B.B.A/B.B.

A (H)
Semester I
Marwadi University

Subject notes for

Microeconomics
Unit I

Complied and prepared by

A’Prof. Harsha Satramani
Study of Economics - Micro & Macro Economics

The study of economics is divided by the modern economists into two parts viz. Micro
economics and Macroeconomics. This division is shown in the figure / chart above. The word
micro has been derived from the Greek word `Mikros' i.e. small and the word macro has been
derived from Greek word `Makros' i.e. large.

 What is Micro-Economics? Meaning & Definition

Microeconomics is that part of economic theory which deals with the behaviour of individual
units of an economy such as a household, a firm, etc.

It is the analysis of economy’s constituent elements—households, firms and industries. Micro

is a Greek word meaning ‘small’. Thus, microeconomics means economics of small.

As the name suggests, microeconomics takes microscopic view of the economy. It is like
dealing with individual trees in the economic forest.

The subject was pioneered by Dr. Alfred Marshall in his book “Principles of Economics”
published in the year 1890.

According to Alfred Marshall, “Microeconomics is a branch of economics which studies the

economic behaviour of the individual unit, may be a particular household or a particular firm.”

According to Prof. Boulding, “Microeconomics is the study of particular firm, particular

household, individual price, wage, income, industry and particular commodity.” It is primarily
concerned with the determination of prices of Individual commodities and factors. It explains
how prices of wheat, cloth, shoes, pens and thousands of other goods are determined.

Similarly, how prices (remuneration) of factors of production (i.e., rent, wages, interest, etc.)
are determined. Thus, the theory of product pricing and theory of factor pricing fall within the
domain of microeconomics .Since prices of products and factors occupy the central place,
microeconomics is, therefore, also called ‘Price Theory’. Examples of microeconomics are:

 Individual income
 Individual saving
 Consumer equilibrium
 Price determination of a good
 Demand of a commodity, etc.

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 2

In microeconomics, problems of individual economic units are studied such as equilibrium of
a consumer (i.e., state of maximum satisfaction), equilibrium of a firm (i.e., state of maximum
profit) and an industry. It explains how a consumer, a producer and an industry attain
equilibrium. An individual household (or consumer) is said to be in equilibrium if it gets
maximum satisfaction from allocation of its expenditure on various goods and services.

 Subject Matter or Scope of Microeconomics

Micro Economics is concerned with the following topics:-

1. 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).
2. 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. Hence, micro economics is also known
as 'Price Theory' or 'Value Theory'.

3. Welfare Theory
Micro economics deals with optimum allocation of available resources and maximisation of
social welfare. It provides answers for 'What to produce?', 'When to produce?', 'How to
produce?' and 'For whom it is to be produced?' In short, Micro economics guides for utilizing
scarce resources of economy to maximize public welfare.

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 3

  Characteristics / Features of Microeconomics
Classical economists always insisted on micro economics because they believed that it is better
to understand concept at individual level and then go for general (or macro) level. E.g. first
understanding individual consumer behaviour and then analysing the behaviour of entire
market.
1. Nature of Analysis
In micro economics, the behaviour of individual consumers and producers in detail is analysed.
It is study of subject matter from particular to general i.e Inductive method, which means by
analysing one individual firm or household, conclusion is drawn to general level.
2. Method
Micro economics divides the economy into various small units and every unit is analysed in
detail. It is a slicing method. It splits up the entire economy into smaller parts for the purpose
of intensive study. This, sometimes, is referred to as the Slicing Method which forms the Partial
equilibrium analysis based on the assumption of ceteris peribus.
3. Scope
Micro economic analysis involves product pricing, factor pricing and theory of welfare. All
these talks about consumer behaviour through utility analysis, forces of demand and supply,
production and cost analysis, market analysis etc.
4. Application
Both theoretically and practically, micro economics is useful in formulating various policies,
resource allocation, public finance, international trade, etc.
5. Nature of Assumptions
Assumption of Ceteris Paribus is always made in every micro economic theory. It means
theory is applicable only when 'other things being same'.

 Uses / Importance / Advantages of Microeconomics

In following ways the microeconomics can be useful:-

1. Individual Behaviour Analysis

Micro economics studies behaviour of individual consumer or producer in a particular
situation. It analysis on various parameters of economic behaviour.
2. Resource Allocation
Resources are already scare i.e less in quantity. Micro economics helps in proper allocation
and utilization of resources to produce various types of goods and services.
3. Price Mechanization

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 4

Micro economics decides prices of various goods and services on the basis of 'Demand-Supply
Analysis'. This whole process is solely dependent on the forces of demand of the commodity
and its supply in an economy. It is also includes study of equilibrium price.
4. Economic Policy
Micro economics helps in formulating various economic policies and economic plans to
promote all round economic development. It is because of analysis of various sectors of
economy at micro level which helps framing policies at macro level.
5. Free Enterprise Economy
Micro economics explain operating of a free enterprise economy where individual has freedom
to take his own economic decisions.
6. Public Finance
It helps the government in fixing the tax rate and the type of tax as well as the amount of tax to
be charged to the buyer and the seller.
7. Foreign Trade
It helps in explaining and fixing international trade and tariff rules, causes of disequilibrium in
BOP, effects of factors deciding exchange rate, etc.
8. Social Welfare
It not only analyse economic conditions but also studies the social needs under different market
conditions like monopoly, oligopoly, etc.

