The term ‘micro’ is derived from Greek word “Mikros” meaning small. Thus, micro economics deals with the analysis of small individual units of the economy such as individual consumer, individual firm, individual prices, etc.It is concerned not only with the total output, total employment or total spending but with the output of particular goods or services by a single firms/ industries and with the spending on particular goods and services by single households or by households in single market. Thus microeconomics is concerned with microscopic study of various elements of economic system and not with a system as a whole. It deals with the behavior of individuals studies, how different units carryout their economic activities and how they reach the equilibrium condition.
Types of Microeconomics theories
Comparative Microeconomics statics: it is the study of the static relationship between different microeconomics variables. It shows the relationship between dependent and independent variables at a particular period of time. The topics covered under this include shifts of demand curve, shifts of supply curve, shift of marginal revenue curve, shift of cost curves such as average cost curve, average variable cost curves, fixed cost curves, shift of marginal cost curves, shift of other revenue and cost curves.
Comparative static of microeconomics equilibrium: It refers to the comparative study of two different equilibriums. Thus in various market structures static equilibrium point may change because of shifts in various cost and revenue curve or demand/supply curve.
Micro dynamics: It is the study of path of the movement from one equilibrium position to another equilibrium position. It is concerned with the study of disequilibrium position.
Micro economics has great importance. Some importance are listed below.
To understand the working of a free economy: Micro economic theory helps in understanding the mechanism of a free market economy. The theory of perfect competition market structure is used as the golden reference for measurement of efficiency and pareto optimality. The knowledge of micro economics is necessary to know how the millions of consumers and seller behave in the economy when conditions of a perfectly competitive market structure are met. Alternately when the assumptions of a perfectly competitive market are violated, they give rise to market failures such as externalities, public goods, information asymmetry, adverse selection and moral hazard.
For efficient allocation of resources: The study of microeconomics also defines the concept of Pareto-optimal allocation. It helps in efficient allocation of resources in a society which maximizes sum of consumer surplus and producer surplus and avoid any deadweight loss. It assumes rationality. Rational behavior refers to best use of resources. It suggest how to achieve given objective of a pareto-optimal allocation with limited resources starting from any pareto-dominated allocation.
For making business decision: Micro economics helps business executive in making production decision. Business firm decides their production, cost and pricing policy on the basis of market mechanism. The knowledge about prevailing market situation helps the firm to make their pricing policy on goods and prices of factor of production. The Production theory outilines production processes and technologies related to total revenue and marginal revenue of firms. The cost theory in microeconomics deals with with study of cost curves such as Marginal cost curve, average cost curve, average fixed cost, average variable cost and concepts of accounting profit and economic profit. Firms can make entry and exit decisions based on their market structure as well as profit and loss analysis. For example a firm making loss in short run in a perfectly competitive market will exit the market in long run but may not exit in short run based on its average fixed cost calculations. Similarly entry is not easy in monopoly markets so despite of supernormal profits in short run, new firms are not able to enter the market.
To provide tools in designing economic policies: it provide useful tool to the government for designing economic policy. It helps the government to formulate prices policy, taxation policy and others. Microeconomic analysis of policies related to taxation, tariffs, quotas, export subsidies, food coupons, tax-wedges, income tax and labour leisure choice and Laffer curve are very integral for policy analysis and designing. Any such policy of tax, tariffs and quotas needs to be analysed for effects on consumer surplus, producer surplus and creation of dead weight loss in society.
To study human behavior: micro economics studies many forms of individual behavior by the various consumer behavior theories such as substitution effect and income effect, indifference curve analysis, etc.It provides analytical tools in understanding the working of individual units in an economy. These elements of behavior economics coupled with study of strategic interactions of firms studied as game theory in oligopoly industry have pointed out important conclusions such as labor-leisure choice, backward bending labour supply curve, Nash equilibrium, prisoner’s dilemma, cooperative games, non-cooperative games, stag hunt, battle of sexes, price war, effects of advertising in monopolistic competition industry, kinked demand curves, Cournot equilibrium and much more.
The basis for prediction of economic activities: This theory establishes the cause and effect relationship between two or more economic events which provides basis for predicting the future economic events. It helps us to make conditional prediction.
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