Economics

Scope Limitations And Importance Of Microeconomics

Importance Of Microeconomics

Microeconomics and Macroeconomics are two approaches forwarded by economists. These approaches help us to study the nature of economic problems. It was Ragnar Frisch who used these two terms for the first time in Economics. Before discussing the importance Of Microeconomics, let us know what the Microeconomics is.

Micro Economics : The term ‘Micro’ is derived from the Greek word ‘Mikros’ which means ‘ small’. Micro Economics is the study of economic behavior of human beings in their individual and group capacities, Professor Bouldings described Microeconomics as “the study of actions of particular firms, households, individual prices, wages, incomes, ‘individual industries, particular commodities etc”. According to Professor Lerner, Microeconomics means looking at the economy through a microscope to how the millions of the individuals or firms play their part in the working of the whole economic system. Microeconomics is described as Slicing method as it studies the actions of individuals and small groups of individuals. Ackley also described Micro Economics as Price theory or Value theory. Scope, Limitations And Importance Of Microeconomics are presented below:

Importance of Microeconomics :

Professor Keynes considered Microeconomics as an important method of economic analysis. The importance of this method is explained from the following points.

1. Evaluation of economic policies : Importance Of Microeconomics is huge because Microeconomics is the best means for evaluating the economic policies of the government,

2. Efficient employment of resources: The main problem faced by the modern governments is related to the efficient utilization of resources. Economic development of  a country depends to a great extent on the efficient employment of resources. Micro Economics emphasizes the need for the efficient employment of the scarce but valuable resources.

3. Growth with stability : Microeconomics helps to achieve the target of growth with stability. While the developed economies are facing the problems of maintaining growth rates with stability, the developing economies are making efforts for achieving growth. Micro Economics is useful in this regard.

4. A boon to business executive : Micro Economics is considered as a boon to the business executive. Every business executive wants to increase the level of output as maximum as possible. For this purpose he makes estimation of the total quantity of goods and services and the total costs involved for their manufacture.

5. Taxation : Microeconomics helps us to understand the complex problems of taxation. It explains the welfare implications of a tax. It also explains which one of the taxes decreases the welfare of the society.

6. International trade : Matters relating to international trade, balance of payments, determination of the exchange value of the domestic currency etc. can be easily understood with the help of micro economic analysis.

7. Prediction : Micro Economics helps us to predict the impact of economic policies of the government. Because Microeconomics studies closely the minute matters relating to the nature, causes and consequences of price determination by the government.

8. Construction and use of models : This approach helps us to construct and use different models for understanding the actual phenomenon.

9. Conditions of economic welfare : Microeconomics involves the study of welfare economics. It is considered as a basis for examining the conditions of economic welfare. It suggests various alternatives for  eliminating wastage with a view to achieve maximum social welfare.

Scope Of Microeconomics :

Microeconomics helps us to study two aspects relating to the

(a) allocation of resources for the production of good’s and services,

(b) Efficient distribution of goods. These aspects are influenced by the prices of  related goods and services. Micro Economics also studies the matters relating to the (a) Product pricing, (b) Factor pricing, (c) Economic welfare.

It analyses the determination of price, and allocation of resources at three different. situations. They are :

1) Equilibrium of individual consumer, and producers,

2) Equilibrium of a single market,

3) Equilibrium of all markets.

It also studies the matters relating to the interdependence of commodity prices, factor prices with . demand, supply and costs in relation to individual consumers, firms and industries. Matters relating to the Welfare theory in its individual and aggregate aspects are also studied in Microeconomics: Therefore, Microeconomics is described as the study of Price Theory.

Limitations Of Microeconomics :

Microeconomics has the following limitations:

1. Non-existent economic system : Microeconomics is based on the assumption of laissez faire. But pure laissez-faire do not exist in the present day world. Even in capitalist countries like England, America, some industries which are strategic, are nationalized and are put under social control.

2. Unrealistic assumptions : Microeconomics is based on several unrealistic assumptions like full employment, perfect competition, free mobility of labor etc. Interestingly these assumptions are not real.

3. Study of parts only : Microeconomics does not include the study of the whole structure of the economy. Therefore, its study is confined to the actions of individuals and individuals in groups only.

4. Inadequate and Misleading : The conclusions drawn from Microeconomics are inadequate and misleading. The analysis of various economic phenomena cannot be applicable to the economy as a whole.

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