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Micro and macro economics theories

Introduction
As the terms imply, Microeconomics
focuses on micro or small segment of economy and it studies the decision making
process and economic problems of individuals ( household, firm, industry etc)
in an economy with respect to that how they use scarce means or resources at
their disposal for satisfying their unlimited ends. On the other hand Macroeconomics
looks at a larger picture and is study of economy as a whole.
In order to understand the concepts
(Microeconomics and Macroeconomics) better, we can say that Microeconomics is
the study of an individual human being, an individual household, an individual
firm or an individual industry etc with respect to how they use/divide their
given scarce means among the possible alternative uses/ends in order to
maximize their gain or well being. Microeconomic theory does not study the
economy as a whole and instead studies the individuals and their gain
maximizing behaviour in any economy. Microeconomics studies and analyzes
individual (human being, household, firm, industry etc) behaviour with respect
to issues like production, consumption, distribution, price determination etc.

The study of Microeconomic theory helps
in following:

  • Understanding
    operation of economy at a micro level
    – The study of Microeconomics
    helps us in understanding various market situations which are possible in
    any economy. It helps in understanding the economic reasons behind the
    decisions like – What to Produce? For whom to produce? How much to
    Produce? etc.
  • Optimization
    of resource allocation

    – The study of Microeconomics helps in understanding that how a firm or an
    industry etc can maximize its production efficiency and the profit by
    appropriate allocation and utilization of resources at its disposal.
  • Minimization
    of Cost

    – The study of Microeconomics helps in the determination of optimum
    production point for a firm/industry.The theory also helps in determining
    the point of cost minimization for a firm
  • Understanding
    Consumer Behaviour

    – The study of Marginal Utility theory, Revealed Preference Hypothesis,
    Consumer Indifferance curves etc give useful insight into consumer
    behaviour and thus help in understanding and predicting the consumer
    behaviour in varied market situations.
  • Demand
    Forecasting

    – The theory of Demand and Demand analysis, elasticity of demand etc help
    in understanding and predicting demand of a product.
  • Impact
    of change in Price/Income/Prices of related goods etc on the demand of a
    Product

    – The study of Microeconomic theory can help an individual firm to
    understand the impact of change in price, income, prices of related goods
    etc on the demand the good or service which the firm is offering to the
    market.
  • Government
    Policy Making

    – The study of demand theory, supply theory, market theory etc can help
    the government in policy making at macro level. For example the study of
    microeconomic theory can help in deciding appropriate tax policy, pricing
    policy of the public goods and services, impact of tax policy in reducing
    inequality of income and wealth etc
  • Foreign
    trade and exchange rate determination
    – Microeconomic theory of demand,
    supply, elasticity of demand etc help in understanding the impact of
    change in tariff on the terms of trade. Similarly, microeconomic theory of
    demand,supply etc helps in understanding the exchange rate determination
    process in the foreign exchange market.
  • Maximisation
    of Social Welfare

    – The study of Microeconomic theory can help in deciding the appropriate
    allocation of resources, commodities and output mix for the maximization
    of the social welfare.
Case Study
Understanding
Government Tax Policy

Have you ever wondered why the tax imposed by government on Goods like Cigrattes,
Liqour etc is very high?
This is so because the Government understands that
consumer demand for such products is inelastic and high tax rate on such goods
will result in higher tax collection for the Government and thus Government
comes out with the policy of high taxes on such commodities.
Similarly, if the Government of a country wishes to
discourage consumption of certain Goods then it can impose very high taxes on
such category of Goods. For example Government tax is very high on Imported Cars
and Other Luxary Products in India.
In the same manner, if Government of a country wishes to
encourage consumption of certain category of goods or may be investment in
production of certain category of Goods then it reduces the related taxes for
encouraging Production/Consumption of such Goods.
Limitations of Microeconomics
The study of Microeconomics gives us useful insight into
operational aspects of an economy at the micro or individual level. As
discussed above, the study of Microeconomic theory can help us in deciding upon
the best resource allocation process for the maximisation of social welfare.
The study of Microeconomic theory also helps in demand forecasting, deciding
the economic policies of the government, price determination under various
market situations etc. However there are certain shortcomings of the Microeconomic
theory as well. We need to understand these limitation in order to complete our
understanding of the Microeconomic theory.
The limitations of Microeconomics are
as follows:
  • Microeconomic
    theory assumes full employment in an economy. This assumption is
    unrealistic in the real markets. No economy or economic system in the
    world has witnessed or experienced the full employment scenario till date.
  • Microeconomic
    theory assumes of a ‘Lassiez Faire’ economic system. This means an
    economic system having ‘No government intenvention’. However, when we look
    around us, we realize that all economic systems across the world including
    the capitalist economies experience government intervention into the
    economic systems on a very regular basis.
  • Most
    Microeconomic theories are based on the static assumption of ‘Ceteris
    Paribus’ which means ‘Other things being equal’. Again, this assumption of
    ceteris paribus, is unrealistic in the real markets.
  • Microeconomic
    theory sometimes leads to generalization of individual behaviour and this
    may not always be true or correct.
  • Microeconomics
    is only a part study of a economy and thus it does not help us much in
    understanding any economic system as a whole.
  • Economics
    is thus a social science which studies human behaviour when an individual
    is encountered with unlimited desires but holds limited means to satisfy
    them. Economics studies that how individuals (i.e; an Individual human
    being or an individual firm or an Industry etc) optimise their resources
    to maximize their gains.
  • Economics
    is thus a social science which studies following:
1.     How an individual uses his limited
resources to maximise his well being
2.     How companies use their limited
resources to maximise their business gains and profit
3.     How an Industry uses the limited
resources in order to maximize gains of the firms which are part of the
Industry as well as the Industry as a whole
4.     How society at large uses the limited
resources at its disposal in order to produce required goods or commodities and
distribute them among various individuals in society.
·       
Microeconomics focuses on micro or small segment of
economy and it studies the decision making process and econtomic problems of
individuals ( household, firm, industry etc) in an economy with respect to that
how they use scarce means or resources at their disposal for satisfying their
unlimted ends. On the other hand Macroeconomics looks at a larger
picture and is study of economy as a whole.
·       
Microeconomics
studies the economic behavior of an individual firm, industry, household,
consumers etc in an economy. On the other hand, Macroeconomics studies the
economic behavior of firms, industries, household consumers etc at an aggregate
level. In other words, we can say that Macroeconomics is the study of economy
or economic systems as a whole.
·       
Microeconomics
studies issues like demand, supply, production, production efficiency, cost,
cost minimization, market structures, pricing, distribution, profit
maximization etc at the individual firm, industry, household or at consumer
level. On the other hand, Macroeconomics studies the economic issues and
problems affecting economy at a broader level. These issues can be problem of
inflation, deflation, stagflation, business cycles, problem of economic growth,
national income, employment etc.
REFERENCES
·       
H.S. Agarwal,
“Microeconomic Theory”, Ane Books India, 2008
·       
G.S. Maddala and
Ellen Miller, “Microeconomics – Theory and Applications”, TATA McGraw
Hill Publication, 2004
·       
A. S. Koutsoyiannis,
“Modern Microeconomics”, Macmillan Publication, 1980
·       
D.N. Dwivedi,
“Managerial Economics”, Vikas Publishing House, 2002

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