AB, CD, EF are 3 budget line. I1, I2, I3 are 3 indifference curve.

At the preliminary stage budget line AB and IC is I1 and equilibrium point is R. As income increases budget line shifted new line is CD, new IC is I2 and equilibrium is S. If income further increase budget line will be EF, IC is I3 and new equilibrium is T. If we add the equilibrium points at different. Income level we get a curve and it is the ICC curve.

Economics as a subject of modern study, distinguishable from moral philosophy and politics, dates from the work, Inquiry into the Nature and Causes of the Wealth of Nations (1776), by the Scottish philosopher and economist Adam Smith. Mercantilism and physiocracy were precursors of the classical economics of Smith and his 19th-century successors.

Standard economics can be divided into two major fields.

• The first, price theory or microeconomics, explains how the interplay of supply and demand in competitive markets creates a multitude of individual prices, wage rates, profit margins, and rental changes. Microeconomics assumes that people behave rationally. Consumers try to spend their income in ways that give them as much pleasure as possible. As economists say, they maximize utility. For their part, entrepreneurs seek as much profit as they can extract from their operations.
• The second field, macroeconomics, deals with modern explanations of national income and employment. Macroeconomics dates from the book, The General Theory of Employment, Interest, and Money (1935), by the British economist John Maynard Keynes. His explanation of prosperity and depression centers on the total or aggregate demand for goods and services by consumers, business investors, and governments. Because, according to Keynes, inadequate aggregate demand increases unemployment, the indicated cure is either more investment by businesses or more spending and consequently larger budget deficits by government.

Adam smith wrote a book in 1776 whose title was “Wealth of Nations”. In his book he discussed the word ‘wealth’ through its four aspects: production of wealth, exchange of wealth, distribution of wealth and consumption of wealth. There fore it can be said according to Adam Smith:

• Economics is a science of wealth.

Wealth means goods and services transacted with the help of money. Lets discuss four aspects of wealth; first one is production of wealth it shows as to how goods and services are produced. Goods and services are produced by the combination of four factors of production i.e. land, labour, capital and organization.

Second aspect is exchange of wealth there are many procedures of goods and services in a society. Every procedure produces goods and services more than his personal requirement. The exchange of wealth enables everyone in the society to satisfy his multiple wants. Third aspect is distribution of wealth, which means the distribution of goods and services among different sections or individuals of a society. As known by explanation of exchange of wealth that procedures of goods and services exchange the surplus wealth with each other through out the year. The last and forth aspect is consumption of wealth that is using up the utility of goods and services for the satisfaction of wants is called the consumption of wealth.

Definition of Economics given by Marshall

Alfred Marshall’s Principles of Economics was the most influential textbook in economics. Marshall defined economics as

• Econimics is study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.”

Many other books of the period included in their definitions something about the “study of exchange and production.” Definitions of this sort emphasize that the topics with which economics is most closely identified concern those processes involved in meeting man’s material needs. Economists today do not use these definitions because the boundaries of economics have expanded since Marshall. Economists do more than study exchange and production, though exchange remains at the heart of economics.

Definition of Economics given by Robbins

Most contemporary definitions of economics involve the notions of choice and scarcity. Perhaps the earliest of these is by Lionell Robbins in 1935:

• “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

Virtually all textbooks have definitions that are derived from this definition. Though the exact wording differs from author to author, the standard definition is something like this:

• Economics is the social science which examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants.

Microeconomics looks at the behavior of individuals, homes, businesses or even groups of these. Microeconomics looks at prices of things and of services. It wants to help people decide how to divide society’s resources. To do this, microeconomics wants to understand how decisions are made and how these small decisions affect bigger things. Macroeconomics looks at the all the economy. It tries to explain the causes of numbers like national income, employment rates, and inflation. Connecting the two branches has been important and the general idea since the early 1980s. A good macroeconomic theory is based on microeconomics, meaning one can explain macroeconomic events using microeconomics for individuals.

MACROECONOMICS

Like most definitions in economics, there are various competing definitions of the term Macroeconomics and Microeconomics.

