In this session, we will be discussing what is the definition of microeconomics, and also discussing microeconomics meaning, microeconomics concept, microeconomics theory, who is the father of microeconomics, principles of microeconomics, the scope of microeconomics, characteristics of microeconomics, types of microeconomics, limitation of microeconomics, uses, or importance or function of microeconomics, microeconomics vs macroeconomics, microeconomics examples.
What is microeconomics?
The words micro, which is derived from the Greek word ‘Mikros’ meaning small or ‘tiny’. So that, Microeconomics is the study of small or individuals parts of the economy. individual units, household income, these are the examples of microeconomics.
Microeconomics, which is defining also by price theories because most of the theories of microeconomics are related to the price determination of goods and services.
Microeconomics, which is also the study of partial equilibrium, because, at the time of the study of one variable, others are assumed to be constant.
Microeconomics is the social science in the sense that it only explains what is, how and why different goods have different values, how individuals and businesses conduct and benefit from efficient production and exchange, and how individuals best coordinate and cooperate with one another, Why are seniors receiving discounts on public transportation systems? Why do flight tickets cost so much during the holiday season? For example, monopoly price is higher than perfect competitive price but it doesn’t tell, it should be reduced because it hurt the consumers.
Definition of microeconomics?
The definition of microeconomics defines by Prof. Boulding, “Microeconomics is the study of a particular firm, a particular household, individual price, wage, income, industry, and particular commodity.”
Define the definition of microeconomics by A. P. Lerner, “Microeconomics consists of looking at the economy through a Microscope”.
Define the definition of microeconomics by H. Craig Peterson and W. Cris Lewis “Micro-economics focuses on the behavior of the individual actors on the economic stage: firms and individuals and their interactions in markets.”
M. C. Connel, who is define the definition of microeconomics, “In microeconomics we the trees not the forest. Microeconomics is useful in achieving a worm’s eye view of some very specific components of our economics system”.
The definition of microeconomics defines by E.K. Browning and J.M. Browning “Microeconomics is the branch of economics based on the economic behavior of ‘small’ economic units: Consumers, workers, savers, business managers, firms, individual industries and markets, and so on”.
Therefore, from all the above discussions it is clearly defined microeconomics is the study of an individual or small parts of an economy rather than aggregate parts. Microeconomics is the study of decision-making behavior at the micro-level.
In the session on what is the definition of microeconomics, we will be also discussing the principles of microeconomics or the scope of microeconomics.
Principles of microeconomics or scope of microeconomics
Microeconomics is the study of individual units or individual consumers, individual firms, or their small parts of microeconomics. The scope of microeconomics covers the following topic or following are the topics related to microeconomics.
The principles of microeconomics or the scope of microeconomics can be dedicated to the following points.
- Theory of demand
- Theory of production and cost
- Theory of product pricing
- Theory of factor pricing
- Theory of economic welfare
Allocation of resources
Assumes the total quantity of resources is given by the microeconomics, and microeconomics defines how they are allocated to the production of various goods. Therefore, microeconomics studies the allocation of resources and determines.
- what to produce?
- how to produce?
- When to produce?
- for whom to produce?
Theory of demand
Microeconomics is the study of how the demand for a commodity is determined. like, the goods, which are produced because it is demand from the consumer. So, the theory of demand defines by the buyer’s demands and their maximum utility. Microeconomics includes the meaning, types, law, and determinations of demand, law of diminishing utility, low of equi-marginal utility, indifference curve revealed preference theory, and so on. Besides, the practical importance of these theories is also included in microeconomics.
Theory of production and cost
The theory of production and cost, which are the most important study of microeconomics. Because the theory of production describes the performance of manufacturers or producers, concepts of different types of products, and the theories like the law of variable proportions, laws of returns to scale, least-cost combinations of inputs, and so on. Similarly, the theory of production and costs refers to the different concepts of cost, nature of short-run and long-run costs, etc. Microeconomics theory also includes mathematical techniques like linear programming, cost-minimization, or output maximization.
