Micro Economics

The word micro means a millionth part. When we speak of micro economics we mean a small part of whole economy that we are analyzing or in micro economic we analyze the units e.g. firm, a consumer or an industry.In other words we study an individual decision making units. For example will studying price we don’t study the general price level instead we discuss price of a particular commodity. While studying rewards of factors of production, we study rewards of F.O.P in a particular industry and so we study individual saving, investment, income, employment, demand and supply and not the aggregate savings, investment, national income, general employment, aggregate demand and aggregate supply.

While studying micro economics it is assumed that there is full employment in the economy and average price level is fixed and hence, the problem left with it is what to produce, how to produce, how much to produce and or whom to produce.

Problems of Micro Economics

In micro economics following problems are discussed:

Consumption Theory

We study the behavior of the consumer i.e. why people purchase consumer goods, what is their aim both in utility and indifference analysis.

Production Theory

In this part of study we discuss how goods and services are produced and how factors of production are combined to gather. What is the cost of production and how it can be minimized?

Price Theory

In price theory problems of determination of relatives prices of goods and services are studied. The affects of price mechanism affects the allocation of resources consumption pattern, investment direction, choice of method of production, foreign trade and distribution of nation income.

Distribution Theory

In distribution we study marginal productivity theory, rent, wages, profits and interests.

De-Merits of Micro Economics

1.      In free economy there are always problems of depression, over production and price fluctuations, so there is no stability in economy.
2. .     Some results are beneficial at individual level but bad at national level  e.g.

      i.   Increase in profits due to increase in price in treated good but general increase in price level produced inflation in the economy.

     ii.  A produce can increase its profits by reduction in wage rate but if wage out policy is adopted in the country, it decreases the purchasing power, which in turn will decrease the demand, investment and creates unemployment.

    iii.  Increase in personal savings looks good, but if major portion of income saved is not further invested it brings depression. Increase in monetary savings is not beneficial because it will not bring economic development.

    iv.  Increase in consumption at individual level is not treated well but if consumption expenditure decreases in the economy rate of investment goes down and as a result there is unemployment in the economy.