In contrast, Macro-Economic studies economic issues in aggregative and overall forms, looking at the broad picture. Microeconomics may look at the incentives that influence individuals to make certain purchases, how they seek to maximize utility, and how they react to restraints. In fact, there Is no free market economy after great depression of 1930. It enables the consumers to allocate their 1ncome on different goods in such a way that total utility is maximized; thus, helping them to avoid the wastage of resources. Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields. Opportunity cost is closely related to the idea of time constraints.
What is Macroeconomics?
The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function. Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable. Microeconomic theory typically begins with the study of a single rational and utility maximizing individual. To economists, rationality means an individual possesses stable preferences that are both complete and transitive.
The following are major definitions relating to the meaning and scope of microeconomics. In Greek, the words `micro’ and `macro’ mean small and huge, respectively. Micro-Economics is the branch of Economics that studies economic issues in small, individual details, as if under a microscope.
- However, an alternative way to develop microeconomic theory is by taking consumer choice as primitive.
- The concentration of microeconomics is on the working of the individual components and macroeconomics studies the economy in general.
- Macroeconomic policies, such as fiscal and monetary policies implemented by governments and central banks, have significant effects on microeconomic agents.
- This can include manufacturing, storing, shipping, and packaging.
- There was an accumulation of unsold stock, closure of production units and widespread unemployment; both employers and employees were affected.
- Microeconomics thus deals with a small part of the national economy.
For instance, changes in interest rates (a macroeconomic policy tool) can influence individual borrowing and investment decisions, affecting consumer spending and firm profitability. First, resources or means of production (land, labour, capital goods such as machinery, technical knowledge) are scarce or limited. Secondly, what is applied to the production of a certain commodity or service is unavailable for the production of another, alternative one.
One can do only one thing at a time, which means that, inevitably, one is always giving up other things. The opportunity cost of any activity is the value of the next-best alternative thing one may have done instead. Opportunity cost depends only on the value of the next-best alternative.
What subjects does Economics relate to?
The principles relating to an individual household cannot be applied to the whole. Microeconomics is concerned with study of parts but not the whole. In terms of individual terms, it is impossible to describe large and complex universe of facts like economic system.
The Mercantilists focused on trade and commerce and the accumulation of gold and silver. The Physiocrats focused on productive work, leading to the generation of agricultural surplus. To understand what Microeconomics is, one must know what Economics is.
It encompasses situations of Market Failure, caused often by Externalities, as well as problems caused by information that is Asymmetric. Most universities make the students first take a course in Micro-Economics and then go on to Macro-Economics. However, some universities are now offering both courses in the same semester or academic year. In the second half of the 18th century, there emerged economic thoughts that go by the name Physiocracy. It emphasized the role of land and agriculture in ensuring a country’s prosperity.
It also helps to frame economic policies aimed at achieving public welfare e.g. tax exemption for the poor, determination of rewards according to qualification and productive capabilities, minimum wage laws etc. The concept of “market type” is different from the concept of “market structure”. Markets can be of various forms or structures, beginning with Perfect Competition, Monopolistic Competition, Oligopoly, Duopoly, Monopoly and, Monopsony). In addition to standard tools of Geometry and Calculus, Game Theory is often used to analyze the various strategies suitable for the various markets. So after the analysis of Consumption and Production comes the analysis of Markets.
By this, they can maximize their profit or at least they will minimize their losses. So far as undergraduate and even post-graduate studies are concerned, it is essential for students first to grasp the concepts of Microeconomics and then go over to those of Macroeconomics. For example, the concept of the `margin’ is first learnt through Marginal Utility, Marginal Rate of Substitution, Marginal Productivity etc. and only subsequently used through Marginal Propensities to Consume and Save. The concept of Consumer Equilibrium has to be learnt prior to its application in the box diagrams used, say, in the Heckscher-Ohlin Theorem of International Trade Theory. During this Depression, both Europe and America suffered along with their colonies in various parts of the world. There was an accumulation of unsold stock, closure of production units and widespread unemployment; both employers and employees were affected.
Read More- Microeconomics
It includes the potential measures of maintaining the economic prosperity of men as consumers and producers and improving that prosperity. Micro economic analysis encourages setting up of small units for growth of economy. This could possibly be achieved more efficiently by initiating and encouraging large scale production. Inspite of proper guidance for the consumers the real-life situation reveals that they are exploited. With the pace of inflation, on one hand, wealth keeps on concentrating in a few hands while, on the other hand, consumers are deprived of their purchasing power.
The natural inequality of income distribution in a free enterprise economy leads to exploitation of consumers. It teaches us to purchase the required products in most suitable quantities so that the total utility obtained is maximized. Hence, Micro economic analysis explains us the optimum use of our income and by virtue of it enables us to avoid the wastage of hard-earned income.
Microeconomics: Meaning, Scope, Importance and Limitations
But in contemporary times, it is impossible to study Economic Theory without knowledge of Mathematical Techniques such as geometry, algebra, calculus, set theory, and matrices. As Nobel Prize winner Paul Samuelson put it, “Not only is Economics at once art and a science, economics as a subject can combine the attractive features of both the humanities and the sciences” (Economics, 7th ed., Chapter 1,p 4). This definition established the character of the subject for a long time to come. Economics studies human beings as they go about their everyday life. In the third quarter of the 18th century, with the publication in 1776 of An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith, Classical Economics was born. Smith emphasized the Division of Labour or Specialization as the source of productivity or efficiency in factories contributing aggregately to the nation’s wealth or prosperity.
Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. A bilateral monopoly is a market consisting scope of micro economics of both a monopoly (a single seller) and a monopsony (a single buyer). A monopsony is a market where there is only one buyer and many sellers.
He has also pointed out that both subjects are “vital” to the understanding of the subject (Economics, 7th ed., p 362). The price of copper will tend to increase if a major copper mine collapses in South America because supply is restricted. Positive microeconomics could help an investor see why Apple Inc. (AAPL) stock prices might fall if consumers buy fewer iPhones. It could also explain why a higher minimum wage might force The Wendy’s Company (WEN) to hire fewer workers. It tells us effect of government policies on allocation of resources.