The theory of product pricing
Therefore, from all the above discussions we know that microeconomics is the study of the determination of the prices of goods and services. it is also known as price theory. So, product pricing is the main subject matter of microeconomics. The relative price of different goods is determined under different market situations. The market situations may be perfect competition, monopoly monopolistic competition, oligopoly, and so on. Microeconomics studies the process of pricing goods and services in these markets’ structures. The theory of factor pricing, which includes the study of the costs, revenue, profit, position of loss, and the behavior regarding profit maximization or cost minimization. Hence, the theory of product pricing is also known as the theory of the firm.
Theory of factor pricing
The theory of factor pricing, which is also another main subject matter of microeconomics. So, the theory of factor pricing is also known as the theory of distribution. land, labor, capital, and entrepreneur these all are the combining with each other, then the goods are produced. Rent, wages, interest, and profit the rewards of these all are factors of production respectively. So, the theory of factor pricing, which is related to the land, labor, capital, and organization studies.
The theory of economics welfare
According to the theory of economic welfare. This type of theory is also another main subject matter of microeconomics. The normative price theory is called welfare economics. Microeconomics also examines the potential measure of maintaining the economic prosperity of men as consumers and producers and improving that prosperity or welfare. Define and analyze the law of economic efficiency, which is one of the important functions of welfare economics. The economy is said to be efficient when the number of goods and services are produced so as to yield maximum satisfaction to the consumers.
In the session on what is the definition of microeconomics, we will be also describing the characteristics of microeconomics.
Characteristics of microeconomics
The characteristics of microeconomics can be dedicated to the following points.
- Study of Individual Units
- Price Theory
- Slicing Method
- No Effect
- Microscopic study of the economy
- Partial equilibrium analysis
- Based on assumption
Study of individual units
According to the study of individual units. microeconomics is the study of the economy, which is the analysis of the individual firm, like that individual consumer, or producer, particular firm, price of a commodity, etc.
According to the price theory. Microeconomics, which is also known as the price theory because price theory is related to factor pricing and product pricing. Factor pricing and product pricing both are the help in determining the price in both commodities and the factor of production in their respective markets.
According to the slicing method. slicing method, which is known by the microeconomics. Microeconomics is the study of the specific unit of an entire economy. For example: How a person maximizes his satisfaction, how a firm maximizes its profit etc.
Microeconomics, which is it deals with the analysis of very small individual units of the economy. According to M. C. Connel, “In microeconomics we the trees not the forest. Microeconomics is useful in achieving a worm’s eye view of some very specific components of our economics system”. So, it is defined microeconomics does not affect.
Microscopic study of the economy
Microeconomics consists of looking at the economy through a Microscope. because it is divided into smaller units to study the operations of the individuals of the individual units in detail.
Partial equilibrium analysis
According to the partial equilibrium analysis. partial equilibrium analysis of the interrelationship between different markets in price determination. Partial equilibrium analysis also highlights the role of market forces such as demand and supply in determining equilibrium.
Based on assumption
The assumption is the most thing, which displays the most important role in economics. so, microeconomics is also analysis is based on certain assumptions. For example, laissez-faire, perfect competition, full employment, ceteris paribus, etc. Such assumptions although make the analysis simple, but may not exists in reality.
In the session on what is the definition of microeconomics, we will be also discussing the types of microeconomics.
Types of microeconomics
According to modern economics. In modern economics, we identified two types of economics. The first one is microeconomics and the second one is macroeconomics. out of that microeconomics is taken as a very important branch of economics.
The types of microeconomics can be dedicated to the following points.
- Micro statics
- Micro comparative (comparative micro static)
- Micro dynamic
According to micro static. Micro static is those types of microeconomics, which are the study of the single equilibrium point for several microeconomic variables. let us consider demand and supply a function of price. Demand and supply, which are two principal variables that determine the equilibrium level for the market. The quantity demanded of a good at a time is generally considered to be related to the price of that particular time. Same way supply is also related to price at a particular static time.
Thus, microeconomics tries to find out the equality of demand and supply at a particular point of time or static time. This static analysis is the study of the static relationship between two variables called demand and supply, which is known by micro statics. In other words, if the functional relationship is established between two principles variables at the same period of time, such analysis is known by micro static. This situation is also known as the equilibrium situation of variables. This equilibrium determines the equilibrium price and quantity. This can be clearer after the following diagram.
