Microeconomics: Nature, Scope and Economic Problems

1. MICROECONOMICS:
Nature, Scope and Economic Problems
Dr. Dhiresh Kulshrestha
Associate Professor (Economics)

2. Microeconomics
 Microeconomics refers to that branch of economics which studies economic
problems of an individual person or of an individual firm.
It provides the microscopic view of an individual unit.
For instance: The study of the economic problem faced by an
individual when his/her income falls short of his expenditure or
A similar study of individual firm or producer provides the subject
matter of microeconomics.

3. Economic Problems, Tools and Solutions
 It has discussed that an economic problem is the problem of the scarcity
of resources in the face of the desired ends.
Solution of such problems essentially required raising the resources to the
level of desired ends.

4. Economic Problems, Tools and Solutions
• What to produce?------ Goods and services
• How to produce? ------Production Process
• For whom to produce? ----Consumer Behavior

5. Economic Problems, Tools and Solutions
• Are the resources being fully utilized?
• How efficient is the production?
• Is the capacity to produce growing?
• Is the purchasing power of money constant?

6. What do Produce?
• To earn income to plug the resource-gap, one needs to produce either a
tangible commodity or an intangible services.
• The basic question that one faces is what goods or services should one
produce and in what quantity so that the gap may conveniently be filled?

7. 2
Individuals in the private sector choose production of such
goods or services and in such quantities that command a high
price in the market ( i.e. goods and services enjoying a high
demand).
For them, price mechanism is a tools of analysis.

8. 3
On the contrary, the public sector, striving for maximization of social
welfare, resorts to the “principle of maximum social advantage” to decide
the types and the quantities of the goods and the services to be produced.
While the private sector has the objective of profit maximization, the
public sector has that of maximization of social welfare.

9. 4
The branch of economics that deals with the problem is
known as ‘Theory of Price’ or ‘Price mechanism
Theory.’

10. How to Produce ?
Having finalised the type and the quantity of the output to be produced,
the next basic problem that arises is that of choice of technique of
production.
Should it be labour-intensive or capital intensive ?

11. 2
• While the private sector reports to the principle of maximum social
advantage for the purpose.
• While the private sector picks up the cheaper one of the technique, the
public sector picks up the one that maximizes the employment
opportunities.
• The Private sector aims at minimization of production costs as a part of
its strategy of profit-maximization.

12. 3
• The Public Sector, on the other hand, aims at maximizing employment as
a part of its strategy of maximum social advantage.
• The public sector, therefore, opts for labour-intensive methods even if
they turn out costlier than capital-intensive methods.
• The branch of economics that deals with this problem is known as the
“Theory of Production”.

13. For Whom to Produce?
• The problem implies who gets how much to consume ?
• The answer to this question would depend on who has how much of income to
buy the products. (Buying capacity)
• The private sector solves the problem through price mechanism. Who gets how
much of income depends on who commands what price in the market.

14. 2
• The price of factor is determined through the price mechanism and every
factor of production is paid the price it commands therein.
• In the Public sector, on contrary, factor prices are subject to government
regulation keeping in view the principles of equity and social justice.

15. 3
1. The answer to the question in the public sector, therefore, resorts to the
principle of maximum social advantage to solve the problem.
2. The branch of economics that deals with this problem is known as the
“ Theory of Distribution”

16. Are the resources being fully utilized?
• The problem of full utilization of the resource is another one of the central
importance.
• Its underutilization amounts to wastage of resource that has alternative
uses. Thus, apart from its actual cost, there is yet cost associated with the
use of the resource.it is its opportunity cost.

17. How efficient is the production?
• Another central issue is the problem of inefficiency. Like underutilization of
resources, inefficiencies in production and distribution have their own costs.
• The tool of analysis employed in this case too is the Production Possibility
Curve (PPC) and the branch of economics with the problem is welfare
economics.

18. Is the capacity to produce growing?
• This relates to the problem of growth. Capacity to produce must grow year on
year. Growth is essential for development and modernization.
• The tool of analysis is again the Production Possibility Curve (PPC) and the
branch of economics that deals with the “Theory of Growth and Development”

19. Is the Purchasing power of money
constant? (Due to Inflation)
• The problem relates to the stability of prices.
• Fluctuating prices disrupt every calculation and every solution. The study
of causes and consequences of price fluctuations has been gaining concern
all over the world in recent time.