A classic example of suboptimal resource allocation is that of a public good. In the present time, social as well as economic welfare has attained greater importance. Accordingly, the economists have to devise those measures and criteria which are aimed at creating efficiency and optimality in the economic system. Therefore, in microeconomics, we study different techniques which bring welfare to the people. As everyone has to face the problem of multiplicity of wants and limited money income.

Macroeconomics depends on Microeconomics

(iii) By setting up production units in remote areas to employ labour at notoriously low wage rate. (ii) By installing automatic and computerized plants to increase the marginal productivity of labour which is not followed by increase in their wage rate. Microeconomics is inadequate and misleading for analysis of economic problems. The principles relating to an individual household cannot be applied to the whole.

• Therefore, microeconomics explains how individual economic units such as consumers, resource owners, and business firms play their part in the working of the whole economic system.
• Economics is the study of how people (or organizations) can choose to use scarce or limited resources to produce various goods and services and distribute them to various members of society for them to consume.
• Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and their theory.
• Moreover, they must operate at or above the shut-down point, which is where the marginal cost curve intersects the average variable cost curve and at the latter’s lowest point.
• The cost-of-production theory of value states that the price of an object or condition is determined by the sum of the cost of the resources that went into making it.
• In the mathematical model for the cost of production, the short-run total cost is equal to fixed cost plus total variable cost.

The demand for an item is either elastic, inelastic, or unitary elastic when the respective coefficient as an absolute term is greater than one, less than one, or equal to one. Both microeconomics and macroeconomics have a place of their own and are important; hence, it is not possible to dispense any of the two. The concentration of microeconomics is on the working of the individual components and macroeconomics studies the economy in general. Also, microeconomics is concerned with the aggregate structure and macroeconomics is concerned with the aggregates themselves. Therefore, both microeconomics and macroeconomics are supplementary to each other, and the superiority of one approach over the other cannot be claimed. Microeconomics explores different market forms, such as perfect competition, monopolistic competition, oligopoly, and monopoly.

Macroeconomics concentrates on phenomena like inflation, price levels, rate of economic growth, national income, Gross Domestic Product (GDP), and changes in unemployment. For example, aggregate output, national income, aggregate consumption, etc. The main tools of Macroeconomics are Aggregate Demand and Aggregate Supply.

Theory of growth, theory of business cycles, monetary and fiscal policies etc. are beyond the limits of micro economics. Microeconomics examines how individuals make choices about consumption based on preferences, budget constraints, and utility maximization. Concepts like marginal utility and the law of diminishing marginal utility are central to understanding consumer decisions. Perfect competition is a situation in which numerous small firms producing identical products compete against each other in a given industry. Perfect competition leads to firms producing the socially optimal output level at the minimum possible cost per unit. Firms in perfect competition are “price takers” (they do not have enough market power to profitably increase the price of their goods or services).

Demand theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is “constrained utility maximization” (with income and wealth as the constraints on demand). Here, utility refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred. As firms produce and sell items, they receive a price for each one sold. Total revenue is the mathematical product of price times the quantity sold at each price.

Formulation of Public Economic Policies

The more utility a product gives, the more a consumer is willing to pay. Consumers often assign different levels of utility to goods, creating varying levels of demand. A market failure can also prompt governmental actions to protect the physical environment. Market systems also fail when a third party suffers costs imposed by an exchange between two parties, which by definition is a negative externality. By the same token, a market failure occurs when a third party receives benefits in the absence of a direct cost, which by definition is a positive externality; in such a case, an imposition of a tax on beneficiaries is a possibility.

Land, labour, capital and entrepreneur are all factors of production and contribute to the process of production. For this contribution, they get rewards in the form of rent, wages, interest and profits respectively. The theory of factor pricing explains how the factor prices (or rewards) are determined. Microeconomists constantly strive to improve the accuracy of their models of consumer and firm behaviour. On the consumer side, their efforts include rigorous mathematical modeling of utility that incorporates altruism, habit formation, and other behavioral influences on decision making.

