What is Microeconomics

Study of the economic behavior of individual units of an economy (such as a person,

household, firm, or industry) and not of the aggregate economy (which is the
domain of macroeconomics). Microeconomics is primarily concerned with the
factors that affect individual economic choices, the effect of changes in these factors
on the individual decision makers, how their choices are coordinated by markets,
and how prices and demand are determined in individual markets. The main subjects
covered under microeconomics include theory of demand, theory of the firm, and
demand for labor and other factors of production

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Microeconomic study deals with what choices people make, what factors influence
their choices and how their decisions affect the goods markets by affecting the price,
the supply and demand.

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What is Macroeconomics

Macroeconomics is the branch of economics that studies the behavior and

performance of an economy as a whole. It focuses on the aggregate changes in the
economy such as unemployment, growth rate, gross domestic product and inflation.

Macroeconomics analyzes all aggregate indicators and the microeconomic factors

that influence the economy. Government and corporations use macroeconomic
models to help in formulating of economic policies and strategies.

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What is Economics

Economics is a social science concerned with the production, distribution, and

consumption of goods and services. It studies how individuals, businesses,
governments, and nations make choices on allocating resources to satisfy their wants
and needs, trying to determine how these groups should organize and coordinate
efforts to achieve maximum output.
Economics can generally be broken down into macroeconomics, which concentrates
on the behavior of the aggregate economy, and microeconomics, which focuses on
individual consumers and businesses.

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Features of Microeconomics

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.

The various features of Micro economics are as follows:

i. Price Theory:
All the factors of production (such as land, labour, capital and entrepreneur)
contribute towards the production process. As a consideration, they receive rewards
in the form of rent, wages, interest and profits respectively. Micro economics deals
with the determination of such rewards i.e. factor prices. Also, it deals with the
determination of prices of goods and services. Hence, it is correctly known as
“price theory”.
Price theory benefits both, the
consumers (by rendering guidance as to how to make optimum use of mone
y to attain maximum satisfaction) as well as the producer (by rendering guidances as
to how to fix the price of a product/ service, which would fetch maximum profit).
ii. Partial equilibrium:
Micro economic analysis is a partial equilibrium analysis. Partial equilibrium
analyses equilibrium position of an individual economic unit i.e. individual
consumer, individual firm, individual industry etc. It isolates an individual unit
from other forces and proceeds with the assumption “Other things remaining the
same” (Ceteris Paribus). Many theories of micro‐economics are based on such
assumptions. Partial equilibrium also neglects the interdependence between
economic variables
iii. Microscopic approach:
Micro economics analyzes and examines each individual unit separately in
detail. In the words of Prof. A.P. Lerner, “It is looking at the economy through
microscope, as it were to see how the millions of cells in the body of economy ‐ the
individuals or households as consumers, and individuals or firms as producers, play
their part in the working of whole economic organism.”
Thus, micro economics is said to conduct the microscopic study of the economy.
Micro economics gives us a ‘worms’ eye view of the economy. In simple words, it
studies the tree and not the entire forest as a whole.
iv. Analysis of Resource Allocation and Economic Efficiency:
Micro economics deals with the resource allocation among the competing
groups. It further explains how the relative prices of both, goods as well as factors
of production would determine the allocation of resources.
This in turn, can help to answer the following questions:
a. Who will produce the goods?
b. What goods will be produced?
c. In what quantities the goods will be produced?
d. How to price the produced goods?
e. How will they be distributed? etc.
Moreover, it examines whether the given allocation of resources is efficient or not
i.e. whether it results in the economic welfare of society.
V. Use of Marginalism Principle:
Marginal refers to the change brought about in total by an additional unit (marginal
unit). Micro economics makes use of marginalism principle as its tool of analysis
as all important micro economic decisions are taken at the margin.
The concept of marginalism is important in all the areas of micro economics.
Producers and consumers also take economic decisions using this principle.
VI. Analysis of Market Structure:
Micro economics analyses different market structures such as perfect competition,
monopoly, monopolistic competition, oligopoly etc. and explains how prices and
quantities are determined in these markets.
vii. Based on Certain Assumptions:
Many economists have used micro economic analysis to develop different theories
which are based on the assumption of Ceteris Paribus which means “Other things
remaining the same”.
The theories follow the partial equilibrium analysis in order to study a particular
individual unit of an economy. They are based on certain assumptions such as
perfect competition, laissez fair policy, pure capitalism, full employment, ceteris
paribus etc, which do not exist in reality. These assumptions make the analysis
simple and the theories static, but at the same time neglect the interdependence
between economic variables and the changing economic world.
viii. Limited Scope:
The scope of micro economics is limited since it doesn’t deal with the nationwide
economic problems such as inflation, deflation, balance of payment situation,
poverty, unemployment, population, economic growth etc.
IX. Study of individual units:
Individual economic unit refers to the smallest part of an economy viz. individual
household, individual firm, individual income, etc. Micro economics studies the
economic behaviour of such individual economic units. In other words, micro
economics splits the economy into small individual units and further studies each
unit separately.
X. Slicing Method:
Micro economics uses slicing method since it splits or divides the whole economy
into small individual units and then studies each unit separately in detail.