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MICRO ECONOMICS ANALYSIS AND BUSINESS POLICIES

A business firm has to formulate a number of economic and managerial policies such asproduction policy, sales policy, advertising policy, purchase policy and investment policyetc. In deciding these policies both, Micro-economic analysis and Macro-economicanalysis, are very useful.There are two branches of economic analysis, Micro-economic analysis and Macroeconomic analysis. Micro-economic analysis is that branch of knowledge in which aparticular firm or industry is studied. Unlike this Macro-economic analysis is that branch of knowledge in which the study of whole economy or study of a large aggregates or averages is made.

Micro Economic Analysis

Micro-economic analysis is the branch of knowledge in which the study of particular economic unit is made. It can be a particular person, a particular firm or a particular industry.According to

Henderson and Quandt,

“Micro-economics is the study of economic actionsof individuals and well defined groups of individuals.”According to

Prof. Boulding,

“Micro-economics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries and particular commodities.”

Scope of Micro Economic Analysis

Micro-economic analysis is related with particular or individual units. Marginal analysis isan essential tool of micro-economics and all the laws based on it are studied in Micro-economics.Following studies are made in Micro-economics:1.Allocation of Resources in the production of Goods and Services : In any economythe quantity of the means of production is limited in a short period. What to produce,how to produce and how much to produce are decided on the basis of allocation of resources. In a free capitalistic economy the allocation of resources to differentproductions and services depends on the prices of resources. This is the reasonthat Micro-economics is called “Theory of Product Pricing” also. In Micro-economicsboth, Theory of product pricing and Theory of Factor pricing are studied. Theory of product pricing, clarifies the process by which the prices of commodities like wheat,cloth, tea, milk, scooter, car etc.whereas the Theory of factor pricing tells us how theprice of using land called rent, the price of using labour called wages, the price of using capital called interest and the rewards or return for entrepreneur’s work calledprofit is determined.

2.Allocative Efficiency : Allocative efficiency is connected with welfare economics. Itincludes efficiency in consumption, efficiency in production and over all efficiency inconsumption and production.

Role of Microeconomics Analysis in Formulation of Business Policies :

Microeconomic analysis plays important role in formulating the policies of the firm andsolving different economic problems, these problems are as follows:1.Helpful in understanding the Mechanism of Economic System: Microeconomicanalysis explains how this economy of free enterprise functions without anycentral regulating body and also throws light on the fact that fully centrallycontrolled economy cannot aperate well.2.Effects of Government Policies on Business Firms and Efforts for PositiveChange: Business firms can make use of Microeconomics analysis in evaluatingstate’s economic policies and in trying to improve them. A Business Economistcan suggest to the government to adopt those policies by which inefficiency canbe eliminated from the economy to maximize the welfare of the people.3.Investigation of Conditions of Economic Welfare : Microeconomic analysis tellsus that the economic welfare will be optimum when there is perfect competition inproduct market and factor market. But on account of monopoly and imperfectcompetition there is bad allocation of resources and less than maximum welfareis achieved. It also suggests measures to eliminate wastage of resources andhelps in achieving optimality which in turn is helpful in achieving the state of optimum welfare.4.Providing Tools of Decision Making : Microeconomic analysis also helps themanagement in realizing its pre-determined objectives and makes the toolsrequired for it available to them.5.Solving Internal Problems of Operations : Microeconomic analysis, throughvarious methods, helps in solving internal problems of operations of a firm. Ithelps management in the choice of commodity, choice of scale of production andchoice of technology for the production etc.6.Helpful in Determining Prices : The Theory of product pricing and the Theory of Factor pricing studied in Microeconomic analysis provides immense help tomanagers in determining prices of their products and prices of factors of production.7.Analysis of Problems of Taxation : The government imposes many kinds of Taxeson income and production. Sales Tax and Excise duty, for e.g. are imposed onsale and production respectively. A firm can evaluate the effects of such taxes onits production and sale etc and make changes in its policies to avoid their badeffects, with the help of the study of Microeconomic analysis.

8.Demand Forecasting : With the help of the study of Microeconomic analysis afirm can plan its production in accordance with the demand forecast made for itsproducts. This enables the firm in getting maximum return from its resources.9.Cost and Production Analysis : Microeconomic analysis helps business firmsanalyse their cost and production and make necessary changes in the policiesregarding them. It can try, if found necessary, to control and reduce the coat of production. Production analysis can help management replace costly resourceswith the cheaper ones and less productive resources with the more productive.10.Profit Planning and Control : The success of a firm is measured by the profit itearns. Microeconomic analysis is of great help to the firms in profit planning andcontrol.11.Measurement of Managerial Efficiency of the Firm : If the management of the firmsucceeds in achieving different targets of the firm it is efficient otherwiseinefficient. Activities of a firm can be analysed in the light of its targets and actualaccomplishments through Microeconomic analysis and necessary action can betaken to induce efficiency through improvement in the fields and areas foundinefficient.

Limitations of Microeconomic Analysis

Following are its main Limitations :1.Analysis of Micro activities only : Only individual units are analysed inMicroeconomic analysis. As a result we are not fully aware of the whole economy.Things which are correct about an individual unit are not necessarily correct about agroup in the same way.2.Based on Unrealistic Assumptions : Microeconomic analysis is based on the twoassumptions (a) Other things remains the same and (b) there is full employment inthe society. Both these assumptions are unrealistic.3.Some of the Economic Problems cannot be studied through Microeconomicanalysis : In every country there are many problems of national level which cannotbe analysed by Microeconomic analysis. Public finance, Fiscal policy, Monetarypolicy, Economic planning, national income and employment are among many suchproblems.4.It does not Study the whole Economy : Microeconomic analysis does not study thewhole economy but only certain parts, organizations and units of it. Knowledge of the whole economy is not required through its study.

Positive and Normative Economics

Economics deals with both POSITIVE and NORMATIVE questions.