According to K.E. Boulding, “Microeconomics is the study of a particular firm, particular household, wage, income, industry, and particular commodity.”
Thus, the branch of economics that analyzes the market behavior of individual firms and consumers in an effort to understand the decision-making process of firms and households is called microeconomics. It is concerned with the interaction between individual buyers, sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand for determination of price and output in individual markets (e.g. coffee industry). It is also known as price theory.
Microeconomics seeks to explain how an individual consumer distributes his or her disposable income between various goods and services, how he attains the level of maximum satisfaction and how he or she reaches the point of equilibrium. It is also concerned with how an individual firm decides what to produce, how to produce and at what cost to produce to maximize the profit. It is the study of each particular tree of the whole forest. It is concerned with a microscopic study of various elements of the economic system and with the system as a whole. It is the worm’s eye view analysis of economics variables.
According to Ackley, “Macroeconomics concerns itself with such variables as the aggregate volume of the output of an economy, with the extent to which its resources employed, with the size of national income, with the general price level.”
The branch of economics that studies the behavior and nature of the aggregate economy is called macroeconomics. It is also concerned with the aggregate performance of the entire economy system. Macroeconomics examines economy-wide phenomena such as changes in unemployment, the rate of growth, national income, gross domestic product, inflation and price levels. It is termed as the bird’s eye view analysis of economic variables. It also establishes an important relationship between movements of income and general price level. Thus, it is also called income and employment theory.
Theories of national income, consumption, saving and investment, of employment, of economic growth, of the business cycle and stabilization policies, of money supply and demand, and of foreign trade broadly constitute the subject matters of macroeconomics. It is the study of the whole jungle, not of an individual tree. It also establishes an important relationship between movements of income and the general price level.
Scope of the Microeconomics
Microeconomics is a branch of economics which is based on the economic behavior of small economic units like consumers, workers, business managers, firms, individual industries, markets and so on. The study of individual units or individual consumers, individuals firms or their small groups is the scope of microeconomics. The scope of microeconomics basically covers the following topics
Uses and Importance of the Microeconomics
- Theory of demand
It is concerned about how the demand for a commodity is determined. Theory of demand indicates to the consumer’s demand and his or her maximum satisfaction. It shows how consumer distributes his limited income in different goods and services at different prices.
- Theory of production
It includes linear programming, a mathematical technique of cost minimization or output maximization. Under the theory of production, microeconomics studies like nature of factor of production, production function, cost analysis and laws of production.
- Commodity Pricing
Prices of individual commodities are determined by market forces demand and supply. So, microeconomics makes individual consumer behavior (demand analysis) and individual producer behavior (supply analysis).
- Factor Pricing
Land, labor, capital and entrepreneur, all factors contribute in the production process. So, these factors of production get rewards in the various forms. Land gets rent, labor gets wages, capital gets interest and entrepreneur get profit. Microeconomics deals with the determination of such rewards i.e. factor prices. So, microeconomics is known as 'Price Theory' as well as 'Value Theory'.
- Welfare Theory
Microeconomics deals with the optimum allocation of available resources and maximization of social welfare. It provides answers for 'What to produce?', 'When to produce?', 'How to produce?' and 'For whom to produce?'. In short, microeconomics guides for utilizing scarce resources of the economy to maximize public welfare.
- Useful in international trade
The study of microeconomics enables us to estimate gains from international trade and determination of the foreign exchange rate. It is the microeconomics that helps to analyze the relative elasticity of demand for each other’s product and also to determine the gains from international trade.
- Efficient allocation of resources
It provides various laws, such as the law of substitution by which a consumer will maximize his satisfaction, where the ratio of marginal utilities is equal to the ratio of their prices. Similarly, a producer will maximize his profit when the ratio of the marginal product of factors of production is equal to the ratio of their prices.
- Understand the operation of an economy
It gives us the knowledge of the working of a free enterprise. It helps to explain the nature of the interrelationships and independence between economic variables by which we will be able to understand the complex economic system. In a mixed economy, the decisions such as what to produce, when to produce, how to produce and for whom to produce, how to distribute and what to consume are taken by producers and consumer with some government regulation. Microeconomics explains the conditions of efficiency in both consumption and production, the clear understanding of the working of the economic system, a greater efficiency in controlling and managing the economy.
- Useful in business decision making
Price theory can be applied to solve certain operational problems continually faced by business enterprises. It helps business to achieve maximum production with the given amount of resources. With the help of microeconomics, business firms can make decisions in demand analysis, cost analysis and methods of calculating prices.
- Business firms have limited or scarce economic resources by which they are facing the problem of optimization, i.e. output or profit maximization or cost minimization. Hence, microeconomics also helps to the business to select highly efficient and least-cost production technique.
- Microeconomics is useful in the determination of pricing through demand and supply model. This model states that price is determined by the force of demand and supply.
Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan