Meaning, importance, limitations of Microeconomics

 Q.  What is microeconomics? Discuss the importance and limitations of microeconomics. 

Ans. MEANING OF MICROECONOMICS: The term micro has been borrowed from the Greek word, ‘Mikros’ meaning small. Under microeconomics, we study individual units, like, a Consumer, a firm, an industry, price determination of a particular commodity etc. In other words, microeconomics studies economic relationships, or economic problems at the level of an individual- an individual firm, an individual household or an individual consumer. It is concerned with determination of output and price for an individual firm or industry.

In the words of Shapiro, “Microeconomics deals with small parts of the economy.”

IMPORTANCE OF MICROECONOMICS: Importance of the study of microeconomics lies in the following:

i) Operation of an Economy: Microeconomics explains the functioning of an economy. It tells whether different constituents of economy, namely, consumers, firms, etc. are functioning efficiently or not.

ii) Prediction: Predictions are made on the basis of the theories of Microeconomics. If a cause occurs then a set of results will follow. For instance, if demand increases prices are also likely to rise.

iii) Economic Policies: Study of microeconomics helps in the formation of economic policies. 

iv) Economic welfare: Microeconomics informs us of the conditions of economic welfare. Study of microeconomics suggests how the ideal of economic welfare can be achieved.

v) Mangerial Decision: Business firms make use of microeconomics to take managerial decisions. They take these decisions on the basis of cost and demand analysis.

LIMITATIONS OF MICROECONOMICS: Following are the main limitations of microeconomics: 

i) Static: In the study of microeconomics, mostly static analysis is made use of. In it many economic variables are assumed to be constant.

ii) Wrong Conclusions: The conclusions drawn from microeconomics are in many cases not valid from the point of view of macroeconomics. For example, in microeconomics, saving is a virtue so far is individual is concerned but if it is viewed from macro angle, if the entire population begins to save more than before, then there will be fall in aggregate demand leading to fall in production and employment.

iii) Unrealistic Assumptions: This economics analysis is based on many unrealistic assumptions like prevalence of full employment and perfect competition in the economy. In real life these assumptions are not found.

iv) Limited Scope: Microeconomics has limited scope, study of many important economic policies and problems like, fiscal policy, monetary policy, inflation, unemployment, etc. is outside its scope.