The above figure shows the equilibrium of the market is at a certain point in time. price is measured along the y-axis, and quantity of goods is measured along the x-axis respectively. Here DD is the demand curve and SS is the supply curve. These curves interest at point E. So that E is the point of equilibrium. OQ is the equilibrium quantity and OP is the equilibrium price. It is said to be a stable equilibrium in the sense that demand and supply are measured at a certain point in time.
Micro Comparative Static Analysis
According to Comparative Micro Statics. Comparative Micro Statics are those types of microeconomics, which are that method of analysis that compares the equilibrium position of the relations between micro variables at different points of time. In others words, the economy is those types, which will not be stable at a point in time. There is a changing tendency of equilibrium so that to make a comparison between equilibrium, these types of microeconomics are the study of two equilibrium of different time periods. This change in demand and supply brings a change even in the equilibrium condition. The concept will be clearer after the figure.
The above figure. price is measured along the y-axis, and quantity of goods is measured along the x-axis respectively. E is the initial equilibrium; OP is the equilibrium price and OQ is the equilibrium quantity. When demand increases at that time new equilibrium can be obtained. In this equilibrium op1 equilibrium price oq1 equilibrium quantity. Now when the income of a consumer increases then it will shift the demand curve to the rightward. D1D1 is the new shifted demand curve. e2 is the new equilibrium point, which determines oq2 quantity and op2 price. Hence the result is an increase in quantity demand followed by an increase in price.
The comparative study of the two equilibrium points. E1 and E2 are the comparative micro static but this study doesn’t explain the process of how a new equilibrium attains.
Due to the change in population, production, fashion, and habits, the world is dynamic. Change in demand and supply are the important causes of change in price. According to the micro-dynamic. Micro dynamic, which is another branch of microeconomics. So micro-dynamic is the study of the process which shows the initial equilibrium break and new equilibrium after passing different disequilibria.
According to the relationship of price and supply. Price and supply are good examples of dynamic functions. The concept will be clearer after the figure.
The above figure. E is the initial equilibrium where DD is the demand curve and SS is the supply curve are equal OQ is the equilibrium quantity while OP is the equilibrium price.
Where demand increase from DD to D1D1 then it reached from initial equilibrium E to new equilibrium after passing P2A and supply is P2B. Supply exceeds demand because, at a higher price, there is a greater profit.
At OP2 price supply is greater by AB, so that price decreased by P2P4. At OP4 price, supply is P4D and demand is P4C, so that demand exceeds supply by DC. It leads toward an increase in price by P4P3.
The process of excess supply or demand continues with rising and falling of price until new equilibrium E1 will not be achieved.
The economy reached from E to E1 after passing different disequilibria A, B, C, D, F, G, H, and so on which is the prime concern of micro-dynamic.
In the session on what is the definition of microeconomics, we will be also discussing Microeconomics vs Macroeconomics.
Microeconomics vs Macroeconomics
|The word micro is derived from the Greek word mikros and the meaning is small.||The word is derived from good work makros and the meaning is large.|
|Microeconomics focused on the small system of the economy.||Macroeconomics focused on the entire system of the economy.|
|It is useful in regulating the prices of a product alongside the prices of factors of production (labor, land, entrepreneur, capital, and more) within the economy.||It perpetuates firmness in the broad price level and solves the major issues of the economy like deflation, inflation, rising prices (reflation), unemployment, and poverty as a whole.|
|It is based on impractical presuppositions, i.e., in microeconomics, it is presumed that there is full employment in the community, which is not at all feasible.||It has been scrutinized that the misconception of composition’ incorporates, which sometimes fails to prove accurate because it is feasible that what is true for aggregate (comprehensive) may not be true for individuals as well.|
|It concentrates on the decision-making process that businesses use to determine which products to make, what price to charge, and so on.||Macroeconomics means large. Thus, macroeconomics studies the behavior of not particular units but all units combined together.|
|It is also known as price theory.||It is a study of the overall condition of the economy.|
|Microeconomics has been called the bottom-up approach.||In macroeconomics, we worry about national goals such as government, debt, aggregated demand, aggregated supply, etc.|
In the session on what is the definition of microeconomics, we will be also discussing the limitations of microeconomics.
