Micro Economics

Dr. Veena Jha

Commerce Department
Meaning of Micro Economics

• Microeconomics is the study of individuals, households and

firms' behavior in decision making and allocation of
resources.
The term microeconomics was coined by Prof. Ragnar
Frisch. In the Greek language 'Mickros' means very small.
And thus microeconomics concerns itself with the small and
individual part of the economy.
Microeconomics is a branch of economics that analyzes market
behavior of individuals and firms in order to understand their
decision-making processes.
Micro means a small part of a thing. Microeconomics thus deals with a
small part of the national economy. It studies the economic actions and
behavior of individual units such as an individual consumer, individual
producer or a firm, the price of a particular commodity or a factor, etc.
Definition of Microeconomics

• Definitions of Micro Economics

Maurice Dobb – “Microeconomics is in fact a microscopic
study of the economy.”
Features Of Micro Economics
1) Study of Individual Units:
Microeconomics is the study of the behavior of small
individual economic units, like an individual firm,
individual prices, individual households etc.
2) Price Theory:
Microeconomics deals with the determination of the
prices of goods and services as well as factors of
production. Hence, it is known as price theory.
3) Based on Certain Assumptions:
Microeconomics begins with the fundamental
assumption, “Other things remaining constant” (Ceteris
Paribus) such as perfect competition, laissez-faire policy,
pure capitalism, full employment etc. These assumptions
make the analysis simple.
4) Limited Scope:
The scope of microeconomics is limited to only individual
units. It doesn’t deal with the nationwide economic
problems such as inflation, deflation, the balance of
payments, poverty, unemployment, population, economic
growth etc.
Importance of Microeconomics
The study of microeconomics is great importance both at theoretical &
practical level.
• 1. FUNCTIONING OF MARKET ECONOMY: In such an economy, the
economic decision are taken & implemented through price
mechanism.
• 2. ALLOCATION OF RESOURCES: It is allocation of resources that
determine a) what to produce ,b) how to produce , c) how much to
produce & c) for whom to produce .
• 3. PRICE DETERMINATION: Theory of product pricing & theory of
factor pricing are essential part of microeconomics.
• 4 .ECONOMIC EFFICIENCY: Microeconomics theory suggests
policies to achieve optimum allocation of resources so on to maximize
welfare of the society.
• 5 HELPFUL IN INTERNATIONAL TRADE: The terms of trade & the
exchange rate between different currencies are also determined by
demand & supply.
• 6 . USEFUL IN BUSINESS DECISIONS: managerial economics is the
study of economic theories, logic, & tools of economic analysis that
are used in the process of decision making. &
• 7. FORMATION OF ECONOMIC POLICY: Economic policy relates to the
policies & programmers of the government designed to control &
regulate economic activities in the country.
Limitations of Microeconomics
• The main disadvantages or limitations of microeconomics can
be highlighted as follows:
1)Unrealistic Assumptions:-

• Microeconomics is based on some assumptions such as

laissez economy, perfect competition and full employment
which are unrealistic.
2. Incomplete Study

It is only the study of economic behavior of individual or unit which does not
provide complete picture of whole economy.
3. No Aggregate Analysis

Microeconomics lacks aggregate analysis of employment, fiscal

and monetary policy which are very important to study national
economy.
4. Limited Scope

Scope of microeconomics is limited or narrow while comparing

to macroeconomics
Thank You