Economics is a science that studies human behaviour as a relationship between

ends and scarce means which have alternative uses.

1. Scarce Resources
2. Wants are unlimited
Resources have alternative usages.

Q1. What is Microeconomics? Explain its features and Importance.

Answer : Micro means small.

Thus, micro economics analyses individualistic behaviour.

It studies an individual consumer, producer, price of a particular commodity,

household, etc.

According to Prof. K. E. Boulding, "Micro Economics is the study of particular

firm, particular household, individual prices, wages, incomes, individual industries
and particular commodities."

Microeconomics is the study of individuals, households and firms' behavior in

decision making and allocation of resources. It generally applies to markets of
goods and services and deals with individual and economic issues.

Description: Microeconomic study deals with what choices people make, what
factors influence their choices and how their decisions affect the goods markets
by affecting the price, the supply and demand.
Characteristics / Features of Microeconomics

Classical economists always insisted on micro economics because they believed

that it is better to understand concept at individual level and then go for general
(or macro) level. E.g. first understanding individual consumer behaviour and
then analyzing the behaviour of entire market.

1. Nature of Analysis

In micro economics, the behaviour of individual consumers and producers in

detail is analysed. It is study of subject matter from particular to general.

2. Method

Micro economics divides the economy into various small units and every unit is
analysed in detail. It is a slicing method.

3. Scope

Micro economic analysis involves product pricing, factor pricing and theory of
welfare.

4. Application

Both theoretically and practically, micro economics is useful in formulating

various policies, resource allocation, public finance, international trade, etc.

5. Nature of Assumptions

Assumption of Ceteris Paribus is always made in every micro economic theory. It

means theory is applicable only when 'other things being same'.
Uses / Importance / Advantages of Microeconomics

1. Individual Behaviour Analysis

Micro economics studies behaviour of individual consumer or producer in a

particular situation.

2. Resource Allocation

Resources are already scare i.e less in quantity. Micro economics helps in proper
allocation and utilization of resources to produce various types of goods and
services.

3. Price Mechanization

Micro economics decides prices of various goods and services on the basis of
'Demand-Supply Analysis'.

4. Economic Policy

Micro economics helps in formulating various economic policies and economic

plans to promote all round economic development.

5. Free Enterprise Economy

Micro economics explain operating of a free enterprise economy where

individual has freedom to take his own economic decisions.

6. Public Finance

It helps the government in fixing the tax rate and the type of tax as well as the
amount of tax to be charged to the buyer and the seller.
7. Foreign Trade

It helps in explaining and fixing international trade and tariff rules, causes of
disequilibrium in BOP, effects of factors deciding exchange rate, etc.

8. Social Welfare

It not only analyse economic conditions but also studies the social needs under
different market conditions like monopoly, oligopoly, etc.
Disadvantages / Limitations of Microeconomics

1. Unrealistic Assumptions

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.

2. Inadequate Data

Micro economics is based on the information dealing with individual behaviour,

individual customers. Hence, it is difficult to get correct information. So because of
incorrect data Micro Economics may provide inaccurate results.

3. Ceteris Paribus

It assumes that all other things being equal (same) but actually it is not so.
Q2: Differentiate Microeconomics and Macroeconomics

Answer:

Basis for
Microeconomics Macroeconomics
comparison
The branch of economics which The branch of economics which deals
deals with the single factors with the large-scale economic
Meaning and the influence of individual factors and studies the entire
decision on the economy is economy (national as well as
Microeconomics. international) is Macroeconomics.
Study of individual entities is
The microeconomic analysis is the
Foundation the foundation of
foundation of macroeconomics.
microeconomics.
Microeconomics explains the
concept of demand, supply, Macroeconomics explains the concept
factor pricing, product of national income, money, general
Scope
pricing, demand, supply, price level, distribution,
consumption, economic welfare, employment, inflation, etc.
etc.
Application Microeconomic analysis can be Macroeconomics can be used to
applied to determine the ways of identify the overall standard or health
improving individual business of the economy and improve the
entities, determining prices of economy by maintaining stability in
factors of production and the general price level and solving
product itself, etc. within the problems like inflation, deflation,
Basis for
Microeconomics Macroeconomics
comparison
economy. poverty, unemployment, etc.
Microeconomics is largely
Study of macroeconomics may
based on the unrealistic
sometimes involve ‘fallacy of
assumption of full
Limitations composition’ which means what is
employment in the economy
true for the whole is true for only a
and ceteris paribus (other things
portion.
remaining constant).

