MEANING
AND DEFINITION OF MICRO ECONOMICS
The term 'micro' has been derived from the Greek word 'Mikros', which means small. Thus, micro economics is the study of individual units of economy such as individual consumers, individual firms and small groups of individual units such as various industries and markets. The term 'microeconomics' has been defined as under:
1. "Microeconomics is the study
of a particular firm, particular household, individual price, wages, income,
industry and particular commodity.'
-Prof. K. E. Boulding
2. "Microeconomics is concerned
with the economic activities of units such as consumers, resource owners and
business firms.
-Prof. Leftwitch
3. "Microeconomics is the study
of economic action of individual and well defined group of individuals.
Handerson and Quandt
SCOPE OF
MICRO ECONOMICS
Micro
Economics studies the individual units of an economy. It includes determination
of price for a commodity, determination of price for a factor of production and
the principles of welfare economics. Scope of micro economics can be illustrated
with the help of following diagram:
IMAGE
CHARACTERISTICS
OF MICRO ECONOMICS
1. A Study of Individual Units: Micro economics is a study of individual units of an economy
such as a particular consumer, a particular household, particular firm, a particular
industry, a particular commodity etc.
2. A Study of Small Variables: Micro economics is a study of small variables. These
variables have a negligible (almost nil) effect on whole economy.
3. Determination of Individual Price: Price theory studies the determination of price for an
individual commodity and an individual factor of production.
IMPORTANCE
OF MICRO ECONOMICS
1. Helpful in Understanding the Whole Economy: An economy is made of individual
units. Therefore, the study of economic activities and behaviour of these units
helps in understanding the whole economy.
2. Helpful in Understanding the Working of Private Sector: Micro economics explains how are the
productive resources allocated in a free market economy for producing various
goods and services.
3. Helpful in Price Determination: Micro economics explains how the relative prices of various
factors of production are determined. It also explains the determination of
price of goods and services.
4. Helpful in the Formulation of Economics Policies of Government: All the economic policies of Government
are affected by the working of individual economic units. As micro economics
studies the activities of such units, it furnishes analytical tool for economic
policies.
5. Helpful in the Study of Welfare Economics: Welfare economics is concerned with
the economic weIfare of consumers and producers. Price theory can be used to
examine conditions of economic welfare.
6. Helpful in Decision Making of an Individual: Micro economics helps an individual
consumer in deciding how to spend his income to get maximum satisfaction and an
individual producer in deciding how to allocate his productive resources to get
maximum production at minimum cost.
7. Helpful in the Formulation of Economics Laws: Micro economics helps in formulating
fundamental economic laws such as the law of diminishing marginal utility, the
law of equi-marginal utility, the theory of consumer's surplus, the theories of
determination of rent, wages, interest and profit etc.
LIMITATIONS
OF MICRO ECONOMICS
1. Based on Impractical Assumptions: Micro economic analysis is based upon certain assumptions
like full employment and perfect competition etc.
2. It does not Provide Real Picture of the Whole Economy: Study of individual economic units
does not provide a complete and real picture of economy.
3. It does not help in the Solution of Problems of National Importance: Micro economic analysis may be
helpful in solving the problems of individual economic units, but it is not of
much help in the solution of economic problems of national importance such as
monetary policy, fiscal policy, employment policy, public finance etc.
4. Results of Micro Analysis do not apply on the whole Economy: Results of micro analysis are not
necessary to apply on the whole economy.
For example- saving is necessary
for an individual but nor for an economy.
DISTINCTION BETWEEN MICROECONOMICS AND MACROECONOMICS:
|
S.No |
Basis of Difference |
Micro Economics |
Macro Economics |
|
1. |
Meaning |
Micro economics is a study of individual unit of an economy. |
Macro economics is the study of the aggregate covering the whole
economy. |
|
2. |
Field of study |
Micro economics studies individual economic unit such as individual
consumer, a household, a firm, a industry, a commodity etc. |
Macro economics is the study national aggregates such as national
income, national output general price level, level of saving and investment,
level of employment etc |
|
3 |
Deal with |
Micro economics deal with determination of price of a commodity, a
factor of production, satisfaction of consumer etc. |
Macro economics deal with the problem of unemployment , trade cycles,
international trade, economics growth etc. |
|
4. |
Tools |
Demand and supply of a particular commodity. |
Aggregates demand and supply
of whole economy |
|
5. |
Assumption |
It assumed that all macro economics variable are constant. |
It assumed that all micro economics variable are constant. |
|
6. |
Concerned with |
·
Theory of product pricing ·
Theory of factor pricing ·
Theory of economic welfare |
·
Theory of national income ·
Aggregate consumption ·
Theory of general price level |
|
7. |
Basis parameters |
Price |
Income |
|
8. |
Other name |
It is also known as Price theory. |
It is also known as Income and Employment theory. |
|
9 |
Application |
It applied in operational and internal issues. |
It applies in environment and external issues. |
