Types of Microeconomic Analysis -Types of Microeconomics

 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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