Microeconomics:

1. It is the study of individual economic units of an economy.

2. It deals with Individual Income, Individual prices, Individual output, etc.

3. Its central problem is price determination and allocation of resources.

4. Its main tools are demand and supply of a particular commodity/factor.

5. It helps to solve the central problem of ‘what, how and for whom’ to produce. In
the economy

6. It discusses how equilibrium of a consumer, a producer or an Industry Is

attained.

7. Price is the main determinant of micro- economic problems.

8. Examples are: Individual Income, Individual savings, price determination of a
commodity, individual firm’s output, consumer’s equilibrium.

Macroeconomics:

1. It is the study of economy as a whole and its aggregates.

2. It deals with aggregates like national Income, general price level, national
output, etc.

3. Its central problem is determination of level of Income and employment.

4. Its main tools are aggregate demand and aggregate supply of the economy as a
whole.

5. It helps to solve the central problem of full employment of resources in the

economy.

6. It is concerned with the determination of equilibrium level of Income and

employment of the economy.

7. Income is the major determinant of macroeconomic problems.

8. Examples are: National Income, national savings, general price level, aggregate
demand, aggregate supply, poverty, unemployment, etc.

CONCLUSION

Microeconomics:
The study of the behavior of individual households and firms in making decisions
on the allocation of limited resources.
Macroeconomics:
The study of the performance, structure, behavior, and decision-making of an
economy as a whole, rather than individual markets.

Q3: What are the three main central problems of an economy? Explain each

Answer:

The problem of choice arises on account of the pressure of three interrelated facts,
viz, human wants are unlimited, means required to satisfy these wants are limited
and means are capable of being put to alternative uses. There would be no problem
if the scarce means had only a single use. However, in reality, these scarce means
have alternative uses.

Thus, whenever the problems of choice and scarcity arise, economics is said to be
emerged, this is why, every economy has to face and solve the following basic
problems:

Allocation of Resources:

The available resources of the society may be used to produce various

commodities for different groups and in different manner.
It requires that decisions regarding the following should be made:

What to produce? (Types and amount of commodities to be produced):

Land, labour, capital, machines, tools, equipment’s and natural means are limited.
Every demand of every individual in the economy cannot be satisfied, so the
society has to decide what commodities are to be produced and to what extent.
Goods produced in an economy can be classified as consumer goods and producer
goods. These goods may be further classified as single use goods and durable
goods.

It is undoubtedly the basic problem of the economy. If we produce one commodity,

it will mean that we are neglecting the production of the other commodity. We
assume that all the factors of production in the economy are fully absorbed, so if
we want to increase the production of one commodity, we will have to withdraw
resources from the production of the other commodity.
On the basis of our requirements goods are further classified as goods- for
necessaries, comforts and luxuries. The economy is also faced with the problem,
how much goods should be produced for necessaries, comforts and luxuries.

How to produce? (Problem of the selection of the technique of production –

choice between labour-intensive and capital-intensive techniques):

After the decision regarding the goods to be produced is taken, next problem arises
as to what techniques should be adopted to produce commodity. Goods can be
produced in large-scale industries or in small-scale village and cottage industries.

The economy has to decide between automatic machines and handicrafts. Hence
two main options are-either capital- intensive technology (more capital and less
labour) or labour-intensive technology (more labour and less capital). The
economy has to decide about the technique of production on the basis of labour
and capital.

For whom to produce? (Problem of distribution of income):

Goods and services produced in the economy are consumed by its citizens. The
individuals may belong to economically weaker sectioned or rich class of people.
Actually this is the problem of distribution. In case of capitalism the decision is
taken on the basis of the purchasing powers of the consumers. Socialistic economy
takes decision regarding goods and services to be produced on the basis of
requirements of the individuals.