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Microeconomics
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Microeconomics

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  • 1. What is Microeconomics ? Meaning & DefinitionMicro means small. Thus, micro economics analyses individualistic behaviour. It studies anindividual consumer, producer, price of a particular commodity, household, etc.According to Prof. K. E. Boulding, "Micro Economics is the study of particular firm, particularhousehold, individual prices, wages, incomes, individual industries and particular commodities."Scope of MicroeconomicsMicro Economics is concerned with the following topics :-1. Commodity PricingPrices of individual commodities are determined by market forces of demand and supply. Somicro economics makes demand analysis (individual consumer behaviour) and supply analysis(individual producer behaviour).2. Factor PricingLand, labour, capital and entrepreneur, all factors contribute in production process. So they getrewards in the form of rent, wages, interest and profit respectively. Micro economics deals withdetermination of such rewards i.e. factor prices. So micro economics is also called as PriceTheory or Value Theory.3. Welfare TheoryMicro economics deals with optimum allocation of available resources and maximisation ofsocial welfare. It provides answers for What to produce?, When to produce?, How to produce?
  • 2. and For whom it is to be produced?. In short, Micro economics guides for utilizing scarceresources of economy to maximize public welfare.Characteristics / Features of MicroeconomicsClassical economists always insisted on micro economics because they believed that it is betterto understand concept at individual level and then go for general (or macro) level. E.g. firstunderstanding individual consumer behaviour and then analyzing the behaviour of entire market.1. Nature of AnalysisIn micro economics, the behaviour of individual consumers and producers in detail is analysed. Itis study of subject matter from particular to general.2. MethodMicro economics divides the economy into various small units and every unit is analysed indetail. It is a slicing method.3. ScopeMicro economic analysis involves product pricing, factor pricing and theory of welfare.4. ApplicationBoth theoretically and practically, micro economics is useful in formulating various policies,resource allocation, public finance, international trade, etc.5. Nature of AssumptionsAssumption of Ceteris Paribus is always made in every micro economic theory. It means theoryis applicable only when other things being same.Uses / Importance / Advantages of Microeconomics1. Individual Behaviour AnalysisMicro economics studies behaviour of individual consumer or producer in a particular situation.2. Resource AllocationResources are already scare i.e less in quantity. Micro economics helps in proper allocation andutilization of resources to produce various types of goods and services.3. Price Mechanization
  • 3. Micro economics decides prices of various goods and services on the basis of Demand-SupplyAnalysis.4. Economic PolicyMicro economics helps in formulating various economic policies and economic plans to promoteall round economic development.5. Free Enterprise EconomyMicro economics explain operating of a free enterprise economy where individual has freedomto take his own economic decisions.6. Public FinanceIt helps the government in fixing the tax rate and the type of tax as well as the amount of tax tobe charged to the buyer and the seller.7. Foreign TradeIt helps in explaining and fixing international trade and tariff rules, causes of disequilibrium inBOP, effects of factors deciding exchange rate, etc.8. Social WelfareIt not only analyse economic conditions but also studies the social needs under different marketconditions like monopoly, oligopoly, etc.Disadvantages / Limitations of Microeconomics1. Unrealistic AssumptionsMicro economics is based on unrealistic assumptions, especially in case of full employmentassumption which does not exist practically. Even behaviour of one individual can not begeneralised as the behaviour of all.2. Inadequate DataMicro economics is based on the information dealing with individual behaviour, individualcustomers. Hence, it is difficult to get correct information. So because of incorrect data MicroEconomics may provide inaccurate results.3. Ceteris ParibusIt assumes that all other things being equal (same) but actually it is not so.