Meaning of micro economics

Microeconomics is the study of individual

economics units of an economy. It deals with
the individual units. The main instrument to
study microeconomics problems are demand
and supply. It is derived from the greek word
mikros meaning small.
It is also known as price
economy it deals with the individual units of
an economy. For example: a sugar industry, a
firm, a house hold etc
It deals with central
problems of allocation of resources and
related principles and policies.
Examples of micro economics theories
/studies: law of demand, law of supply,
determination of producers equilibrium.

Nature of microeconomics
In the nature of economics we may
consider whether it is a science or an art.
Science not only means the collection of facts
but it also means that the facts are arranged
in such a manner that they speak for

themselves. It means that some laws are

discovered through these facts. Thus science
is a systematic body of knowledge concerning
the relationship between causes and effects
of a particular phenomenon.
Arguments in favour of economics as an
art:
Many economists like Marshall, Pigou etc.
believe that economics is an art also
besides being a science
Economics as an art it is the branch of
systematic body of knowledge which
develops best ways of doing things
Economics As A Positive Or A Normative Science
Positive science is that science which studies an accurate
and true description of events as they happen. Thus it
deals with what, how and why. Normative science is
suggestive in nature. Normative science tells us what
ought to be.
Economics as a positive science

1 Positive science is logical whereas normative science

is emotional. Therefore it is more exacts it is based
on the logic.
2 If economics studies only the realities of the real
world then the chances of the disagreement are less,
as the case would be if it studies both.
3 The economists cannot make the rational judgments
if they try to analyze both what is and what ought to
be.
4 Economics as a normative science
5-Economics would offer more meaningful conclusions if it
gives suggestions too long with the facts.
6-Economics will be more useful if it is fruit bearing too
along with the light bearing. Most of the people study
economics for the fruits and not for the light merely.
7-if the economist synchronizes the analysis of economic
problems with concrete economic policies he would save
time. Else it would be difficult if one person finds the
solutions and the other tries to justify those solutions.

Importance of micro economics

To understand the working of the
economy:
It helps us in understanding the working of a
free enterprise economy. It gives us an idea
about how major economic decisions are taken
in a market economy.

 Helpful in the efficient employment of

resources:
It suggests economizing, that is how efficiently
the scarce available resources can be utilized in
production process in an economy.
Helps in International Trade:
Micro economics is used to explain gains from
internal trade, external trade, foreign
exchange, balance of payment, disequilibrium
and in the determination of exchange rate.
Basis of welfare economics:
The entire structure of micro economics has
been built on the basis of price theory which is
an important constituent of micro economics. It
suggests the conditions of efficiency and
explains how it can be achieved. It helps in
improving the standard of living of population.
Helpful in understanding the
consequences of taxation:
Imposition of tax leads to reallocation of
resources from one place to another. Micro
economics explains how imposition of different
types of direct and indirect taxes lead to
attainment of social welfare.

Difference between
macro economics

micro

and

Macroeconomic
s

Microeconomics

Definition

Macroeconomics
is a branch of
economics
dealing with the
performance,
structure,
behavior, and
decision-making
of an economy as
a whole.

Microeconomics
is the branch of
economy which
is concerned
with the
behavior of
individual
entities such as
market, firms
and
households.

Foundation

The foundation
of
macroeconomics
is
microeconomics.

Microeconomics
consists of
individual
entities.

Basic Concepts

Output and
income,
unemployment,

Preference
relations,
supply and

Macroeconomic
s

Microeconomics
inflation and
deflation.

demand,
opportunity
cost.

Applications

Used to
determine an
economy's
overall health,
standard of
living, and needs
for improvement.

Used to
determine
methods of
improvement
for individual
business
entities.

Careers

Economist
(general),
professor,
researcher,
financial advisor.

Economist
(general),
professor,
researcher,
financial
advisor.

Concept of Equilibrium

Equilibrium is the state in which market supply and

demand balance each other and, as a result, prices
become stable. Generally, when there is too much supply
for goods or services, the price goes down, which results
in higher demand. The balancing effect of supply and
demand results in a state of equilibrium.

Consumer Equilibrium
The solution to the consumer's problem, which entails
decisions about how much the consumer will consume of
a number of goods and services, is referred to
as consumer equilibrium. This condition states that the
marginal utility per dollar spent on good 1 must equal the
marginal utility per dollar spent on goods
Derivation:In case of 1 commodity:Mux = PX
IN CASE OF 2 COMODITY;Muy

= Py

Dividing case 1 and 2

Mux/muy = px/py.
Producers Equilibrium:

Equilibrium refers to a state of rest when no change is

required. A firm (producer) is said to be in equilibrium

when it has no inclination to expand or to contract its

output. This state either reflects maximum profits or
minimum losses.
There are two methods for determination of
Producers Equilibrium:
1. Total Revenue and Total Cost Approach (TR-TC
Approach)
2. Marginal Revenue and Marginal Cost Approach (MRMC Approach).

Cardinal and ordinal approach

Cardinal approach
Cardinal approach is the
one, which rests on the
assumption that utility
can
be
measured
thereby implying that
utility can be quantified.

For the purpose of

measurement of utility
the cardinal approach
uses utils which help in
understanding
how
much utility is derived

Ordinal approach
Ordinal
approach
of
utility does not give out
any measurement unit
which means that this
approach
does
not
consider
the
quantification of utility.

As
per
ordinal
approach, utility is used
for grading/ranking of
the products depending

from consumption of a on the preferences of the

product. Thus cardinal consumer.
numbers are used to
show
the
utility
schedule.
Here comparisons can be
made
of
the
utility
derived
from
two
products, but the utility
The
cardinal
utility cannot
be
computed
approach focuses on the quantitatively.
independent
utility
derived from a product
and
hence
any
dependence is avoided.
The ordinal approach will
give
a
sense
of
Though this approach preferences, likes and
brings
out
the dislikes but there is no
preference
of
one numerical measurement
product
over
other and this approach is
through utils but this used in grading the
of
the
does not imply any preferences
depending
conclusion or relation consumer
upon the alternatives
between the choices
that are available to
him/her.

Theory of consumption
Consumption, in economics, the use of goods and
services by households. Consumption is distinct from
consumption expenditure, which is the purchase of goods
and services for use by households.

Features of utility
Features of Utility

The following are the features of utility:

1. Subjective Concept:
Utility is a subjective concept as it differs from person to
person depending on their tastes, preferences, etc.
For eg. A newspaper may have utility for a literate person
but has minimum utility for an illiterate.
2. Relative Concept:
Utility is a relative concept as it may differ from time to
time and place to place. A commodity may have utility at a
particular time or place and may not have utility at another
point of time or place.
For eg. Mobile phones have utility at homes, but have
limited utility inside a classroom.

law of diminishing marginal utility

Introduction

law of diminishing marginal utility is a law of economics

stating that as a person increases consumption of a
product, while keeping consumption of other products
constant, there is a decline in the marginal utility that
person derives from consuming each additional unit of that
product
Meaning of the law
The law of diminishing marginal utility is a law of
economics stating that as a person increases consumption
of a product, while keeping consumption of other products
constant, there is a decline in the marginal utility that
person derives from consuming each additional unit of that
product.
Types of utility
Total utility is the total satisfaction received from
consuming a given total quantity of a good or service
Marginal utility is an important economic concept
because economists use it to determine how much of an
item a consumer will buy. Positive marginal utility is when
the consumption of an additional item increases the
total utility.
Average Utility is defined as the utility derived (or obtained)
from the use of one unit of commodity. It is calculated by
dividing the total number of utile by the number of units
commodity is used by the consumer.