Meaning, Scope, Importance and Limitations of Micro Economics
Meaning, Scope, Importance and Limitations
of Micro Economics
Micro-Economics: The term ‘Micro’ is derived from the Greek word ‘Mikros’ which means small. The concept of microeconomics was introduced by Ragnar Frisch. Microeconomics studies individual units like individual household, pricing of a firm, wages of a worker, profits of an entrepreneur, etc.
According to Maurice Dobb, “Micro-economics is
in fact a microscopic study of the economy.”
In
short, microeconomics is the study of the economic behaviour of individual
consumers, firms, and industries and the distribution of production and income
among them.
In
Microeconomics, Economy is divided into various small units and each unit is
analysed in detail. It is called slicing method.
Scope of
Micro Economics:
1. Theory of product pricing, which includes:
1.1 Theory of consumer behaviour: For a consumer point of view, it studies the behaviour of a consumer how he spends his limited income on the purchase of various goods and services to get maximum satisfaction. we study the demand for a commodity, law of demand, consumer equilibrium, saving etc.
1.2 Theory of production and costs: we study production and cost function and many laws related to it such as the law of supply, the law of variable proportions and returns to scale. There are many factors that impact the cost of the product. It also studies how the demand and supply play important role in determining the price of the commodity under different market conditions such as perfect market, imperfect market, monopoly etc.
2.
Theory of factor pricing, which constitutes-
·
Theory
of wages.
·
Theory
of rent.
·
Theory
of interest.
·
Theory
of profits.
There are basically
four factors-land, labour, capital and entrepreneurs involved in the
production. In microeconomics, we study how the price of each factor is
determined.
Microeconomics is
also called as ‘Price Theory’ or ‘Value Theory’.
3. Theory of economic welfare: Microeconomics is also concerned with optimum allocation and distribution of scarce resources and maximizing public welfare. It suggests how the ideal economic welfare can be achieved.
Importance of Microeconomics: Microeconomics has both theoretical and practical importance.
- It explains the consumers and producers’ behaviours in an economy.
- Microeconomics helps in the efficient management of the limited resources available in a country.
- It is helpful in understanding the working of a free enterprise economy where there is no central control, and individual is free to take his own economic decisions.
- It explains how through market mechanism goods and services produced in the community are distributed.
- It also explains the determination of the relative prices of the various products and productive services.
- It helps in the formulation of economic policies calculated to promote efficiency in production and the welfare of the masses.
- It not only tells us how the economy operates but also how it should be operated to promote the general welfare.
- Microeconomics analysis is also applicable to the various branches of economics such as public finance and international trade.
Limitations:
- Microeconomics explains only small individual units of economic activity. It cannot give an idea of the functioning of the economy as a whole.
- It is based on many unrealistic assumptions such as full employment and perfect competition in the economy.
- It cannot be used for solving the problem relating to public finance, monetary and fiscal policy etc.
- The study of microeconomics in many cases is nor suitable for the macro perspective. For example saving is considered good for a consumer but if all the consumers begin to save more and spend less part of their income on consumption, then it will impact the economy badly.
Very impressive lecture
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