Introduction to Microeconomics- TU Notes

 Definition/ Meaning of Microeconomics

Microeconomics is defined   as the anch of economics   which deals with   individual  parts of  an  economy.  In other  words,  it is  the  part of  economic  analysis, which is concerned with the behavior of individual units: consumers, households, and  firms.  It examines  how  consumers choose  between  goods and services, how workers choose between jobs, and how business firms decide what to produce, how to produce, and how much to produce.

Thus,  microeconomics is  the  branch of  economics,  which deals  with  very small  units  of the  economy.  It studies the behaviour  of individual  units  of the  economy  rather than the economy as a whole. Microeconomics also tries to explain the effects of price  change  in the  market  due to  the  change  in  demand  and  supply  conditions. It also studies how a firm determines the price of its product. Therefore, microeconomics is also called price theory. In other words, microeconomics is also known as the price theory because it is mainly concerned with the determination of the equilibrium price of goods and services in the market.

 Microeconomics is based on the assumptions like the existence of full employment, a free-market economy, perfect competition, and partial equilibrium analysis, etc. It is also known as the slicing method because it studies small economic variables or each individual part of the economy which are considered as the slice of the macroeconomic   variables.   Likewise,   microeconomics   is   also   known   as   the   microscopic  analysis  because  it  is  concerned  with the microscopic  study  of  various  elements of the economy. It is like the study of a single tree of the forest. And it gives worm's eye view analysis of the economic system and economic variables. 

  The  objective  of  microeconomics  is  to  study  pricing  policies  concerning  the  optimum  allocation  of  resources.  The  economic  efficiency  can  be  achieved  only  through   optimum   allocation   of   resources,   which   is   the   basis   of   welfare   economics.  Hence,  we  can  say  that  the  heart  of  microeconomics  is  the  study  of  problem of 'scarcity' and 'allocation of resources.

Features of Microeconomics 

The features of microeconomics are as follows:

  • Microeconomics studies the individual parts of an economy. 
  • Microeconomics is concerned with individual firms and consumers. 
  • Microeconomics  is  based  on  the  assumptions  of  full  employment,  partial  equilibrium analysis, and perfect competition. 
  • Microeconomics is applicable only in the free market economy.The   major   variables   of   microeconomics   are   relative   price,   individual   demand, and supply, the output of an individual firm, etc. 
  • Microeconomics is also known as price theory because it studies how the price of a product is determined. 
  • The microeconomic analysis   is   also   known   as   slicing   method   as   well   as   microscopic analysis. 
  • Microeconomics is like the study of a particular tree of the whole forest. 

Scope of Microeconomics 

Scope means the area covered by a subject. Therefore, the scope of microeconomics means  the  area  covered  by  the  microeconomics.  Microeconomics  covers  the  individual  behaviour  of  consumers,  producers  and  factor  owners  or  factors  of  production. The scope of microeconomics can be broadly divided into the following areas:

1.      Theory      of      demand: 

The theory of demand is an important area of microeconomics.  It  analyses  various  determinants  of  demand, the elasticity  of  demand,  etc.  It  also  studies  many  relevant  issues  of  consumer  behaviour  like     marginal     utility     analysis,     indifference     curve     analysis,     etc.     Microeconomics also shows how consumers distribute their limited income in different goods and services and derive maximum satisfaction. 

2. Theory of production and cost:

 Goods and services are produced to fulfill consumers' demands. As resources are scarce, production should be carried out efficiently. Microeconomics studies the theory of production, which analyses  the  behaviour  of producers concerning the optimum  allocation  of  resources.  Many  theories  of  production  like the law  of  variable  proportions,  laws of returns to scale and the least cost combination of inputs help to analyse production  possibilities.  It  also  consists  of an analysis  of the cost  of  production,  linear programming, etc. 

3.      Theory  of  product  pricing:  

Goods  and  services  produced  by  firms  are  offered in sale to the consumers at some price. Such price depends upon different factors like cost of production, demand, and supply situation in the market,  nature  of  competition  in  the  market,  etc.  Microeconomics  analyses  these  different  aspects  and  explains  the  process  of  price  determination  in  the  different  market  conditions,  i.e.  perfectly  competitive  and  imperfectly  competitive markets.  

4. Theory of factor pricing: 

Production of goods and services requires inputs or  factors  of  production.  The  factors  of  production include land,  labour,  capital, and organization or entrepreneur. The firm has to pay a certain price or  reward  to  these  factors  of  production  for  their  contribution to the  production  process.  The  reward  of  land is rent; the reward of labour is wages;  the  reward  of  capital  is  interest  and  the  reward  of  organization  or  entrepreneur is profit. Microeconomics studies how these rewards or prices of   the   factors   of   production   are   determined   in   the   different   market   conditions. 

5.      Theory   of   economic   welfare: 

  The   theory   of   economic   welfare   is   an   important  part  of  microeconomics,  which  is  related to the efficiency  and  betterment  of  consumers  and  producers.  This  is  also  known  as  welfare  economics. The main objective of welfare economics is to achieve efficiency in  production  and  distribution.  Production efficiency refers  to the production  of  goods  and  services  at  the  lowest  possible  cost  and  occurs  where  marginal  cost  (MC)  equals average  cost  (AC).  This  is  possible  to  achieve  only  in  the  perfectly  competitive  market  in  the  long  run.  On  the  other  hand,  efficiency  in  distribution  occurs  when  goods  and  services  are  received by those who have the greatest need for them. To conclude, economic welfare is concerned with the maximization of social welfare and economic efficiency.

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