Definition, Subject matter, and Uses of Microeconomics
Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. It is considered a more complete, advanced, and settled science than macroeconomics. It studies what choices people make, what factors influence their choices, and how their decisions affect the goods market by affecting the price, supply, and demand. It analyzes market failure, where the market fails to produce efficient results. Individual demand and supply, individual prices of products, etc. are some examples of microeconomics.
Subject matter or Scope of Microeconomics:
Product Pricing: Microeconomics is concerned with the analysis of the determination of prices of large numbers of individual commodities. So one of the major areas covered in microeconomic theory is the analysis of the determination of prices of various goods through the interaction between demand and supply.
Theory of Demand: The theory of consumer behavior is studied in microeconomics which includes the law of demand, the elasticity of demand, the law of diminishing marginal utility, and so on.
Theory of Production and Cost: Microeconomics studies the theory of production and cost which includes the law of variable proportions, the law of returns to scale, a least-cost combination of inputs, linear programming, and so on.
Factor Pricing: Factors like land, labor, capital, and entrepreneur contribute to producing goods and services. So they get rewards in the form of rent, wages, interest, and profit respectively.
Welfare Theory: Microeconomics deals with optimum allocation of scarce available resources and maximization of social welfare. Microeconomics guides for utilizing scarce resources of an economy to maximize public welfare.
Uses of Microeconomics:
Individual Behavior Analysis: Microeconomics studies the behavior of individual consumers or producers in a particular situation.
Resource Allocation: Microeconomics explains the efficient allocation and utilization of resources to produce various types of goods and services. It explains economizing of scarce resources to achieve maximum welfare.
Price Determination: Microeconomics is useful in explaining how the market mechanism determines the price in a free market economy. The market forces of demand and supply determine the prices of goods and services without any government intervention.
Economic Policy: Microeconomics helps in formulating various economic policies like price policy, tax policy, and economic plans for the economic welfare of the people and to promote all-around economic development.
Public Finance: It helps the government in fixing the tax rate and the type of tax as well as the amount of tax to be levied on the buyer and the seller.