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Microeconomics

Updated: Apr 14

The subject matter of economics is divided into two categories – microeconomics and macroeconomics. The term ‘micro’ is derived from the Greek word, ‘Mikros’ which means small or a millionth part. The term ‘macro’ is derived from the Greek word, ‘Makros’ which means large. The terms ‘Micro’ and ‘Macro’ in economics have been coined by Norwegian Economist Prof. Ragnar Frisch of Oslo University. Microeconomics deals with a small part of the overall economy. It studies the economic actions and behavior of individual units such as an individual consumer, individual producer, or a firm. Macroeconomics is the branch of economics which analyses the entire economy.

Microeconomics v/s Macroeconomics
 

Scope of Micro Economics:

1. Theory of product pricing, which includes -

(a) Theory of consumer behavior.

(b) Theory of production and costs.

2. Theory of factor pricing, which constitutes -

(a) Theory of wages.

(b) Theory of rent.

(c) Theory of interest.

(d) Theory of profits.

3. Theory of economic welfare


Importance of Micro Economics

1) Price Determination: Microeconomics explains how the prices of different products and various factors of production are determined.

2) Free Market Economy: Microeconomics helps in understanding the workings of a free market economy. A free market economy is an economy where the economic decisions regarding producing goods, such as ‘What to produce’? ‘How much to produce’? ‘How to produce’? etc. are taken at individual levels. There is no intervention by the Government or any other agency.

3) Foreign Trade: Microeconomics helps in explaining various aspects of foreign trade like the effects of tariffs on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a specific country, etc.

4) Economic Model Building: Microeconomics helps in understanding various complex economic situations with the help of economic models. It has made a valuable contribution to economics by developing various terms, concepts, terminologies, tools of economic analysis, etc. Economic models are built using various economic variables.

5) Business Decisions: Microeconomic theories are helpful to businessmen in making crucial business decisions. These decisions are related to the determination of the cost of production, the determination of prices of goods, the maximization of output and profit, etc.

6) Useful to Government: It is helpful to the government in framing economic policies such as taxation policy, public expenditure policy, price policy, etc. These policies help the government to attain its goals of efficient allocation of resources and promoting the economic welfare of society.

7) Basis of Welfare Economics: Microeconomics explains how best results can be obtained through the optimum utilization of resources and their best allocation. It also studies how taxes affect social welfare.


Microeconomics v/s Macroeconomics




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