Allocation of resources is determined by price or market mechanism i. It is in this context that a large part of microeconomic theory is concerned with showing the nature of departures from perfect competition and, therefore, from welfare optimum economic efficiency. Macroeconomics on the other hand, studies the aggregate or overall economic behaviour of households, firms, industries etc in any economy. Likewise, measures aimed at controlling general prices cannot be applied with much advantage for controlling prices of individual products. By using the assumption of 'Ceteris Paribus', it becomes easy to understand the relationship between two variables or in other words the impact of change in one variable on the other variable while other variables remain constant.
Surplus and deficit of international trade can be explained with the help of theory of demand, production possibility curve and indifference curves. It also provides deals, such as term of trade, to decide whether to increase or restrict trade activities with a particular country. Even behaviour of one individual can not be generalised as the behaviour of all. Microeconomics instead of studying the total economy concentrates only on small parts of it. In other words, you will be able to satisfy only some of your desires and requirements and not all as you have limited means or resources. Helpful in Analysing the Problems of Taxation By studying the effects of different types of taxes with the help of microeconomics, it can be known that which tax is proper to impose and which tax is not.
Aggregates must be functionally related: The aggregates forming the main body of macroeconomic theory must be significant and mutually consistent. Microeconomics centers on lowest-level economic decisions and interactions in a society, or those that occur with individuals and businesses in the marketplace. Posted by Muhammad Arshad at 05:54 Despite its importance, microeconomics analysis suffers from certain limitations, which are as follows. In present world the main problem of every nation is the efficient allocation of resources among the competitive markets. Consequently it throws no light on the collective functioning of the national economy.
Pricing policy Microeconomic analysis provides business managers with a thorough knowledge of theories of production and pricing in order to ensure optimum profit for the firm in the long run. So micro economics makes demand analysis individual consumer behaviour and supply analysis individual producer behaviour. A boon to business executive : Micro Economics is considered as a boon to the business executive. If, for instance, wages of nurses increase but of typist rises much aggregate employment would increase. Economics, thus, has descriptive, normative and predictive aspects. Macroeconomic is called income and Employment analysis.
We need to understand these limitation in order to complete our understanding of the Microeconomic theory. For example,the law of demand studies cause and effect relationship between price and demand for a commodity. This is the comparison of the level of consumer demand for particular goods to the available supply in the marketplace. Cost analysis Microeconomic theories explain various conditions of cost like fixed cost, variable cost, average cost, and marginal cost. Micro-economic analysis is also applicable to the various branches of economics such as public finance,.
Macroeconomics is the study of the aggregates and averages of the entire economy. Welfare Theory Micro economics deals with optimum allocation of available resources and maximisation of social welfare. So, Microeconomics helps in macro analysis. For other practical applications In microeconomics, different theories of economics are studied, such as, theory of demand, theory of production and cost, theory of dquimarginal utility, etc. Price or market mechanism is the main tool for this.
It is used to explain the gains from international trade, balance of payment disequilibrium and the determination of foreign exchange rate. For example, individual thrift may be good, but social thrift is definitely harmful for the community. Till recently, especially before Keynesian Revolution, the body of economics consisted mainly of microeconomics. Helpful in Factor price Determination of Services and Commodities With the help of microeconomics, price determination of any commodity is done by demand and supply of that commodity under different conditions of the market. Management of Business Enterprises These days, with the help of microeconomics business manager, take.
Keynes,the society has unemployment rather than full employment. The demand and supply of foreign currency plays a major role in the imbalance of payment. Nature of Assumptions Assumption of Ceteris Paribus is always made in every micro economic theory. Micro Comparative Static Analysis It deals with the comparison of two micro static points of two different points in time. Complementary of Macroeconomics studies individual action and behavior.
The main draw back of micro economics is that it fails to offer practical guidance to government in the formulation of appropriate economic policies. It is called price theory. This helps the government and the entrepreneurs in selecting a better type of market system. However, I actual practice it hardly exists and practiced anywhere in the world. Such decisions as to how to produce, what to produce, when to produce, and for whom to produce are taken independently by the producers. These issues can be problem of inflation, deflation, stagflation, business cycles, problem of economic growth, national income, employment etc. To formulate the public policy for market mechanism Microeconomics helps in formulating the public policy for market mechanism in any country.
The knowledge of the economy as a whole is also equally important to the men. Again, if an individual depositor withdraws his money from the bank, there is no risk. The change in the equilibrium from E to E1 is not a sudden change. Scope of Microeconomics Fall points are studied under microeconomics: 1. Nature of Analysis In micro economics, the behaviour of individual consumers and producers in detail is analysed.