Micro Economics

Micro Economics

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Definitions of Micro Economics

Small units of an economy are included in Micro Economics e.g. one consumer, one producer, one firm, one industry etc. In other words, individual units are studied in Micro Economics. It has main instruments of demand and supply. It solves the three basic central problems of an economy i.e., what, how and for whom to produce.

Important definitions of ‘Micro Economics’ are as follows :

1. According to K.E. Boulding, “Micro Economics may be defined as that branch of analysis, which studies the economic behaviour of the individual unit, may be a person, a particular household or a particular firm. It is a study of one particular unit rather than all the units combined together.”

2. According to Handerson an Quant. “Micro Economics is the study of economic action of individual and well-defined group of individuals.”

Characteristics of Micro Economics

Salient characteristics of Micro Economics are a follows :

1. Study of Individual Economic Units : Various factors like individual income, production, consumption etc. are explained with the help of Micro Economics.

2. Study of Micro Variables : In micro economic analysis micro variables of the economy are studied. For Example, one firm, one industry, one consumer, one producer etc. These micro variables generate neglible effect which does not affect the entire economy.

3. Study of Individual Price Determination : In micro economic analysis, price determination of individual units on the basis of demand and supply is done.

Scope and Branches of Micro Economics

Scope of ‘Micro Economics’ includes mainly three theories : 1. Theory of Product Pricing. 2. Theory of Factor Pricing. 3. Theory of economic Welfare.

1. In Theory of Product Pricing, Price determination of consumption goods is studied which includes both demand as well as supply sides. Demand side studies the behaviour and consumption pattern of consumers while in supply side, production cost and production conditions are included.

2. In Theory of Factor Pricing, price determination of factors of production (i.e. rewards to factors for their contributions in production) is studied.

3. Theory of Economic Welfare, is the central point of micro economic analysis in which it is studied how to distribute the given quantities of goods and services among different consumers so as to maximize the economic welfare.

Significance of Studying Micro Economics

1. Necessary to Study the Economy as a Whole : Addition of individual units makes the entire economy. Hence, knowledge of individual units is necessary for economic analysis of the entire economy.

2. Helpful in Determining Economic Problems : Price determination and distribution problems find important place in economic analysis. These problems are solved with micro economic. Price determination takes place with demand and supply forces which is a part of micro economic analysis.

3. Helpful in Policy Formulation : Individual units analysis in micro economics helps Government in formulating economic policies.

4. Helpful in Understanding the Problems of Applied Economics : Micro economic analysis helps in understanding the problems of various branches of applied economics like Public Finance, International Economics etc.

5. Helpful in Understanding the Working of Capitalist Economy : Capitalist economy is a free economy in which central problems of the economy are solved by ‘Price Mechanism’ (i.e. by interplay of demand and supply forces). Micro economic analysis is helpful in solving the economic problems of capitalist economy.

Limitations of Micro Economic Analysis

Micro economic analysis fails to adopt the shape of ‘Universal Analysis’ due to its various limitations are as follows :

1. Study not of Whole but of a Fraction : Micro economics studies only a fraction of the economy and does not study the entire economy. The true picture of the entire economy can not be represented by studying only individual units.

2. Inadequate Analysis : Micro economic analysis is an inadequate analysis because conclusions derived from individual units may not be applicable to entire economy. Micro Economics fails to analyse the collective nature of the entire economy.

3. Based on Unrealistic Assumptions : Micro economic analysis is based on the unrealistic assumption of ‘Full Employment’. Full employment does not prevail in real life, rather it is an exception to the real word.

4. Based on Laissez Faire Concept : Micro economic analysis is based on ‘Laissez Faire’. Government role remains absent in laisses faire (i.e. free economy). In present days, role of the government is necessary in economic world.