1. Product Pricing
The theory of product pricing explains how the relative prices of cotton cloth, rice, car and thousands of other commodities are determined.
Price of a commodity depends upon the forces of demand and supply. Therefore, analysis of demand and supply side is necessary in order to explain the process of determination of price.
Study of demand side covers the analysis of consumer's behavior and study of supply side, covers the analysis of conditions of production, cost and behaviour of firm & industry.
So, theory of product pricing is subdivided into theory of demand & theory of production & cost.
2. Factor Pricing
Theory of factor pricing i.e. Theory of distribution explains how wages (price for the use of labour) rent (payment for the use of land), interest (Price for the use of capital), profits (the reward for the entrepreneur are determined.
3. Theory of welfare
Theory of welfare basically deals with efficiency in the allocaton of resources. Efficiency in the allocation of resources is attained when it results in maximization of satisfaction of people. Economic efficiency involves three efficiencies:
A) Efficiency in production: Efficiency in production means producing maximum possible amount of goods, from the given amount of resources.
B) Efficiency in consumption: Efficiency in consumption means distribution of produced goods & services among the people for, consumption, in such away as to maximize total satisfaction of society.
C) Efficiency in the direction of production i.e. overall economic efficiency: Efficiency in the direction of production means production of those goods which are most desired by the people.
Micro economic theory shows under what conditions these efficiencies are achieved.
We may conclude that Micro Economics is mainly concerned with price theory and allocation of resources. It seeks, to examine the following basic economic questions:
1. What goods are produced with and in what quantities?
2. Who will produce them & how?
3. To whom & how the wealth so produced shall be distributed?
4. How shall resources be allocated to production & consumption in efficient manner?
All these questions are in the domain of Micro Economics. Above discussion on subject matter of Micro Economics explains the scope of it.
The study of Micro Economics is mainly confined to price, theory, and resource allocation. It does not study the aggregates relating to whole economy. This approach does not stud national economic problems such as unemployment, poverty, inequality of income etc. Theory of growth, theory of business fluctuation, monetary and fiscal policies etc. are beyond the limit of Micro Economics, so it's scope is limited, compared to that of Macro Economics.
Features of Micro Economics
The following are the features of Micro Economics
1. Study of individual units
Micro Economics is the study of behaviour of small individual economic units, like particular households, individual firms, individual prices etc.
2. Price Theory
Micro Economics is called price theory because it is primarily concerned with determination of prices of goods and factors of production.
3. Slicing method
Micro Economics splits the economy into small individual unit and then studies each unit separately in detail: Thus it is said that Micro Economics uses Slicing method.
4. Partial equilibrium
Micro Economic analysis is a partial equilibrium analysis. Partial equilibrium analyses equilibrium position of individual consumer individual firm, individual industry etc. Partial equilibrium analysis isolates an individual unit from other forces and proceeds with the assumption. "Other things remaining the same" (Ceteris paribus). This approach neglects the interdependence between economic-variables.
5. Microscopic approach
Micro Economics is .the microscopic study of the economy. In the words of Prof. A.P. Lerner, "It is looking at the economy through microscope, as it were to see how the millions of cells in the body of economic - the individuals or households as consumers, and individuals or firms as producers play their part in the working of whole economic organism".
In Micro Economic theory, we discuss how the various cells of economic organism, such as thousands of consumers, thousands of producers or firms, thousands of workers and resource suppliers in the economy; do their economic activities and reach their equilibrium state. In other words in Micro Economics, we attempt only a microscopic study of the national economy. We do not study the national economy in its totality.
6. Analysis of resource allocation and economic efficiency
Micro Economics deals with the allocation of resources among competing groups. Micro Economics explains how relative prices of commodities and factors of production determine the allocation of resources in turn determines
A) What goods will be produced & in what quantities?
B) How, they will be distributed?
It means Micro Economics also deals with the problem of income distribution.
Micro Economics also examines whether the given allocation of resources is efficient i.e. whether it results in economic welfare of society.
7. Use of marginalism principle
Micro Economics uses marginalism principle as a tool of analysis. Marginal means change brought about in total, by an additional unit i.e. marginal unit. All important micro economic decisions are taken at the margin. So this concept is of crucial importance in all areas of Micro Economics.