 The simplest answer to the question “What is Macroeconomics?” can be found at WordReference.com. They state that “Macroeconomics is the branch of economics concerned with aggregates, such as national income, consumption, and investment “.

The Economist’s Dictionary of Economics defines Macroeconomics as “The study of whole economic systems aggregating over the functioning of individual economic units. It is primarily concerned with variables which follow systematic and predictable paths of behavior and can be analyzed independently of the decisions of the many agents who determine their level. More specifically, it is a study of national economies and the determination of national income.”

 The website Tutor2U.net answers the question “What is Macroeconomics” with the following response: “Macroeconomics considers the performance of the economy as a whole. Many macroeconomic issues appear in the press and on the evening news on a daily basis. When we study macroeconomics we are looking at topics such as economic growth; inflation; changes in employment and unemployment, our trade performance with other countries (i.e. the balance of payments) the relative success or failure of government economic policies and the decisions made by the Bank of England.”

 Wikipedia.org states that “Macroeconomics is the study of the entire economy in terms of the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices. Macroeconomics can be used to analyze how best to influence policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments. ”

Introduction to Macroeconomics:

Macroeconomics, branch of economics concerned with the aggregate, or overall, economy. Macroeconomics deals with economic factors such as total national output and income, unemployment, balance of payments, and the rate of inflation. It is distinct from microeconomics, which is the study of the composition of output such as the supply and demand for individual goods and services, the way they are traded in markets, and the pattern of their relative prices.

 At the basis of macroeconomics is an understanding of what constitutes national output, or national income, and the related concept of Gross National Product (GNP). The GNP is the total value of goods and services produced in an economy during a given period of time, usually a year. The measure of what a country’s economic activity produces in the end is called final demand. The main determinants of final demand are consumption (personal expenditure on items such as food, clothing, appliances, and cars), investment (spending by businesses on items such as new facilities and equipment), government spending, and net exports (exports minus imports).

Macroeconomic theory is largely concerned with what determines the size of GNP, its stability, and its relationship to variables such as unemployment and inflation. The size of a country’s potential GNP at any moment in time depends on its factors of production—labor and capital—and its technology. Over time the country’s labor force, capital stock, and technology will change, and the determination of long-run changes in a country’s productive potential is the subject matter of one branch of macroeconomic theory known as growth theory.

The study of macroeconomics is relatively new, generally beginning with the ideas of British economist John Maynard Keynes

  in the 1930s. Keynes’s ideas revolutionized thinking in several areas of macroeconomics, including unemployment, money supply, and inflation.

MICROECONOMICS

Perhaps the simplest answer to the question “What is Microeconomics?” can be found at WestValley.edu. They state that “Microeconomics deals with the decision making and market results of consumers and firms”.

 Wikipedia.org states that “Microeconomics is the study of the economic behavior of individual consumers, firms, and industries and the distribution of total production and income among them.It considers individuals both as suppliers of labor and capital and as the ultimate consumers of the final product.”

 The Economist’s Dictionary of Economics defines Microeconomics as “The study of economics at the level of individual consumers, groups of consumers, or firms… The general concern of microeconomics is the efficient allocation of scarce resources between alternative uses but more specifically it involves the determination of price through the optimizing behavior of economic agents, with consumers maximizing utility and firms maximizing profit.”

 Apart from all the above definitions I’ll state as the following:

Microeconomics is the branch of economics that deals with small units, including individual companies and small groups of consumers. Economics is concerned with the allocation of scarce means among competing ends. People have a variety of objectives, ranging from the satisfaction of such minimum needs as food, clothing, and shelter, to more complex objectives of all kinds, material, aesthetic, and spiritual. However, the means available to satisfy these objectives at any point in time are limited by the available supply of factors of production (labor, capital, and raw materials) and the existing technology.
Microeconomics is the study of how these resources are allocated to the satisfaction of competing objectives. It contrasts with macroeconomics, which is concerned with the extent to which the available resources are fully utilized, or increase over time, and related issues. It is not always possible to make a distinction between microeconomics and macroeconomics. For example, the difference between conflicting schools of thought in macroeconomics is sometimes traced to differences in assumptions related to microeconomics.

