Types of Microeconomic Analysis -Types of Microeconomics
The microeconomic analysis is affected by time. Based on consideration of time in different models, microeconomic analysis can be divided into the following three types:
1. Micro Statics
2. Comparative Micro Statics
3. Micro Dynamics
1. Micro Statics (Micro Static Analysis)
Micro statics is defined as the static relationship between microeconomic variables whose values relate to the same point of time or to the same period of time. It assumes that there will be no change in relationship between the variables. So, micro static analysis shows equilibrium situation at the specified time.
2. Comparative Micro Statics (Comparative Micro Static Analysis)
Comparative micro statics is defined as the comparative study between different equilibrium positions determined from the interaction between microeconomic variables at different points of time. In other words, comparative micro statics compares the equilibrium positions at different periods of time.
3. Micro Dynamics (Micro Dynamic Analysis)
Microdynamics is defined as the analysis of the process through which the system moves from one equilibrium to another. In other words, microdynamics explains the lagged relationship between the microeconomic variables. It is concerned mainly with states of disequilibrium rather than equilibrium and takes time factors into consideration. It studies models involving time and path through which new equilibrium in the market is established. It provides answers to the causes of breaking initial equilibrium and establishing a new equilibrium.
Uses/ Importance of Microeconomics
Microeconomics has many uses or importance. It is regarded as the tool to observe the economic behaviour of the society and consumers. It has also both theoretical as well as practical uses. The main uses or importance of microeconomics can be explained as follows:
1. Understanding functioning of the economy:
Microeconomics is very useful to understand or get knowledge of the functioning of an economy. It tells us how economic activities operate and also explains the mechanism of the free market economy. It helps to understand the determination of price of goods and services in the different market conditions. It also makes it possible to understand behaviour of millions of consumers and producers in the economy.
2.Helpful to formulate economic policies:
Microeconomics is very useful to formulate economic policies. With the study of microeconomics, we can understand effects of government policies on the allocation of resources. Microeconomic tools are useful in designing price policies, tax policies, subsidy policies, and others in the economy. Microeconomic concepts like elasticity of demand are also very useful to formulate economic policies related to international trade, exchange rate, etc.
3. Helpful to study human behaviour:
Microeconomics is very useful to study human behaviour. The various laws of microeconomics like law of diminishing marginal utility, the law of substitution or law of maximum satisfaction, the indifference curve, etc. help to study human behaviour and predict consumer behaviour in different market situations.
4.Efficient allocation of resources:
Microeconomics is also useful for the efficient allocation of resources. We know that all the resources are scarce or limited but human wants are unlimited. Therefore, it is necessary to allocate scarce resources efficiently in the production of different goods and services. In the present world, the main problem of every nation is the efficient allocation of resources among the competing uses. Microeconomic theories explain how to achieve efficient allocation of resources in both consumption and production which ensures maximum social welfare.
5.Useful in international trade:
Microeconomics is also useful to study international trade. International trade involves the import and export of goods and services. It also includes the balance of payment, trade surplus, and deficit, exchange rate, etc. The rate of exchange is determined by the demand and supply of foreign currency. The surplus and deficit in foreign trade are explained by the help of microeconomic variables like demand and supply. Similarly, the elasticity of demand is also used to estimate the gain from international trade.
6.Basis of welfare economics:
Microeconomics is the basis of social welfare. Welfare economics is related to the betterment of consumers, producers, and the overall economy. It indicates a higher level of satisfaction. The whole structure of welfare economics is built entirely on the price theory of perfect competition. Microeconomics also helps in selecting a suitable tax system in a country without affecting social and economic welfare.
7.Helpful in business decision making:
The most important use of microeconomics is that it helps in making business decisions. It provides analytical tools to study and solve business problems. Nowadays, business firms use microeconomics while taking the managerial decisions. The branch of economics which mostly integrates microeconomic theories with business practices is called managerial economics. Thus, microeconomics is very useful to make business decisions which involve optimum resource allocation, pricing, cost analysis, production decision, prediction of future demand or sales, etc. The role of microeconomics in business decision making can be explained as follows:
i. Demand analysis and forecasting:
Microeconomics is very helpful to analyse and forecast future demand for a product. Demand for a product depends on many factors like the price of the product, price of the related goods, the income of the consumer, taste, and fashion of the consumer, composition, and size of the population, etc. Based on these determinants of demand, business firms forecast future demand and present sales of the product.
ii.Cost analysis:
Microeconomics analyses different types of costs of production, factors determining cost of production, and different methods of minimising cost of production. Based on these analyses, business firms can estimate the cost of production before making a production decision.
iii.Price determination:
One of the important functions of a firm is to determine price of the product. The determination of the price of the product depends on many factors like demand, supply, nature of competition, price of related goods, price elasticity of demand, etc. which we study in microeconomics. Hence, microeconomics is useful in determining the price of the product.
iv.Optimal production decision:
A production decision is concerned with the choice of technique of production. Business firms always face the problem of the choice of appropriate techniques of production because of limited resources, skill, and knowledge. Microeconomics deals with different alternative techniques of production, which help to find out the optimal production decision.
v.Optimal resources utilization:
All the resources which are used in the production of goods and services are limited or scarce. Microeconomics deals with how these scarce resources are allocated efficiently in the production of goods and services. It also helps to decide what to produce, how to produce, how much to produce, and for whom to produce.
Limitations of Microeconomics
Though microeconomics is very important, it is not free from limitations. The main limitations of microeconomics can be explained as follows:
1. Static analysis:
The microeconomic analysis is mostly static. Many microeconomic variables are assumed to be constant. But in practice, economic variables change. Therefore, microeconomics is regarded unrealistic to a large extent.
2.Wrong conclusions:
The microeconomic analysis is based on the individual behaviour. Some analyses are true in the case of individuals, but when we observe on aggregate, the observation may be totally different. For example, saving is good on the individual basis but if it is viewed from a macroeconomic angle, it will be very harmful for the nation because if all people of the nation begin to save more than before, there will befall in consumption, investment, income, and employment in the economy. Hence, the conclusion drawn from the microeconomic analysis may be wrong.
3.Unrealistic assumptions:
Microeconomic theories have been developed based on many assumptions like existence of full employment, perfect competition in the market, a free-market economy, etc. But all these assumptions are unrealistic and not found in real-life situations. Hence, microeconomics is based on unrealistic assumptions.
4.Limited scope:
Microeconomics studies only small units of the economy. It does not study all parts of the economy. It is silent about the important economic policies and problems like fiscal policy, monetary policy, inflation, unemployment, poverty, inequality, etc. Hence, microeconomics has limited scope.
5.Ignores the role of the government:
Microeconomics is based on the assumptions of a free-market economy, where the role of government is very limited. But in reality, the role of government is necessary for the efficient functioning of the market system
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