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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