Microeconomics | Importance of Microeconomics | Scope | Uses
Microeconomics
The word Micro was derived from the Latin word ‘Mikros’ which means small.
Micro economics is that branch of economics which deals with the small units of economics, like individual income, saving, consumption etc.
The study of small or individual economic activities is the microeconomics.
It is also known as price theory or value theory because it studies about price determination process of individual firms, individual industries and pricing of factor of production.
Microeconomic theories make the assumptions of, other things remaining same, full employment of resources and short term analysis.
According to K.E. Boulding, “Microeconomics is the study of particular firms, particular households, individual prices, wages, income, individual industries and particular commodities.”
According to C.R. McConnell, S.L. Brue and S.M. Flynn, “Microeconomics is the part of economics concerned with decision making by individual customers, workers, households and business firms.”
From the above cited definition it is obvious that microeconomics studies the economic behavior of individual economic decision makers, such as a consumer, a worker, a firm, or a manager.
It analyzes the behavior of individual households, industries, markets, labour unions or trade associations.
In microeconomics we measure the price of a specific product e.g. tea, coffee, a mobile phone, a book of microeconomics, the number of workers employed by a single firm e.g. a legal or accounting service provider, the revenue or income of a particular firm or household or the expenditure of a specific firm, family and of a government unit.
Microeconomics deals with how wage of labour, rent of land and other rentable assets, interest of money borrowed and lent are determined in the market.
It analyses issues like the demand for and supply of a commodity in a market or the effect of government subsidy to sugarcane/just producing farmers as well as the effect of minimum wage fixation.
Features or Characteristics of Microeconomics
The main features of microeconomics are given below:
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a. |
It is individualistic economics. |
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b. |
It is concerned with individual economics activities like particular households, individual income, wage, firms etc. |
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c. |
It assumes to be full employment equilibrium in the economy. |
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d. |
Assumptions are made in microeconomic theories; it means it is based on partial equilibrium analysis. |
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e. |
It is based under market economy where price plays a central role. |
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f. |
It is known as price theory or value theory. |
Importance of Microeconomics
In the study of economic theory micro economics occupies a great important role; following are the main importance of micro economics:
To understand the functioning of free economy
Micro economics explains the working of a free economy.
It tells us how millions of consumers and producers in an economy take decision about allocation of productive resources among millions of goods and services.
To provide tools for economic policies
Micro economics provides different analytical tools to evaluate economic policies like pricing policy, tax policy of the government.
Market mechanism is the main tools which helps us in this respect.
Helps in efficient allocation of resources
The main problem faced by modern government is the efficient allocation of resources among different alternatives.
Micro economics helps to allocate an economising scarce resource efficiently.
Helps to the business man
Micro economics help to the business man in the achievement of maximum productivity with the help of available resources.
Producer will be able to know consumers quantity demand and then calculate cost of production and revenue.
Helpful in international trade
Micro economics is used to explain profit or loss from trade. It also explains balance of payment, determination of foreign exchange rate in the field of international trade.
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Scope of Microeconomics
Scope of microeconomics is also known as the subject matter of microeconomics.
It analyses in microeconomics.
Microeconomics is the study of individual units of the economy such a consumer, a firm, a worker, a price of product etc.
Firms have to make decision on what goods and services to produce and how much to produce, for whom to produce that output and how much to charge for the output; households have to make choices on what and how much to buy.
The determination of prices of products and factors of production also come within the study of microeconomics.
So, microeconomics is also called price theory.
The major areas of study of microeconomic are explained below:
(A) Product pricing theory
Microeconomics explains how the prices of goods and services are determined.
Product pricing is the one of the main topics covered in microeconomic.
This theory analysis the determination of prices of various products through the interaction between demand and supply viz interaction between the buyers and sellers.
In a centrally planned (command), economy prices of goods and services are determined by the government authority such as diesel, petrol, gas cylinder etc.
But in a free market and mixed economic system, the prices of goods and services are determined by forces of market demand and supply such as edible oil, rice, vegetables etc.
Demand theory states that people demand less when prices are rising.
Supply theory states that when the price of a product increases, businesses firm increase supply in the market.
However, supply would respond differently with change in price in the short-term and long-term of time.
(B) Factor pricing theory
Land, labour, capital and entrepreneur’s ability are the essential factors of production.
These factors are used for producing goods and services.
Employers pay rent for the use of land and machinery, wage for labour service, interest for the use of monetary capital and entrepreneurs get profit for their enterprising ability.
