Microeconomics-Unit 1

Introduction to Microeconomics
Introduction

 Economics is a social science concerned with the production, distribution, and

consumption of goods and services.
 It studies how individuals, businesses, governments, and nations make choices
about how to allocate resources.
 Economics focuses on the actions of human beings, based on assumptions that
humans act with rational behavior, seeking the most optimal level of benefit or
utility.
 Economics can generally be broken down into macroeconomics, which concentrates
on the behavior of the economy as a whole, and microeconomics, which focuses on
individual people and businesses.
Microeconomics

 Microeconomics is the study of the economic actions of individuals and small

groups of individuals.
 This includes, ‘the study of particular firms, households, individual prices,
wages, income, particular commodities’.
 It is concerned with problems of income distribution.
 Its interests is in relative prices of particular goods and services.
 It’s a microscopic study of the economy.
Scope of Microeconomics

Microeconomics studies :-
 How Resources are allocated to production of particular goods and services
 How the goods and services are distributed among the people
 How efficiently they are distributed
 Studies the price theory- How the price of a good is determined
 Firstly, there is a consumers market or a commodity market where the
consumers meet producers to buy goods.
 The demand of the consumers depend on the prices of the product.
 Secondly, there is a producers market or a factor market.
 Here there is demand for factor services comes from the producers and supply
comes from the consumers.
Importance of Microeconomics

 To understand the working of a free economy- The decisions of what to

produce, how to produce and for whom to produce is taken by the consumers
and producers both.

 To provide tools for Economic Policies-It provides analytical tools for

evaluating the economic policies of the state. It helps in formulating pricing
policies.

 Helpful in efficient employment of resources-Microeconomics helps in

economizing the scarce resources with efficiency.
Helpto Business Execution- Helps in attainment of maximum productivity in a
business.

Helpful
in understanding the problem of taxation- A tax leads to reallocation of
resources at times. Through microeconomics we study which tax leads to
diminution of social welfare.

Helpfulin International Trade-It is used to explain gains from trade. It helps to

study balance of payments and also the relative elasticities of demand.

Toexamine the conditions of Economic welfare- Basically it studies the

subjective satisfaction of an individual.

The basis for Prediction- We can make predictions and plan the occurrence.

Constructionand Use of Models- Helps in understanding basic models in a

simplified way.
Limitations of Microeconomics

 It is based on unrealistic assumption of full employment in the economy.

 It is based on the assumption of laissez-faire, i.e. capitalist economy.

 It is concerned with the study of parts and ignores the whole.

 It is misleading as what is true for an individual household may not be true to

the whole economy.
Macroeconomics

 It is the study of aggregates or averages covering the entire economy. Eg-

Unemployment, National Income, Aggregate supply, Aggregate demand.

 Helps in understanding the working of an economy.

 In Economics Policies
 In General Unemployment
 In National Income
 In Economic Growth
 Monetary Problems
 In Business Cycles
Limitations of Macroeconomics

 Fallacy of Composition- What is true to one may not be true to everyone

 To regard Aggregates as Homogenous
 Ignoring individual difference
 Indiscriminate use can be misleading
Distinction between Microeconomics and
Macroeconomics

Microeconomics
 The word ‘mikros’ means small
 Study of individuals
 For eg-Income of a household
 Based on partial-equilibrium
analysis
Macroeconomics
 The word ‘makros’ means large
 Study of the economy as a whole
 For eg- National Income
 Based on general equilibrium
References

 Micro Economic Theory- M.L. Jhingan