Microeconomics addresses situations where markets fail to allocate resources efficiently, leading to externalities (positive or negative effects on third parties), public goods, and information asymmetries. It examines the role of government policies and interventions to correct these failures and promote economic welfare. Microeconomics is a part of economics that contemplates the traits of the decision-makers within the economy such as households, individuals, and enterprises.
Factor pricing theory
The term ‘macros’ in macroeconomics is derived from the Greek word ‘makros’ meaning ‘large.’ Macroeconomics is the study of the economy as a whole. It means that in macroeconomics, we study the behavior and choices made by the whole economy with the changes in different aspects of goods and services in an economy. Hence, its main focus is on the aggregate growth and correlation of an economy. The major components of macroeconomics are unemployment, inflation, and national output. It helps in determining how to achieve equilibrium in the income and employment level of a country.
There was an accumulation of unsold stock, closure of production units and widespread unemployment; both employers and employees were affected. Decisions depended on a rational weighing of costs and benefits, leading to a balance or equilibrium. It is this equilibrium that became the most important objective rather than the wealth of nations, that is, growth. Menger, William Stanley Jevons and Alfred Marshall are foremost among these new thinkers who came to be called `marginalists’ or Neo-Classicals.
What is the Main Problem of Microeconomics?
Commercial companies can make decisions in demand analysis, cost analysis and pricing methods. The scope of the input market studies how producers obtain their production materials at the lowest possible cost and can produce goods or services that have a higher selling value. This means that in this scope it discusses the product process itself from the beginning which does not yet have a high value after it reaches the hands of consumers or buyers. Microeconomics and Macroeconomics are two branches of economics that study different aspects of the economy. Microeconomics zooms in on the decisions made by individuals and businesses, while macroeconomics zooms out to look at the broader picture of how the economy functions as a whole. Microeconomic analysis provides business managers with a thorough knowledge of theories of production and pricing in order to ensure optimum profit for the firm in the long run.
Chapter 4: Elasticity of Demand
Accordingly, economic theories are also being devised on the basis of uncertainty. Therefore, in microeconomics, we also study the economics of uncertainty. Microeconomics is concerned with the economic activities of such economic units as consumers, resource Owners and business firms.
This implies that if the price of any commodity increases, the demand for that commodity will decrease. The different market structures produce cost curves27 based on the type of structure present. Strategic behavior, such as the interactions among sellers in a market where they are few, is a significant part of microeconomics but is not emphasized in price theory. Price theorists focus on competition believing it to be a reasonable description of most markets that leaves room to study additional aspects of tastes and technology.
What is the difference between macroeconomics and microeconomics?
It defines a relationship between the quantity of the commodities and production factors on the one hand, and the price of the commodities and production factors on the other. Microeconomics is concerned with demand analysis i.e. individual consumer behaviour, and supply analysis i.e. individual producer behaviour. It studies the economic actions and behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor, etc. S. Jevons were concerned with households and firms as individuals rather than aggregative entities and used `marginal’ (small additional or incremental) units in their methodology. The old-fashioned Neo-Classical theory of Marginal Utility, for example, says that the price of a commodity is decided by the additional `utility’ that a small additional unit of it yields.
For example, general price level, poverty, rate of unemployment, scope of micro economics national income, aggregate supply, aggregate demand, etc. In a market economy, price and quantity are considered basic measures to gauge the goods produced and exchanged. The law of demand states that, in general, price and quantity demanded in a given market are inversely related.
Scope of Micro Economics
- Even though the term Economics had not come into usage then, there was thinking on economic issues in Western Europe in the 16th to late 17th centuries that went by the name Mercantilism or merchant-like thoughts.
- It helps in determining how one can achieve equilibrium at a small scale.
- On the producer side, industrial organization has grown into a field within microeconomics that focuses on the detailed study of the structure of firms and how they operate in different markets.
- It teaches us to purchase the required products in most suitable quantities so that the total utility obtained is maximized.
- Microeconomics, branch of economics that studies the behaviour of individual consumers and firms.
- In simple terms, microeconomics and macroeconomics are not independent of each other.
At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. The model of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand (as to the figure), or in supply. Microeconomics focuses on individual decision-makers and specific markets. Put simply, the field focuses on smaller factors that influence the decisions made by key stakeholders, such as consumers and businesses.
Demand analysis
- Microeconomics is a form of high level of mobility in the market, thus enabling economic actors to directly adapt and adjust to changes in the market.
- (iii) By setting up production units in remote areas to employ labour at notoriously low wage rate.
- Thus, microeconomics under the topic theory of distribution talks about the procedures and basis of pricing of different factors in different market structures.
- It also considers the impact of education, skills, and unions on employment.
- It examines the role of government policies and interventions to correct these failures and promote economic welfare.
- Distribution is not only a matter of distributing a product from producers to consumers, but also a form of business promotion and packaging of these products or services.
Both economic theories discuss the same economic objects, such as producers, consumers, prices, impacts, and so on. The scope of microeconomics also involves the interaction of the market with the factors of production, where the seller has the product to meet the needs of the factors of production which he does by becoming a buyer as well. While the buyer or consumer then needs money to be able to continue to meet their needs and satisfaction. Microeconomists constantly strive to improve the accuracy of their models of consumer and firm behaviour.
Price elasticity is a useful form of analysis for studying how the prices of certain goods or services are formed in a market. The formation of this price is influenced by the large number of requests in the market. Paradox means a contradictory or seemingly absurd statement, which is often true.
So far as public policy-making (governmental or even corporate) is concerned, macroeconomics is more relevant. So far as undergraduate and even post-graduate studies are concerned, it is essential for students first to grasp the concepts of Microeconomics and then go over to those of Macroeconomics. For example, the concept of the `margin’ is first learnt through Marginal Utility, Marginal Rate of Substitution, Marginal Productivity etc. and only subsequently used through Marginal Propensities to Consume and Save. The concept of Consumer Equilibrium has to be learnt prior to its application in the box diagrams used, say, in the Heckscher-Ohlin Theorem of International Trade Theory. In Greek, the words `micro’ and `macro’ mean small and huge, respectively. Micro-Economics is the branch of Economics that studies economic issues in small, individual details, as if under a microscope.