8. Based on certain assumptions
Micro Economics assumes laissez fair policy, pure capitalism, full employment, perfect competition etc. which do not exist in reality. Also most of the theories are based on the 'ceteris paribus' assumption i.e. Other things being constant. The assumption makes the analysis simple, but at the same time, it neglects the interdependencebetween economic variables. The assumption makes the theories static and neglects changing economic world.
9. Limited Scope
Micro Economics studies individual economic units & not the whole economy. It does not deal with the nation-wide problems like unemployment, inflation, deflation, poverty, balance of payment situation, economic growth etc. So its scope is limited.
10. Analysis of market structures
Micro Economics analyses different market structures i.e. perfect competition, monopoly oligopoly, monopolistic competition etc and describes how prices & quantities are determined in different markets.
Importance and usefulness of Micro Economics:
1. To understand the working of free market economy
Micro economic theory helps in understanding the working of free market economy.
2. Explains price determination & allocation of resources
It explains how the relative prices of various products & factors are determined and further explains why prices of these various products & factors are found different.
Also it explains the process of allocation of resources for the production of various goods & allocation of total production among the various consumers.
3. It helps businessman in decision making
The knowledge of price theory is useful to businessman in deciding policies regarding the prices, cost of production, investment, attainment of maximum productivity etc. Also, with the-help of Micro Economics the businessman can estimate demand for his product.
4. Useful to government
It is useful to government in framing economic policies, Micro Economic analysis is useful in determining tax policy, public expenditure policy, price policy, efficient allocation of resources etc.
5. Helpful in international trade & public finance
Many aspects of international trade like effects of tariff determination of exchange rate, gains from international trade etc. can be explained with the help of micro economic analysis. It is useful in public finance to analyse incidence and effect of particular tax.
6. Model Building
Micro Economics builds simple model which helps us in understanding complex economic situations. Development of various terms, concepts, terminologies, tools of economic analysis is valuable contribution of Micro Economics to the science of economics.
7. Basis of welfare economics
Micro Economics examines the conditions of economic welfare. It explains how best results can be obtained through avoidance of wastage of resources.
Central Problems of the Rconomy:
Central problem of the economy are:
1. What to Produce: Due to scare resources and allocation of resources to alternative use it is very important to decide what to produce and in how much quantity. It is very essential to decide which needs are to be given priority and which can wait.
A) Firstly, economy has to decide what goods and services are to be produce. For instance, it has to be deciding that from consumer goods like wheat, cloth, rice etc what to produce likely from capital goods like machines tractors, from peace time good bread, butter and from war time goods guns riffles what to be produced first.
B) After deciding what good to be produce it is very important to decide in what quantity is to be produced. For e.g. if it is decided that more of war goods will be produced like guns, rifles etc than less of educational goods will be produced like school, colleges etc.
2. How to Produce: It is very important to decide by which method the production should take place as there two technique to perform the production process. These are:
A) Labour intensive Technique: In this technique production is done through labours and by adopting this technique there is greater employment.
B) Capital intensive Technique: In this technique production is done through machines and by adopting this work is done efficiently and faster without much wastage of time.
An economy has to decide which technique is to be adopted according to the situation of their country.
3. For whom to Produce: It is basically concerned with the distribution of the final goods or briefly distribution of the final production. It has two aspects:
A) First aspect relate to personal distribution: How income generated through production is to be distributed among the society and different individual of household.
B) Second aspect relate to functional distribution: How income generated through production is to be distributed among the Factor of production like land, labour, capital, entrepreneur as a reward for the production.
Distinguish between Micro and Macro Economics
Points of Difference | Microeconomics | Macroeconomics |
Meaning | Microeconomics studies economic issues at individual level i.e individual firm, individual consumer or household. | Macroeconomics studies economic issues at the level of country as whole. |
Determination | Microeconomics is basically concerned with the determination of output and price for an individual firm or industry | Macroeconomics is basically concerned with the determination of aggregate output and general price level in the economy as whole. |
Constant thing | Study of Microeconomics assumes that macro variable are constant, e.g it is assumed aggregate output is given while we are studying determination of output and price of an individual firm or industry. | Study of Macroeconomics assumes that Micro variable are constant. eg it is assumed that distribution of income remains the constant when we are studying the level of output in the economy. |
Role | Market mechanism plays a significant role like problem of product prising | Government plays a vital role in fixing up the prices.
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