Meaning and scope of microeconomics-subject matter of microeconomics

Much the micro economics deals with the problem of equilibrium. Game theory is scope of micro economics a major method used in mathematical economics and business for modeling competing behaviors of interacting agents. The term “game” here implies the study of any strategic interaction between people.

Microeconomics provides a more detailed understanding of individuals, firms, and markets. Microeconomics studies small and individual units of the economy which later on becomes a base to study the economy as a whole. The management can use facts and figures to arrive at most suitable decision. After having discussed the theories of “Satisfaction Maximization” the demand behaviour of a consumer with respect to a particular commodity is also considered in micro economic theory. Competition acts as a regulatory mechanism for market systems, with government providing regulations where the market cannot be expected to regulate itself.

Interdependence of Microeconomics and Macroeconomics

Microeconomists formulate various types of models based on logic and observed human behavior. Therefore, quantity of production of goods is decided by different firms individually. For this purpose, a firm tries to find optimum combination of factors.

The government can adjust its policies through reaction of individuals. It also provides guidance for small segments of an economy to bear them well coordinated with each other. Moreover, the study of micro economics is essential to achieve the best outcome of macro policies. By the distribution theories we learn the determination of rewards to factors of production in the form of rent, interest, wages and profit by which distribution of wealth takes place.

In fact, microeconomics deals with individual consumer and a firm or industry. Therefore, it is concerned with behaviour of individual consumers and producers and principles relating to organisation and operations of firms and industries. The different market structures produce cost curves[23] based on the type of structure present.

1. There is, of course, the concept of a Robinson Crusoe Economy where the country has just a single person performing all the economic activities by himself.
2. A classic example of suboptimal resource allocation is that of a public good.
3. S. Jevons were concerned with households and firms as individuals rather than aggregative entities and used `marginal’ (small additional or incremental) units in their methodology.
4. In fact, microeconomics deals with individual consumer and a firm or industry.
5. Inspite of proper guidance for the consumers the real-life situation reveals that they are exploited.

Unequal distribution of income will lead to unequal distribution of wealth. It will then consequently provoke reaction to achieve fair and relatively equal distribution of income/wealth in a society. In the present time, social as well as economic welfare has attained greater importance. Accordingly, the economists have to devise those measures and criteria which are aimed at creating efficiency and optimality in the economic system. Therefore, in microeconomics, we study different techniques which bring welfare to the people. While the equilibrium of the firm is attached with “Minimization of Costs” or “Maximization of Output”.

The factors of production are earning in factor market but they are spending in product market. The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations meeting these assumptions.

Positive microeconomics describes economic behavior and explains what to expect if certain conditions change. It theorizes that consumers will tend to buy fewer cars than before if a manufacturer raises the prices of cars. The cost-of-production theory of value states that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation. Technology can be viewed either as a form of fixed capital (e.g. an industrial plant) or circulating capital (e.g. intermediate goods).

thoughts on “Meaning and Scope of Microeconomics”

These distinctions translate to differences in the elasticity (responsiveness) of the supply curve in the short and long runs and corresponding differences in the price-quantity change from a shift on the supply or demand side of the market. Microeconomics studies the determination of prices of goods and services therefore it is known as price theory. Microeconomics studies product pricing in different market situations like perfect competition, monopoly, monopolistic competition, oligopoly, etc. The theory of product pricing is also called the theory of the firm. The subject matter of the theory of product pricing is the theory of demand and the theory of production and cost.

How a Dictionary Defines Microeconomics

A term for this is “constrained utility maximization” (with income and wealth as the constraints on demand). Here, utility refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred. Microeconomics is the study of what’s likely to happen when individuals make choices in response to changes in incentives, prices, resources, or methods of production. Individuals are often grouped into microeconomic subgroups such as buyers, sellers, and business owners.

As a result, price theory tends to use less game theory than microeconomics does. The link between personal preferences, consumption and the demand curve is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints. Microeconomics is a branch of economics studying the behaviour of an individual economic unit. Adam Smith is known as the father of economics and microeconomics. Microeconomics helps in contemplating the attributes of different economic decision-makers like individuals, enterprises, and households.

This approach does not study national economic problems such as unemployment, poverty, inequality of income etc. Theory of growth, theory of business cycles, monetary and fiscal policies etc. are beyond the limits of microeconomics. Microeconomics thus deals with a small part of the national economy. It studies the economic actions and behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor, etc.

For example, increased consumer spending can stimulate aggregate demand, leading to higher economic growth. Similarly, firms’ investment decisions impact overall investment levels and economic activity. Thus, microeconomics under the topic theory of distribution talks about the procedures and basis of pricing of different factors in different market structures. It explains how the output produced is shared among those persons who cooperate in the production of the output. Thus, the study related to individual units of the economy and small aggregate units such as market demand and industries lies in the scope of microeconomics.

Accordingly, economic theories are also being devised on the basis of uncertainty. Therefore, in microeconomics, we also study the economics of uncertainty. As everyone has to face the problem of multiplicity of wants and limited money income. In such state of affairs, it is the desire of each consumer to maximize his satisfaction, when so happens the consumer is said to be in equilibrium.

The variable cost is a function of the quantity of an object being produced. The cost function can be used to characterize production through the duality theory in economics, developed mainly by Ronald Shephard (1953, 1970) and other scholars (Sickles & Zelenyuk, 2019, ch. 2). Therefore, microeconomics explains how individual economic units such as consumers, resource owners, and business firms play their part in the working of the whole economic system. Instead of studying the whole economy, it takes a small unit of the economy and studies the economic behavior of such part in detail. The law of demand states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy (other things unchanged).