Meaning of Microeconomics

• An equilibrium point is static at one instance, but it is also dynamic in nature by virtue of a curve shift that results in a different intersection of the demand and supply curve.
• It is examined how he satisfies his multiple ends with his scarce means e.g., why consumers purchase goods and which factors influence their decisions.
• For a given market of a commodity, demand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good.

Total utility is the total satisfaction a product brings to the consumer. While a consumer may be satisfied after eating one slice of pizza, a seventh slice of pizza may cause the consumer to feel sick. The benefit (utility) received from eating a seventh slice of pizza is less than that of the first.

The Term Macro-Economics

In fact, there Is no free market economy after great depression of 1930. Microeconomics is helpful in solving the problems of individual firms. It also helps entrepreneurs to achieve optimum production point with their budget constraint. By this, they can maximize their profit or at least they will minimize their losses.

Correspondence between prices and quantities is revealed through demand and supply schedules. Compilations of a market-level demand schedule and supply schedule originate with individual-level schedules. All individuals that buy or sell an item constitute the market for that item. Individual demand schedules represent the quantities each consumer is willing and able to purchase at each price.

While the equilibrium of the firm is attached with “Minimization of Costs” or “Maximization of Output”. However, as Paul Samuelson has emphasized, that there is no essential opposition between Macro-Economics and Micro-Economics. “Macroeconomics deals with the big picture – with the macro aggregates of income, employment, and price levels. After all, the big picture is made up of its parts.” (Economics, 7th ed., p 362).

Role (Importance) of Microeconomics in Business Decision Making

The fixed cost refers to the cost that is incurred regardless of how much the firm produces. The variable cost is a function of the quantity of an object being produced. The cost function can be used to characterize production through the duality theory in economics, developed mainly by Ronald Shephard (1953, 1970) and other scholars (Sickles & Zelenyuk, 2019, ch. 2). The link between personal preferences, consumption and the demand curve is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints. It is examined how he satisfies his multiple ends with his scarce means e.g., why consumers purchase goods and which factors influence their decisions.

At this point, we shift our attention toward other applications of microeconomics beginning with regulations designed to infuse competition into non-competitive situations and market environments. In terms of those individual-level demand schedules, the ability to purchase an item is a function of a consumer’s income and the willingness to purchase is a function of the satisfaction that originates from the item’s consumption. In other words, consumers maximize their utility subject to their budget constraints. Utility is another word for the satisfaction an individual receives when consuming the item. Marginal utility then, by definition, is the additional unit of satisfaction from consuming an additional amount of the item. However, marginal utility increases but it becomes smaller with additional amounts until a point is reached at which it is zero.

In other words, theory of utility, concepts of demand and elasticity of demand are studied in it. “Micro economics studies the behaviour of individual parts and units of any economy, e. G., determination of the price of a product or study and observation of the behaviour of a consumer scope of micro economics or a firm”. When consumers or businesses purchase or produce particular goods, they forego buying or producing something else. If an individual uses a month’s salary for a vacation instead of saving, the opportunity cost is the interest that could have accrued in the savings account.

A study of economics introduces students to many models, some of which focus on consumers and others on producers. It is best to think of graphs and models as tools that simplify reality. With a view toward a nation’s ability to produce two items, say goods X and Y, there are numerous combinations of X and Y possible but the production of more X essentially translates into the production of less Y and vice versa. Key concepts include the laws of demand and supply, which describe the relationship between price and quantity demanded or supplied. Demand tends to decrease as prices rise, while supply generally increases with higher prices.

Gauri collected the information about the income of a particular firm. So far as modern Macro-economic (as distinct from Classical Economics, which was macro in character), started with John Maynard Keynes after the Great Depression of the 1930s. Political Science too helps in the study of Economics, which originally was called `Political Economy’. Knowledge of history and geography too, is essential for a grasp of Economics. But in contemporary times, it is impossible to study Economic Theory without knowledge of Mathematical Techniques such as geometry, algebra, calculus, set theory, and matrices.