataka Class 12 Commerce Economics Limitations Of Micro Economics Notes

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