Limitation of microeconomics
The limitation can be dedicated to the following points.
- May not be true in aggregates
- Assumption of full employment is wrong
- Emphasis to small parts
- Intervention of government in economics activities
It May is not true in aggregates
According to microeconomics. We know that microeconomics is the study of small and individuals units, it doesn’t include the economy as a whole. what may be true in the case of individuals units, may not be true in the case of aggregates. just take for example, according to microeconomics individual saving is goods since it leads to one’s economic prosperity but if all people save, effective demand is reduced and leads towards unemployment.
The assumption of full employment is wrong
According to microeconomics, Microeconomics, which assumes other things in the same situation and full employment. but according to reality, microeconomics, which has unemployment rather than full employment. unemployment is those types of problem, which are facing the whole of economics in the world so that it cannot address the real situation.
Emphasis on small parts
Therefore, from all the above discussions it is clearly defined microeconomics is the study of an individual or small parts of an economy rather than aggregate parts. also, Microeconomics is the study of individuals demand, saving but silent about an aggregate concept like national income national investment, and so on.
The intervention of government in economics activities
According to regulations and control in any country of the government. control and regulations are those types of things, which are the most important role display in the activity of microeconomics. but according to microeconomics, microeconomics assumes that there is no interference by the government in economic activities.
In the session on what is the definition of microeconomics, we will be also discussing the uses and importance of microeconomics.
Uses and Importance of microeconomics
The uses and importance of microeconomics can be dedicated to the following points.
- Proper allocation of resources
- Pricing policy
- Decision making
- Study of human behaviors
- Formulation of government policies
- Solution of contemporary economic problems
- To identify the condition of welfare of people.
Proper allocation of resources
In any business organization, the most important role is displayed by microeconomics. microeconomics, which helps business firms to make proper allocation of resources at minimum cost. because consumers and producers act rationally. for example, the resources or the factors of production are limited and the price mechanism of any economy decides all the allocation of resources according to their productivity.
Decision-makings are those words or those things, which are the most critical problems in human life or in any business organization. But the problem is solved by microeconomics. Microeconomics, which are helping to humans and in the business to the process of making the decision. It contributes to improved decision-making in the area of demand analysis, optimal production decisions, pricing decisions to maximize profit. It guides businessmen to determine the price of different goods and factors of production. It is useful to formulated firm policy oriented toward greater profit.
Study of human behaviors
Macroeconomic is concerned with the study of human behaviors. like the law of diminishing utility, equip-marginal utility, indifference curve theory all study human behavior. Similarly, Economic phenomena are discussed in the forms of positive and normative sciences. Microeconomics also guides people; how limited resources can be utilized to optimize the level of profit.
Formulation of government policies
According to the formulation of government policies. Formulation of government policies established by microeconomics for the welfare of the people. Microeconomics is one of the tools, which is useful in designing price policy, taxation policy, tax, loans, subsidy, and others in an economy dominated by the public sector.
Solution of contemporary economic problems
Contemporary economic problems are those types of problems, which are solved by only using the method of price theory. such as public finance, international trade. Price theory also helps to analyses the effect of different taxes, benefits from international trade, correct balance trade, and payments, control of the population, poverty alleviation program, unemployment, and inequality. So that, in the society of human being the equality can be maintained.
To identify the condition of the welfare of people
Welfare economics suggests a possible way to increase the welfare of people and helps to avoid different problems and defines the rules of economic efficiency. Because welfare economics define by the theory of normative price. Identify the condition of the people in any country with the help of microeconomics, so that comparison with the people living in other countries is also possible.
Microeconomics serves as the basis for analyzing and solving the pricing problems and it also tells us how the prices of products are determined. for example, the elasticity of demand is the chapter of microeconomics, tells us about fixing the price of a product. If the elasticity of demand is inelastic, the higher price can be charged and low when the elasticity of demand is elastic.
In the session on what is the definition of microeconomics, we will be also discussing microeconomics examples.
The microeconomics examples can be dedicated to the following points.
- Opportunity Cost
- Labor Economics
- Competitive Advantage
- Consumer Choice
- Consumer Confidence
- Business Confidence
- Information Economics
- Welfare Economics