Introduction to Microeconomics

Meaning of the Microeconomics

According to K.E. Boulding, “Microeconomics is the study of a particular firm, particular household, wage, income, industry, and particular commodity.”

Thus, microeconomics is the discipline of economics that examines consumer and firm market behavior in order to comprehend how businesses and families make decisions. It is concerned with how different buyers and sellers interact as well as the variables that affect the decisions that buyers and sellers make. Microeconomics, in particular, focuses on supply and demand patterns to determine pricing and output in specific markets (e.g. coffee industry). It also goes by the name of pricing theory.

Microeconomics aims to clarify the distribution of a single consumer's disposable income among numerous goods and services, as well as how he or she achieves maximum satisfaction and reaches the point of equilibrium. It also addresses how a certain company chooses what to produce, how to manufacture it, and how much to make it for in order to maximize profit. It is the examination of every specific tree throughout the entire forest. It focuses on both the system as a whole and on a microscopic examination of specific economic system components. It is an investigation of economic variables from the perspective of a worm.

Meaning of the Macroeconomics

According to Ackley, “Macroeconomics concerns itself with such variables as the aggregate volume of the output of an economy, with the extent to which its resources employed, with the size of national income, with the general price level.”

Macroeconomics is the area of economics that focuses on the characteristics and behavior of the whole economy. It also gives consideration to the overall health of the economic system. In macroeconomics, phenomena that affect the entire economy are examined, including changes in unemployment, growth rates, national income, gross domestic product, inflation, and price levels. It is referred to as an investigation of economic variables from above. Additionally, it reveals a significant link between changes in income and the general level of prices. As a result, income and employment theory is another name for it.

Macroeconomics covers a wide range of topics, including theories of national income, consumption, saving, and investment, employment, economic development, business cycles and stabilization measures, money supply and demand, and international commerce. Instead of focusing on a single tree, it is the study of the entire jungle. Additionally, it reveals a significant link between changes in income and the general level of prices.

Scope of the Microeconomics

The study of small economic units, such as consumers, employees, business managers, firms, specific industries, markets, and so on, is known as microeconomics. Microeconomics is the study of single entities, such as consumers, businesses, or their tiny groupings. The following subjects are essentially included in the field of microeconomics:

• Theory of demand: It is worried with how a commodity's demand is established. The consumer's demand and maximum level of satisfaction are indicated by the theory of demand. It demonstrates how the consumer allocates his limited resources among various items and services offered at various costs.

• Theory of production: It incorporates linear programming, a mathematical method for maximizing output or minimizing costs. Microeconomics subjects including factor nature, production function, cost analysis, and production rules are covered by the theory of production.

• Commodity Pricing: Demand and supply factors in the market impact the prices of specific commodities. Thus, individual producer behavior and individual consumer behavior are both influenced by microeconomics (demand analysis) (supply analysis).

• Factor Pricing: Production is influenced by a number of elements, including land, labor, capital, and entrepreneurs. Therefore, these production factors receive compensation in a variety of ways. Land receives rent, labor receives pay, capital receives interest, and business owners receive profit. Microeconomics is concerned with figuring out how much these incentives, or factor prices, are worth. Thus, both "Price Theory" and "Value Theory" are terms used to refer to microeconomics.

• Welfare Theory: Microeconomics focuses on maximizing societal welfare and distributing resources as efficiently as possible. What to produce, when to produce, how to produce, and for whom to produce are all addressed. Simply put, microeconomics provides recommendations for maximizing the welfare of the public while utilizing the economy's limited resources.

Uses and Importance of the Microeconomics

• Useful in international trade: We can calculate the advantages from international trade and the foreign exchange rate thanks to the study of microeconomics. The relative elasticity of demand for one another's goods is analyzed using microeconomics, which is also used to calculate the benefits of trade.

• Efficient allocation of resources: It offers several rules, including the law of substitution, which states that a customer will be most satisfied when the cost of marginal utilities is equal to the cost of their prices. Similar to this, a producer will make the most money when the price to marginal product ratio of the factors of production is the same.

• Understand the operation of an economy: It teaches us about how a free enterprise operates. It aids in illuminating the nature of the interactions and independence of economic variables, allowing us to better comprehend the intricate economic system. In a mixed economy, producers and consumers, with some government oversight, decide what to produce, when to produce it, how to produce it and for whom, how to distribute it, and what to consume. Microeconomics discusses the circumstances that lead to efficiency in both consumption and production, a clear grasp of how the economic system functions, and a higher level of efficiency in managing and directing the economy.

• Useful in business decision making: Price theory can be used to address some operational issues that businesses experience on a regular basis. It enables businesses to produce as much as possible with the available resources. Business organizations can decide on demand analysis, cost analysis, and pricing methodologies with the use of microeconomics.
  • Due to their finite or scarce economic resources, business firms must optimize their operations in order to maximize their output, profits, or both. Microeconomics hence aids businesses in choosing the most cost-effective and highly efficient production methods.
  • In order to determine price using a demand and supply model, microeconomics is useful. According to this paradigm, supply and demand act as a driving factor in determining price.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan