Following are the demerits of micro economic analysis and policies related to it. Microeconomics is helpful in solving the problems of individual firms. It also helps entrepreneurs to achieve optimum production point with their budget constraint.
Price Determination:
The natural inequality of income distribution in a free enterprise economy leads to exploitation of consumers. It teaches us to purchase the required products in most suitable quantities so that the total utility obtained is maximized. Hence, Micro economic analysis explains us the optimum use of our income and by virtue of it enables us to avoid the wastage of hard-earned income.
Like most definitions in economics, there are plenty of competing ideas and ways to explain the term microeconomics. As one of the two branches of the study of economics, an understanding of microeconomics and how it relates to the other branch, macroeconomics, is critical. Even so, should a student turn to the internet for answers, he or she would find a plethora of ways to address the simple question, “what is microeconomics?” Here is a sample of one such answer.
The microeconomic theory also comprises mathematical techniques like linear programming to determine the optimal cost of production. For a given market of a commodity, demand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). Demand theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc.
How do macroeconomic policies influence microeconomic behavior?
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. Micro-economics is Economics using the perspective of small, micro units. Thus, the focus of microeconomics is mainly confined to price theory and resource allocation. It does not study the aggregates relating to the whole economy.
- But in the present time the element of risk has attained a lot of importance.
- A bilateral monopoly is a market consisting of both a monopoly (a single seller) and a monopsony (a single buyer).
- The treatment, however, is different from that of Open Economies in macroeconomics, say, by Mundell-Fleming.
- 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.
Microeconomics and Macroeconomics: Meaning, Scope, and Interdependence
Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement. The “Law of Supply” states that, in general, a rise in price leads to an expansion in supply and a fall in price leads to a contraction in supply. Here as well, the determinants of supply, such as price of substitutes, cost of production, technology applied and various factors of inputs of production are all taken to be constant for a specific time period of evaluation of supply.
Supply and demand
Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. A bilateral monopoly is a market consisting of both a monopoly (a single seller) and a monopsony (a single buyer). A monopsony is a market where there is only one buyer and many sellers.
Consumer Choice and Demand
The terms ‘micro’ and ‘macro’ were first used in economics by Norwegian economist Ragnar Frisch in 1933. These terms were derived from the Greek words ‘mikros’ and ‘makros’ respectively which refer to the small scope of micro economics individual unit and large. So far as public policy-making (governmental or even corporate) is concerned, macroeconomics is more relevant.
Supply is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be profit maximizers, meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit.
Like two or more individuals, countries too can come together in relations of production and exchange. This international trade too is analyzed in Microeconomics, beginning with the theories of the Mercantilists and Adam Smith to more modern ones. The treatment, however, is different from that of Open Economies in macroeconomics, say, by Mundell-Fleming. This relates to the determination of payments for the various factors of production, such as rent, wages and profits, in terms of marginal productivity, reward for risk-taking etc. But even if the epithet `science’ is given to Economics, it remains a Social Science. It is, to use Marshall’s words, `the study of mankind’, of people as members of a society or nation or economy, acting and interacting among themselves in the complex process of production and exchange, consumption and distribution.
Each economic system has to make the decisions regarding what is to produced, how it is to be produced and how the resources to be allocated amongst the different competing uses. Thus, in the micro economics, we deal with the problem of production, consumption, distribution and resource allocation. The theory of production talks about the performance of manufacturers or producers and how they allocate available limited resources to produce certain commodities. It consists of studying factors of production, production functions, cost analysis, and the law of production.
Examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. Microeconomics is the social science that studies the implications of incentives and decisions and how they affect the utilization and distribution of resources on an individual level. Microeconomics shows how and why different goods have different values. It addresses how individuals and businesses conduct and benefit from efficient production and exchange and how individuals can best coordinate and cooperate with each other. This is studied in the field of collective action and public choice theory.
Micro economics is based on unrealistic assumptions, especially in case of full employment assumption which does not exist practically. Even behaviour of one individual cannot be generalised as the behaviour of all. (iii) By setting up production units in remote areas to employ labour at notoriously low wage rate. Microeconomics is inadequate and misleading for analysis of economic problems.
Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above. 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.
It emphasized the role of the government in following policies leading to a positive Balance of Trade, which was thought to be the index of the country’s prosperity. Micro economics is based on the information dealing with individual behaviour, individual customers. So, because of incorrect data Micro Economics may provide inaccurate results.