In factor pricing theory of microeconomics, following topics are studied:
Rent theory
Wage theory
Interest theory
Profit theory
(C) Welfare theory
Welfare economics uses techniques of microeconomics to evaluate well-being from the allocation of productive resources in connection with desirability and economic efficiency.
It analyzes social welfare in terms of economic activities of the individuals of the society.
The central point of welfare economics is the study of the economic welfare of the human community.
The welfare theory keeps the man in the primary place and wealth in secondary place.
Wealth is only the means of human satisfaction.
Therefore wealth is only a means to the fulfillment of ends, which is human welfare.
In welfare theory of microeconomics, following topics are studied:
What to produce?
How to produce?
When to produce?
To whom to produce?
Uses of Microeconomics
Microeconomic theories are used in the analysis of the behaviour of an individual consumer, a business firm, a supplier of resource(s) of production, a government unit and market of goods and services.
The following are some of the major used and important of microeconomics:
Individual behaviour
Microeconomics is the branch of economics.
It studies the behaviour of individual economic units like consumers, workers, investors, owners of land, business firms and any individual or organization that plays a role in the working of an economy.
It explains how and why these units make economic decisions.
For example, it explains how consumers make buying decisions and how their choices are affected by changes in prices and incomes.
It also explains how firms decide how much to produce and how many workers to employ.
Free enterprise economy
Microeconomics helps to understand how a free enterprise and market economy works.
A market economy operates with the free play of demand and supply sides but with a minimum involvement of the government.
In market economy individuals and firms have freedom of choice in making decision in the use of scarce resources.
Individuals and households freely decide what and how much to consume, in which a firm to work, whom to lend saving.
Similarly, decision on what goods and services to produce, how to produce, when to produce and for whom to produce are taken independently by the producers.
Welfare economics
Welfare economics is the branch of economics.
It uses microeconomics techniques to evaluate welfare or well-being at the aggregate level.
Microeconomic theory is concerned with the economic efficiency and economic welfare.
In welfare economics, economists are concerned with how societies allocate scarce resources to improve the wellbeing of the largest section of the society.
The study of microeconomic theory can help in deciding appropriate allocation of resources and production of goods and services for the growth of social welfare.
Welfare economics depends on assumptions regarding the measurability and comparability of human welfare.
It is based on ethical value and philosophical ideas about well-being.
Government’s policies
Microeconomic analysis also provides the foundation for examining the role of the government in the economy and the effects of government actions.
Microeconomic tools are commonly used to evaluate the most important issues in modern society like pollution control, rent controls, minimum wage laws, import-export tariffs and quotas, housing, educational programmes, health care programs, workplace safety etc.
The government charges taxes on above mentioned economics tools.
Taxes effect to the buyers and sellers and demand and supply also.
The microeconomic concepts of evaluating the positive and negative externalities are very useful for making government pricing and taxation policies for certain goods and services.
Foreign trade analysis
Microeconomics is used to explain the gains from international trade.
Foreign trade depends on import and export of goods and services.
The elasticity of import and export in the trading countries, effect of dumping, balance of payments disequilibrium, the determination of foreign exchange rate, imposition of tariffs and its impact on foreign trade.
Useful to business firms
Business firm uses microeconomic theory and its methods of analysis to solve certain problems.
Microeconomic theory used by business executives are known as business economics.
The good knowledge of microeconomic theory enables business executives to make improved decision in demand analysis, output decision, cost analysis and calculating prices.
Business firm or management decision making includes:
(i) Allocation of resources in an optimal way to produce goods and services
(ii) Demand analysis and its forecasting
(iii) Making optimal and best production decision
(iv) Analysis of cost of production
(v) Fixation the price of the products
(vi) Payments to factors of production
(vii) Making profitable investment decisions etc.
Limitations of Microeconomics
Major limitations of microeconomics include the following:
Unrealistic assumptions
Microeconomics is based on unrealistic assumptions.
The assumption of the existence of full employment is hard to realize practically.
Ceteris paribus assumptions
Ceteris paribus means other things remaining the same.
Most microeconomic theories are based on the static assumption.
The assumption of ceteris paribus makes microeconomic analysis less practical in the real-life situations.
Difficult to generalize
Microeconomics studies individual units or units taken in few numbers.
It is somewhat difficult to generalize the individual behaviour to large context.
Generally, microeconomic concepts may not always be true or correct.
Studies part
Microeconomics studies part of the economy, not the total.
Hence, it does not help much in understanding any economic system as a whole.
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