MICRO ECONOMICS

 MICRO ECONOMICS

 Economists divide positive economics into two parts for economic analysis. 

 I. Micro Economics

 II. Macro Economics 

1. Micro Economics:

                              Adam Smith pioneered micro economics as a separate subject and his concepts gained amorous popularity till the theories of Dr. Keynes, were introduced. Micro means stall and it equates to “one millionth part.” In this part we analyses economy in individual and small units e.g. Consumer’s behavior, demand, supply, price, determination of a good in a market, equilibrium position of the firm, Firm's behavior and its problems and Resource’s pricing and employment theories. While analyzing small entities classical economists used to assume economy at full employment level. Therefore, the problem lies in resource allocation, which can be resolved through price mechanism.

 Following matters are discussed in micro economics: 

1) Price Theory: Price determination is based upon demand and supply of any particular commodity in the market. Moreover, impacts of price mechanism on free economy are also ascertained. 

2) Consumer's Behavior Theory: This theory focuses upon consumer's behavior that how he/she ménages his expenditure on consumption goods.

3) Be of the firm behavior: IN this part objectives and problems of a firm and its various types of equilibrium are discussed. Optimal combination of factors of production, firms cost of production, revenue and attainment of maximum profit is focused.

 4) Wealth Distribution Theory: In this part Marginal Productivity theory, and modern theory of factor pricing is discussed.

 2. Importance of Micro Economics

 Importance of micro economics is theoretical as well as practical Theoretical important is as under.

 1) Analysis of micro economics focuses on the process of free economy. It shows how millions of consumers and producers utilize, available resources to produce millions of goods and services,

 2) It guides us writ distribution of goods and services under price mechanism.

 3) It also determines the relative prices of products and services Micro analysis not only depicts efficiency of both the sectors, production as well as consumption of wealth but also defines optimum level of production Its practical importance can be judged as it can help in making economic policies to enhance productive efficiency of factors and welfare of common man. Thus, it has both positive and normative role. It not only depicts how economy works but also emphasizes how it should work to improve welfare, Micro economics analysis is applied on various fields of the economy, e.g. Individual savings Cost minimization, profit maximization etc. According to

Prof. Lerner,

                      "Micro Economic, theory facilitates the understanding of billions of ambiguous and complicated facts through simple models of behavior.

3. Merits of Micro Economics:

 Its merits may be assessed as under:

 1) It reveals important decisions of various people and institutions, og optimum combination of factors of production to maximize profit with the help of ISO Quant curves. An entrepreneur determines factors pricing according to their value of marginal productivity. A consumer maximizes its utility from his / her limited resources by acting upon law of equip marginal utility.

2) If there is any defect in any unit of the economy e.g., firm or commercial institution it can be immediately and easily rectified. Since we are aware of the entities of the unit therefore, discrepancy can be detected earlier and remedial measures can be taken without any wastage of time.

 3) The decision taken for economic analysis at macro level needs detailed knowledge of micro economics because it is necessary to foresee the effects of these decisions on small units and entities. 

4. Demerits of Micro Economics:

 But micro analysis has following demerits which are harmful for the economy at national level. 

1) In capitalism, people have economic freedom in making all the decisions. Thus personal interest is preferred over the national interest and these decisions are incongruent, that why economy faces recession due to over production. On the other hand markets boom with expanded business activities, hence markets remain destabilized and keep on fluctuating. To control such a situation,decisions should be taken at national and international level which is not possible at micro level. 

2) In micro analysis we just know about the problems of just a part or a unit but problems at national level and their remedies cannot be judged under micro analysis.

 3) Sometimes, decisions taken at micro level are beneficial for individuals but are harmful at national level, e.g. (1) If the price of a commodity increases, firms profit rises. On the other hand the problem of inflation arises due to increase in prices, which badly affects consumers purchasing power and unequal distribution of wealth takes place. Thus, a critical issue arises at national level If an entrepreneur decides to reduce wages of labor, their purchasing power decreases due to which demanded goods decrease prices decrease and recession period is most probably expected. So the profit margin of producers and economic conditions are badly affected. (ii) Savings are considered good at individual level but at national level there is no use of savings because any nation cannot progress due to just issuance of money.

 4. Basic problems of microeconomic theory: 

                                                                            An important factor while studying micro economics is that at the time of analyzing small entities, classical economists assumes economy at full employment level. Thus, the basic problem was resources allocation which could be solved through price mechanism. In this system prices have the pivotal role. Basic problems of micro economics are as under.

  1) The allocation of resources

2) The determination of output composition.

 3) The distribution of wealth. 

The maintenance and expansion of the productive capacity of the economy. Brief review of these problems is as under:

 1) Allocation of Resources:

                                               Resources either natural or man-made have their alternative uses, because various factors can be used in production process of various goods and services. So in micro economics we decide which resources should be used in the production of which commodities. Thus the resource allocation is the core issue; Classical believe in self-adjusting mechanism therefore, the issue of resource allocation would be solved by “Price Mechanism.”

2) The determination of output composition:

                                                                          After taking decision about production of goods and services the problems arises that how much goods should be produced, which consumer items should be produced more and which less? Moreover, which capital goods should be produced? While determination of output composition, demand for consumer and capital goods is considered. The most demanded goods are produced at large scale while, the things which have limited demand are produced at small scale. At this level while, determining quantity of goods, how much resources should be utilized at present and how much will be left for future. While determining the level of output entrepreneurs keep their aim of maximization of profit in their minds and output is determined where firms

 MC = MR (Marginal Cost = Marginal Revenue) 

3) Distribution of Product:

                                           How the production is distributed in different classes of the society is another important issue. It means for whom production is made and how do we divide it into different classes. So that every individual has his/her sufficient share.

 4) Maintenance and expansion of the productive capacity of the economy: 

                                                                                                                               In micro economics classical economists assume economy at full employment level. Thus, the issue is to maintain the productive capacity of the economy at desired level. If the economy is in equilibrium above or below full employment level it is resolved by readjusting forces so that these may not be any possibility of over production and general unemployment. Moreover, the cheapest method of production should be adopted to enhance production capacity.