Importance of Microeconomics | Economics Blogs

Importance of Microeconomics

Meaning of Micro Economics :

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 behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor, etc.

Definitions of Micro Economics

1)Maurice Dobb – “Microeconomics is in fact a microscopic study of the economy.”
2) Prof A. P. Lerner – “Microeconomics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body of economy – the individuals or households as consumers and individuals or firms as producers play their part in the working of the whole economic organism.” The following chart gives an idea of the scope of microeconomics.

1) Explain the importance of Microeconomics?
Uses of Microeconomics.

Following are the importance of Microeconomics :
i) Price Determination:
Microeconomics explains how the prices of different products and various factors of production are determined.

ii) Free Market Economy:
Microeconomics helps in understanding the working of a free market economy. A free-market economy is that economy where the economic decisions regarding the production of goods, such as ‘What to produce?, How much to produce?, How to produce? etc.’ are taken at individual levels. There is no intervention by the Government or any other agency.

iii) Foreign Trade:
Microeconomics helps in explaining various aspects of foreign trade like effects of a tariff on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a particular country, etc.

iv) Economic Model Building:
Microeconomics helps in understanding various complex economic situations with the help of economic models. It has made a valuable contribution to economics by developing various terms, concepts, terminologies, tools of economic analysis, etc. Economic models are built using various economic variables.

v) Business Decisions:
Microeconomic theories are helpful to businessmen for taking crucial business decisions. These decisions are related to the determination of cost of production, determination of
prices of goods, maximization of output and profit, etc.

vi) Useful to Government:
It is useful to the government in framing economic policies such as taxation policy, public expenditure policy, price policy, etc. These policies help the government to attain its goals of efficient allocation of resources and promoting the economic welfare of the society.

vii) Basis of Welfare Economics:
Microeconomics explains how the best results can be obtained through the optimum utilization of resources and their best allocation. It also studies how taxes affect social welfare.

Thus, microeconomics has many theoretical and practical importance as well as uses.

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