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. and resources. Microeconomics deals with the economic interactions of a specific person. occur in markets. For instance an economist may study the market for compact discs. a single entity or a company. In other words Microeconomics is the study of individual market. These interactions. time. which mainly are buying and selling goods. such as the government.Definition: Micro economics Microeconomics is how people deal with money. the firms that sell compact discs and any other groups that influence the price and availability of compact discs.

The theory analyzes the composition of such a flow and the way of price determination of the goods and services as well as price of the resources used. Microeconomic theory is called price theory due to its functional nature related to individual business activities of households and firms. and business firms. resource owners.Functions: The function of microeconomic theory studies the economic behavior of consumers. which studies the circular flow of goods and services from household to business firm. . who individually can play a decision-making role in a free market economy.

Micro Economics activities: .

and capital in the factor market and the firm mentioned in component-3 buys the inputs. Likewise. labors. capital. ‡This circular flow continues till the economy exists in the society. ‡The households are the buyers and firms are the sellers in the goods and services market. is concerned to sell the available economic recourses i. . land etc. ‡The household spends money income received by selling their economic resources to buy goods and services. the household activity ..e. firms spends money income received by selling goods and services to buy inputs like raw materials..In figure it says«« ‡ The component 1. Land. labor.

. 2. (d) Theory of profits. which includes(a) Theory of consumer behavior. (b) Theory of rent. which constitutes(a) Theory of wages.In microeconomics. we study the following: 1. (b) Theory of production and costs. Theory of product pricing. (c) Theory of interest. Theory of factor pricing. .

balance of payments disequilibrium and determination of foreign exchange rate. It helps in the formulation of economic policies. . Microeconomics is used for constructing economic models for better understanding of the actual economic phenomena. which are meant for promoting efficiency in production. and welfare of the people. Microeconomics is helpful in understanding the working of free enterprise economy where there is no central control. Microeconomics is the basis of welfare economics.significance of Micro: y y y y y y y Microeconomics is of great help in the efficient management of the limited resources available in a country. It explains how through market mechanism goods and services produced in the community are distributed. Microeconomics is utilized to explain the gains from international trade.

out put and employment. total consumption.Definition of Macro: Macroeconomics is the study of economic system as a whole. Therefore it deals with the totals or aggregates national income. saving and investment and the general level of prices .

Importance Operation of an Economy y Basis of the economy as a whole y Predictions y Economic Policies y It is helpful in removing difficulties of a particular firm y It is the basis of welfare economics y .

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