Adam Smith’s Definition: Adam Smith (1723-1790), the founder of economics described it as a science of wealth in his book, “The wealth of nations “in 1776.
The early economist also called economics the science of wealth.
According to Cairn’s, “Economic deals with the phenomenon of wealth”
According to F.A. Walker, “Economics is that relates to wealth”

* (Wealth means that goods and services transacted with the help of money)

There are four aspects of wealth in the light of Adam Smith’s definition of Economics.

1. Production of wealth: There are four factors of production i.e. land, labor, capital and entrepreneur. The production of goods and services is the result of combination of four factors of production. The wage is given to labor as a reward of its physical and mental work where capital helps to produce goods and services by providing man made resources. The rent is that part of payment which is made only for the use of land where as the entrepreneur has to act of combining the factors of production to produce goods and services.

2. Exchange of wealth: The multiple wants of the people are satisfied by the exchange of goods and services produced for each other. The above phenomenon can take place with the help of wealth.

3. Distribution of wealth: The distribution of wealth means the share of each factor of production in national wealth produced in a year as a result of exchange of wealth. Some parts of society are backward due to unequal share in the national wealth; it is called unequal distribution of wealth.

4. Consumption of wealth: The people use their share in the national wealth for the satisfaction of their human wants and get utility from the use of goods and services. It is known as the consumption of wealth.

The study of economics, founded as a separate academic discipline in the 18th century, is an inexact science – largely because complex patterns of human behaviour have to be reduced to gross simplifications to enable economists to analyse them. Nevertheless, some general observations are known as laws.

Law of Diminishing Returns That if one factor of production – staff, say – is continually increased while the others remain constant, eventually the point is reached where each new unit of increase brings a smaller addition to production than the previous one. In a car cruising in top gear, for instance, each additional litre of petrol (gas) used produces a smaller and smaller increase in speed, so that a car cruising at 100km/hr (58 mph) uses more than twice as much petrol as a car travelling at 50km/hr (29 mph). Also known as the Law of Variable Proportions.

Gresham’s Law That ‘bad money drives out good’. Or, that debasing the metal content of coinage lowers the value of money, since owners of unadulterated coins tend to hoard them or melt them down to purchase a greater number of debased coins. Attributed, with no foundation, to Elizabeth I’s financial adviser, Sir Thomas Gresham. Probably first stated by the Polish astronomer Nicolaus Copernicus.

Iron Law of Wages That if wages rise above subsistence level, they produce a higher birthrate and expand population, which in turn forces wages down to subsistence level again. Given wide currency by British economist David Ricardo, but French origin. Not now accepted, since in the 20th century wealthy nations have in practice tended to have lower birthrates than poor nations.

Parkinson’s Law That work expands to fill the time availasble to do it. Or, that the amount of work done varies inversely to the number of people employed. Humorously (but still seriously) published by the British economist Cyril Northcote Parkinson in 1958.

Peter Principle That in any organisation every employee rises to his level of incompetence. All valuable work is therefore done by people who have not yet reached that level. Another satirical law, published by a Canadian-born author, Professor Lawrence J. Peter, in 1969.

Say’s Law. That every rise in the supply of goods produces an increase in demand for them. Stated by the French economist Jean-Baptiste Say in 1803. True only for barter economies, but generally believed until the Great Depression.

Law of Supply and Demand That competition between consumers and producers brings the supply of goods and the demand for them into balance. Cardinal ‘law’ of free-market economic theory. Overproduction lowers prices, increasing demand; over consumption raises prices, reducing demand.

By definition, then, the elasticity of demand is the rate at which the quantity demanded changes in response to a change in price.
Its formula is: Ed = percentage change in quantity demanded/percentage change in price.

This rate of change in demand varies according to commodities, market and consumers. At times a small change in prices has a big effect of demand. This phenomenon is called elastic demand. This effect is usually seen when consumers have more buying options. There are also situations when a large change in price has a small effect of demand. This is called inelastic demand. Commodities like basic food items like salt tend to show inelastic demand.

A perfect elastic demand exists when demand increase with no change in price. This is called infinite elasticity. A situation of zero elasticity result when lowering the price does not increase the demand.