Microeconomics is derived from a Greek word means small. Basically it is the study of particular economic units, firms, households, individual prices, wages, income, individual industries and commodities. The theory of microeconomics or price theory is based on the study of individual parts of the economy. We study the individual consumer’s demand for a good and to derive the market demand for a good (i.e. demand of an individual or group for a good) in microeconomic analysis. Similarly we study the individual firm’s behavior in the fixation of prices and output in microeconomic theory. The words by Samuelson for microeconomics are that we examine how individual prices are set among other things, what determines the capital and land prices and enquire the weaknesses & strength in regard to market mechanics. In the words of Left witch “Microeconomic theory or price theory deals with the economic behavior of individual decision making units such as consumers, resource owners, business firms as well as individuals who are too small to have an impact on the national economy.
Microeconomics and allocation of resource. The microeconomic theory takes the total quantity of resources as given. It seeks to explain how they are allocated to the production of goods. The allocation of resources to the production of goods depends upon the price of various goods and the prices of factors of production. Microeconomics analyses how the relative prices of goods and factors are determined. Thus the theory of product pricing and the theory of factor pricing (rent wages, interest and profit) fall within the domain of micro economics.
Microeconomics and economic efficiency. The microeconomic theory seeks to explain whether the problems of scarcity and allocation of resources so determined are efficient. Economic efficiency involves (C) efficiency in consumption (3) efficiency in production and distribution and (3) over all economic efficiency. Micro economic theory spells out the conditions of efficiency. These conditions can be of greatest help in raising the standard of living of the people. The total content of micro economic theory is presented in the following chart.
Importance of micro economics:
Before Keynesian revolution, the body of economics mainly consisted of micro economics. The classical economics as well as the neo-classical economics belonged to the domain of micro economics. The importance and uses of micro economics in brief are as under:
- Helpful in understanding the working of free market economy. The micro economics helps us to understand the working of free market economy. It tells us as to how the prices of the products and the factors of production are determined. It throws light as to how the goods and services produced are distributed among the various people for consumption through market mechanism.
- Helps in knowing the conditions of efficiency. Microeconomics helps in explaining the conditions of efficiency in consumption, production and in distribution of the rewards of factors of production. It highlights the factors which are responsible for the departure from achieving the optimum efficiency. It suggests policies also which help in the promotion of economic efficiency of the people.
- Working of the economy without central control. The microeconomics reveals how a free enterprise economy functions without any central control.
- Study of welfare economy. Microeconomic involves the study of welfare economics.
Limitations of Microeconomics. Micro-economics despite its many advantages is not free from limitations. They in brief are (1) Assumption of full employment in the economy which is unrealistic (2) Assumption of laisses fair policy which is no longer in practice in any country of the world (3) It studies part of the economy and not the whole.
Summing up, microeconomics is the study of the decisions of people and businesses and the interaction of those decisions in the market. It analyses the “trees” of the economy as distinct from the “forest”.
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