Also, microeconomics is concerned with the aggregate structure and macroeconomics is concerned with the aggregates themselves. Therefore, both microeconomics and macroeconomics are supplementary to each other, and the superiority of one approach over the other cannot be claimed. Microeconomics for firms may look at how producers decide what to produce, in what quantities, and what inputs to use based on minimizing costs and maximizing profits.
Economic Policies:
Microeconomic decisions by both small businesses and individuals are mainly motivated by cost and benefit considerations. Costs can be either in terms of financial costs such as average fixed costs and total variable costs or they can be in terms of opportunity costs, which consider alternatives foregone. Microeconomics then considers patterns of supply and demand as dictated by the aggregate of individual decisions and the factors that influence these cost-benefit relationships.
At the heart of the study of microeconomics is the analysis of the market behaviors of individuals in order to better understand their decision-making process and how it impacts the cost of goods and services. In microeconomics, it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting power. The factor market is examined because of supply of factors and derived demand from product market.
Moreover, different types of revenues arc also considered in microeconomics. A household can get maximum satisfaction through allocation of its expenses. A firm can get maximum profit when marginal revenue is more than marginal cost. An industry is in equilibrium when new firm does not enter the market or old firm does not leave the market. That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure.
These groups create the supply and demand for resources, using money and interest rates as pricing mechanisms for coordination. Perfect competition is a situation in which numerous small firms producing identical products compete against each other in a given industry. Perfect competition leads to firms producing the socially optimal output level at the minimum possible cost per unit. Firms in perfect competition are “price takers” (they do not have enough market power to profitably increase the price of their goods or services).
Microeconomics is also called price theory as it studies the pricing of goods and services and the factors of production. The basic elements of microeconomics are goods and services, prices, markets, and economic agents like consumers, firms, and government. Towards the end of the 19th century, there developed a new approach, which has come to be called Neo-Classical. Instead of the aggregates, the units became marginal or incremental. Instead of the entire nation, the individual consumer or producer became the focus of interest.
- They can check whether the government has used that money for welfare of the people.
- Moreover, the study of micro economics is essential to achieve the best outcome of macro policies.
- Therefore, in microeconomics, we also study the economics of uncertainty.
- Microeconomics shows how and why different goods have different values.
- That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure.
Supply is typically represented as a function relating price and quantity, if other factors are unchanged. Strategic behavior, such as the interactions among sellers in a market where they are few, is a significant part of microeconomics but is not emphasized in price theory. Price theorists focus on competition believing it to be a reasonable description of most markets that leaves room to study additional aspects of tastes and technology.
Examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. Microeconomics is the social science that studies the implications of incentives and decisions and how they affect the utilization and distribution of resources on an individual level. Microeconomics shows how and why different goods have different values. It addresses how individuals and businesses conduct and benefit from efficient production and exchange and how individuals can best coordinate and cooperate with each other. This is studied in the field of collective action and public choice theory.
Theory of Market Structure and Behaviour:
However, as Paul Samuelson has emphasized, that there is no essential opposition between Macro-Economics and Micro-Economics. “Macroeconomics deals with the big picture – with the macro aggregates of income, employment, and price levels. But do not think that microeconomics deals with unimportant details. After all, the big picture is made up of its parts.” (Economics, 7th ed., p 362).
Microeconomics and Macroeconomics: Which is more Important?
The Marshallian and Walrasian methods fall under the larger umbrella of neoclassical microeconomics. Neoclassical economics focuses on how consumers and producers make rational choices to maximize their economic well-being, subject to the constraints of how much income and resources they have available. The Consumer equilibrium and the Producer equilibrium are the representatives of partial equilibria. But the existence of equilibrium of all the consumers of the economy or all the producers of the economy generates General equilibrium of consumption or production. Such all along with different criteria of welfare economics are the important issues of microeconomics.
Regulations help to mitigate negative externalities of goods and services when the private equilibrium of the market does not match the social equilibrium. Opportunity costs can tell when not to do something as well as when to do something. For example, one may like waffles, but like chocolate even more. But if offered waffles or chocolate, one would take the chocolate.
A good example would be that of digital marketplaces, such as eBay, on which many different sellers sell similar products to many different buyers. Consumers in a perfect competitive market have perfect knowledge about the products that are being sold in this market. On the supply side of the market, some factors of production are described as (relatively) variable in the short run, which affects the cost of changing output levels. Their usage rates can be changed easily, such as electrical power, raw-material inputs, and over-time and temp work. Other inputs are relatively fixed, such as plant and equipment and key personnel.
Understanding the interdependence of microeconomics and macroeconomics is essential for policymakers, economists, businesses, and individuals alike. It provides insights into how individual decisions aggregate to shape overall economic outcomes and how macroeconomic policies impact individual economic agents. Microeconomics is the study of individual units of the economy, such as individual consumers, individual firms, and small groups of individual units like various industries and markets. S. Jevons were scope of micro economics concerned with households and firms as individuals rather than aggregative entities and used `marginal’ (small additional or incremental) units in their methodology. The `margin’ was the concept they used in their technique of study.
Microeconomics assumes the total quantity of resources is given and it seeks to explain how they are allocated to the production of various goods. Therefore, microeconomics studies the allocation of resources and determines what to produce, how to produce, and for whom to produce. The study of micro economics is highly helpful in understanding the determination of relative prices for the productive services rendered by different factors of production. According to Prof. Robbins, human wants are unlimited but the resources to satisfy them are limited. Therefore, we face the problem of choice in wants and economy in means. In other words, prices of all goods are determined by the equilibrium of demand and supply.
Therefore, microeconomics deals with the determination of product and factor prices and their quantities in the individual markets and the allocation of resources among various firms and industries. Microeconomics studies the economic behavior of specific economic elements and specific economic variables. The units of study in microeconomics are parts of the economy like households, firms, and industries.
