Scope And Purpose Of Microeconomics And Its Significance In Business Decision Making

It explains how the output produced is shared among those persons who cooperate in the production of the output. 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 is concerned with demand analysis i.e. individual consumer behaviour, and supply analysis i.e. individual producer behaviour. 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. 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. The old-fashioned Neo-Classical theory of Marginal Utility, for example, says that the price of a commodity is decided by the additional `utility’ that a small additional unit of it yields.

Determination of Relative Prices of Products & Factors of production

That call would fit the classification of normative economics, which is one of two types of economic analysis. The other type is positive economics which occurs when analysts deal strictly with data or facts centering their attention on whether that information is accurate. For example, individuals are more likely to agree on matters regarding the accuracy of data than they are on matters regarding what ought to occur in response to their interpretations of the data. Microeconomics used for the study of a business unit, but not the economy as a whole is known as managerial economics. The various tools used in microeconomics like cost and price determination, at an individual level becomes the foundation of managerial economics.

• For example, a firm operating as a monopoly will face different constraints than a firm operating with many competitors in a competitive market.
• This allows economists to develop mathematically testable models of individual markets.
• In contrast, the London School of Economics offers BSc and MSc degrees to its students of Economics.
• Therefore, quantity of production of goods is decided by different firms individually.

The theory of product pricing explains how the price of a commodity is determined. Towards the end of the 19th century, there developed a new approach, which has come to be called Neo-Classical. Instead of the entire nation, the individual consumer or producer became the focus of interest. The theory of production talks about the performance of manufacturers or producers and how they allocate available limited resources to produce certain commodities. It consists of studying factors of production, production functions, cost analysis, and the law of production. The microeconomic theory also comprises mathematical techniques like linear programming to determine the optimal cost of production.

Absence of Large-Scale Production:

Producers, for example business firms, are hypothesized to be profit maximizers, meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit. Supply is typically represented as a function relating price and quantity, if other factors are unchanged. 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).

microeconomics

The terms ‘micro’ and ‘macro’ were first used in economics by Norwegian economist Ragnar Frisch in 1933. These terms were derived from the Greek words ‘mikros’ and ‘makros’ respectively which refer to the small individual unit and large. Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields.

How Important Is Microeconomics in Our Daily Life?

Microeconomics differs from macroeconomics, the study of the effects of interest rates, employment, output, and exchange rates on governments and aggregate economies. Both microeconomics and macroeconomics examine the actions in terms of supply and demand. Depending on competitiveness and structures of the markets in which they operate, some firms can influence the market price and others merely accept the market price for their outputs.

• The natural inequality of income distribution in a free enterprise economy leads to exploitation of consumers.
• Microeconomics is different from the study of macroeconomics that considers the economy as an entity.
• Graphs depicting these functions show cost on the vertical axis and quantity on the horizontal axis.
• Microeconomics is based on full employment in the economy so it examines the equilibrium position of consumer and producer.

Economists use software to graph the production possibility frontier (PPF). Figure 5 shows the combinations of two goods a company or economy can produce. The relevance of these regions to firms selling items appears near the end of this section, but we turn our attention away from price elasticity for now considering two other demand elasticity concepts. Consumer sensitivity to price changes may be more important and worthy of elaboration at this juncture.

As prices move higher along the demand curve and begin to enter the upper region, consumers become more sensitive to price changes and then they begin to reduce their purchases of the item. Purchase quantities fall faster than prices rise resulting in decreases in a consumer’s total expenditures and a firm’s total revenues. The branch of microeconomics that deals with firm behaviour is called producer theory.

Microeconomics is a branch of economics studying the behaviour of an individual economic unit. Microeconomics helps in contemplating the attributes of different economic decision-makers like individuals, enterprises, and households. In simple terms, microeconomics helps in understanding why and how different goods have different values, how individuals make certain decisions, and how they cooperate. This scope area investigates how factors of production—labor, capital, land—are bought and sold in the market.

Moreover, different types of revenues arc also considered in microeconomics. Models contain a set of relationships and those relationships use lines and curves for illustrative purposes. However, graphs are a known stumbling block for many students so their omission from this essay serves to expedite learning. When the need arises, readers are encouraged to consult those sources as they read through the pages of this essay. All said, when viewing a two-dimensional graph showing the demand and supply curves in the market for any given item, viewers would notice that its price appears on the vertical axis and its quantity is appears on the horizontal axis.

Analysis of production efficiency, consumption efficiency, and overall economic efficiency are conducted on the basis of microeconomics. The study of microeconomics helps the decision makers to analyze and determine how the productive resources are allocated for various goods and services. It also helps in solving the producers’ dilemma of what to produce, how much to produce and for whom to produce.

In essence, the firm owner expects to earn a specific minimum level of profit in order to remain in the current business. Therefore, in order to remain in the business, a firm owner or an entrepreneur will receive a rate of profit considered normal for the market in which he or she conducts business operations. A real need exists to sell items at a market price that covers average total costs.

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. 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. It teaches us to purchase the required products in most suitable quantities so that the total utility obtained is maximized.

It occurs where the marginal cost curve intersects the average total cost curve and at the latter’s lowest point. The break-even point also marks the location at which those costs are equal and the firm earns a normal profit. The term may be misleading to some as it suggests the absence of profit; it is noteworthy that a major difference exists here between accounting and economics. Profits are part of the cost of doing business given the opportunity cost concept, which is the value the owner attaches to the best foregone alternative.

One scope of micro economics example of product produced in a perfectly competitive market structure is agriculture. In this instance, there are numerous buyers and sellers of an agricultural product such as corn. Consequently, corn farmers take the price dictated by the market and almost anyone can obtain enough resources to grow corn.