Microeconomics - Meaning Scope Features Uses Limitations

Study of Economics - Micro & Macro Economics

The study of economics is divided by the modern economists into two parts viz. Micro economics and Macro economics. This division is shown in the figure / chart above. Micro economics and Macro economics, both the terms were used in 1933 by Prof. Ragnar Frisch from Oslo University of Norway.

The word micro has been derived from the Greek word `Mikros' i.e. small and the word macro has been derived from Greek word `Makros' i.e. large.

What is Microeconomics ? Meaning & Definition

Micro means small. Thus, micro economics analyses individualistic behaviour. It studies an individual consumer, producer, price of a particular commodity, household, etc.

According to Prof. K. E. Boulding, "Micro Economics is the study of particular firm, particular household, individual prices, wages, incomes, individual industries and particular commodities."

Subject Matter or Scope of Microeconomics

Micro Economics is concerned with the following topics :-

1. Commodity Pricing

Prices of individual commodities are determined by market forces of demand and supply. So micro economics makes demand analysis (individual consumer behaviour) and supply analysis (individual producer behaviour).

2. Factor Pricing

Land, labour, capital and entrepreneur, all factors contribute in production process. So they get rewards in the form of rent, wages, interest and profit respectively. Micro economics deals with determination of such rewards i.e. factor prices. So micro economics is also called as 'Price Theory' or 'Value Theory'.

3. Welfare Theory

Micro economics deals with optimum allocation of available resources and maximisation of social welfare. It provides answers for 'What to produce?', 'When to produce?', 'How to produce?' and 'For whom it is to be produced?'. In short, Micro economics guides for utilizing scarce resources of economy to maximize public welfare.

Characteristics / Features of Microeconomics

Classical economists always insisted on micro economics because they believed that it is better to understand concept at individual level and then go for general (or macro) level. E.g. first understanding individual consumer behaviour and then analyzing the behaviour of entire market.

1. Nature of Analysis

In micro economics, the behaviour of individual consumers and producers in detail is analysed. It is study of subject matter from particular to general.

2. Method

Micro economics divides the economy into various small units and every unit is analysed in detail. It is a slicing method.

3. Scope

Micro economic analysis involves product pricing, factor pricing and theory of welfare.

4. Application

Both theoretically and practically, micro economics is useful in formulating various policies, resource allocation, public finance, international trade, etc.

5. Nature of Assumptions

Assumption of Ceteris Paribus is always made in every micro economic theory. It means theory is applicable only when 'other things being same'.

Uses / Importance / Advantages of Microeconomics

1. Individual Behaviour Analysis

Micro economics studies behaviour of individual consumer or producer in a particular situation.

2. Resource Allocation

Resources are already scare i.e less in quantity. Micro economics helps in proper allocation and utilization of resources to produce various types of goods and services.

3. Price Mechanization

Micro economics decides prices of various goods and services on the basis of 'Demand-Supply Analysis'.

4. Economic Policy

Micro economics helps in formulating various economic policies and economic plans to promote all round economic development.

5. Free Enterprise Economy

Micro economics explain operating of a free enterprise economy where individual has freedom to take his own economic decisions.

6. Public Finance

It helps the government in fixing the tax rate and the type of tax as well as the amount of tax to be charged to the buyer and the seller.

7. Foreign Trade

It helps in explaining and fixing international trade and tariff rules, causes of disequilibrium in BOP, effects of factors deciding exchange rate, etc.

8. Social Welfare

It not only analyse economic conditions but also studies the social needs under different market conditions like monopoly, oligopoly, etc.

Disadvantages / Limitations of Microeconomics

1. Unrealistic Assumptions

Micro economics is based on unrealistic assumptions, especially in case of full employment assumption which does not exist practically. Even behaviour of one individual can not be generalised as the behaviour of all.

2. Inadequate Data

Micro economics is based on the information dealing with individual behaviour, individual customers. Hence, it is difficult to get correct information. So because of incorrect data Micro Economics may provide inaccurate results.

3. Ceteris Paribus

It assumes that all other things being equal (same) but actually it is not so.

Glance on Notes of Microeconomics

1. Micro economics is that branch of economics which studies individualistic behaviour. It concentrates on individual consumer, producer, price of a particular commodity, household, etc.
2. The word micro has been derived from a Greek word 'Mikros' i.e. Small.
3. The concept of 'Micro Economics' was introduced by Prof. Ragnar Frisch and was developed by Dr. Alfred Marshall.
4. Micro economics mainly concentrates on commodity pricing, factor pricing and economic welfare.
5. It is the 'Slicing Method' which divides the economy into various small units and every unit is analysed in detail.
6. It indicates the partial equilibrium analysis.
7. It is based on 'Ceteris Paribus' assumption.