Main features of micro economics.

1] Unit of study / nature of analysis – Individualistic and Microscopic.

Micro economics is a microscopic or in-depth study of individual firms, particular households, individual prices, wages, incomes, in detail. It is a study of subject matter from particular to general.

2] Resource allocation
Micro economic analysis is concerned with how resources are allocated among best and efficient alternative uses – ie in such a manner that it results in maximization of satisfaction of the people. That is in the production of particular goods and services in the economy it helps to decide  what to produce how what to where what to when what to for whom what to etc.

3] Economic efficiency
Micro economic analysis studies how efficiently the various resources are allocated to the individual consumers and producers with in the economy. It means
Efficiency in production – ie maximum production with minimum resources.
Efficiency in consumption – ie distribution of goods and services among people resulting in maximum satisfaction of the society.
Efficiency in the direction of production – ie production of most desired goods which will maximize their satisfaction.

4] Method
Slicing Method. Micro economics divides/slices the economy into various small units and makes an in depth analysis of each. Micro economics uses Slicing Method

5] Vision
It studies in detail, the behavior of individual economic units. Worms eye view. Tree not forest.

6] Scope
Micro economic analysis involves theory of price and theory of welfare.

a]Theory of price
i). Commodity Pricing Prices of individual commodities are determined by market forces of demand and supply. So micro economics makes demand analysis (individual consumer behaviour) and supply analysis (individual producer behaviour).

ii). Factor Pricing Land, labour, capital and entrepreneur, all factors contribute in production process. So they get rewards in the form of rent, wages, interest and profit respectively. Micro economics deals with determination of such rewards i.e. factor prices [factor cost].

So micro economics is also called as ‘Price Theory‘ or ‘Value Theory‘ .

b]. Economic welfare
The study of micro economics helps to maximize economic welfare. This is done through efficient allocation resources in production, consumption and distribution of goods and services.

7] Application
Both theoretically and practically, micro economics is useful in formulating various policies, resource allocation, public finance, international trade etc.

8] Marginal analysis
The concept of margin and marginal are the key tools of micro economic analysis. The term margin refers to anything extra. Marginal analysis helps to study a variable through the effects of minor changes. Eg what happens to satisfaction if the consumer increases or decreases his consumption in small doses.

Some important laws like the law of diminishing marginal utility, law of equi marginal utility,have been derived from marginal analysis.

9] Approach – Partial equilibrium approach.
Micro economic analysis is partial equilibrium analysis. It proceeds with the assumption of “other things being constant” in order to establish the relationship between two variables. Eg law of demand states that “other things being constant demand varies inversely with price”.

10] Construction of models
Micro economics involves construction of simplified economic models to express the actual complicated economic phenomenon. It is a simplified form of economic reality. All economic models state the relationship between economic variables. Eg the model of law of demand states that there is an inverse relation between price and quantity demanded, other things remaining constant. An economic model can be presented in different forms like charts,diagrams,statistical tables or a equation. eg law of demand can be presented in a simple manner in the form of an equation.

D = f [P].

Where D is demand; f[P] is function of price.

11] Nature of assumptions
Micro economic analysis is based on certain postulates known as assumptions.

a] Rationality/Economic man
Micro economic analysis assumes that every individual under consideration behaves in an economically rational manner and follows the mini-max principle. As a consumer he tries to maximize his satisfaction in his given limited income, as a producer he tries to maximize his profits in his given investment/cost.-

b] Ceteris Paribus
The assumption of “Ceteris Paribus” is always made in every micro economic theory. It means that it is applicable only when “other things being constant”. Eg law of demand states that “other things being constant demand varies inversely with price”. Therefore the law of demand is valid only when other things being constant.

c] Perfect mobility of resources
Micro economic analysis assumes perfect mobility of economic units eg of factors of production. Factors are free to move where ever they find attractive rewards.

d] Perfect knowledge
Micro economic analysis assumes free flow of complete and reliable and valid information about market conditions and varied opportunities.

e] Divisibility
One important assumption of micro economic analysis is that goods and labour efforts are divisible so as to bear semblance to the assumption of continuity in mathematics.

f] Full employment
Micro economic analysis assumes full employment of the economy as a whole.

g] Laissez faire
Micro economic analysis is based on the laissez faire policy ie complete freedom or survival of the fittest.

h] Pure capitalism
Micro economic analysis is based on the assumption of pure capitalism.

On the basis of these assumptions micro economic analysis deals with the problem of price determination and resource allocation.

i] Diminishing returns – Production over a period of time is subject to diminishing returns. Similarly

ii] Marginal utility - consumption is subject to marginal utility.

Economic analysis on the basis of micro approach is generally based on the assumption of full employment in the economy as a whole. On the basis of this assumption, the economic problem is mainly concerned with pricing, distribution and economic welfare.

Posted in General Economics