 Disadvantages / Limitations of Microeconomics

1. Unrealistic Assumptions
Micro economics is based on unrealistic assumptions, especially in case of full employment
assumption which does not exist practically. Even behaviour of one individual cannot be
generalised as the behaviour of all.
2. Inadequate Data
Micro economics is based on the information dealing with individual behaviour, individual
customers. Hence, it is difficult to get correct information. So because of incorrect data Micro
Economics may provide inaccurate results.
3. Ceteris Paribus
It assumes that all other things being equal (same) but actually it is not so.

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 5

  Problems of Economy
Production and consumption are the two vital processes in an economy. Business enterprises
provide people with job opportunities. These job opportunities enhance purchasing power of
people that induce consumption of goods and services produced by the business enterprises.
Thus, all economic activities revolve around these two processes.

What are the central problems of an economy?

The problem of scarcity of resources which arises before an individual consumer also arises
collectively before an economy. On account of this problem and economy has to choose
between the following:

(i) Which goods should be produced and in how much quantity?

(ii) What technique should be adopted for production?

(iii) For whom goods should be produced?

These three problems are known as the central problems or the basic problems of an economy.
This is so because all other economic problems cluster around these problems. These problems
arise in all economics whether it is a socialist economy like that of North Korea or a capitalist
economy like that of America or a mixed economy like that of India. Similarly, they arise in
developed and under-developed economics alike.

1. What to produce?

There are two aspects of this problem— firstly, which goods should be produced, and
secondly, what should be the quantities of the goods that are to be produced. The first problem
relates to the goods which are to be produced. In other words, what goods should be produced?
An economy wants many things but all these cannot be produced with the available resources.

Whether consumer goods should be produced or producer goods or whether general goods
should be produced or capital goods or whether civil goods should be produced or defence
goods. The second problem is what should be the quantities of the goods that are to be
produced.

Production of goods depends upon the use of resources. Hence, this problem is the problem of
allocation of resources. If we allocate more resources for the production of one commodity, the
resources for the production of other commodities would be less.

2. How to produce?

The second basic problem is which technique should be used for the production of given
commodities. This problem arises because there are various techniques available for the
production of a commodity such as, for the production of wheat, we may use either more of

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 6

labour and less of capital or less of labour or more of capital. With the help of both these
techniques, we can produce equal amount of wheat. Such possibilities exist relating to the
production of other commodities also.

Therefore, every economy faces the problem as to how resources should be combined for the
production of a given commodity. The goods would be produced employing those methods
and techniques, whereby the output may be the maximum and cost of production be the
minimum.

Broadly speaking, there are two techniques of production-labour-intensive technique and

capital-intensive technique. Labour-intensive technique involves greater use of labour and
capital-intensive technique involves greater use of capital. Because of abundance of labour
India would prefer labour-intensive technique. Similarly, America will use capital-intensive
technique because of abundance of capital.

3. For whom to produce?

The main objective of producing a commodity in a country is its consumption by the people of
the country. However, even after employing all the resources of a country, it is not possible to
produce all the commodities which are required by the people. Therefore, an economy has to
decide as to for whom goods should be produced. This problem is the problem of distribution
of produced goods and services. Therefore, what goods should be consumed and by whom
depends on how national product is distributed among various people.

All the three central problems arise because resources are scarce. Had resources been unlimited,
these problems would not have arisen. For example, in the event of resources being unlimited,
we could have produced each and every thing we had wanted, we could have used any
technique and we could have produced for each and everybody.

Besides, what, how and for whom there are three more problems which are also regarded as
basic problems.

4. The problem of efficient use of resources

An economy has to face the problem of efficiently using its resources. Production can be
increased even by improving the use of resources. Resources will be deemed to be better
utilised when by reallocating them in various uses, production of a commodity can be increased
without adversely affecting the production of other commodities.

5. The problem of fuller employment of resources

In many economies, especially in developing economies, there is a tendency towards under-

utilisation of resources. Resources lying idle or not being utilised fully is a recurring problem
in many economies. This problem is particularly acute in labour-abundant economies like that
of India where large scale unemployment exists. In many economies, a vital resource like land
too remains under-utilised. Resources being relatively scarce, they should not be allowed to
remain idle as it is a waste.

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 7

 6. The Problem of Growth

The last problem is of growth. Every economy strives to increase its production for increasing
standards of living of its people. Economic growth of a country depends upon the fact as to
what extent; it can increase its resources. This problem is not confined to developing economies
alone. It is also faced by developed economies which strive for increasing their resources in
order to increase the material comforts of their technically advanced societies.

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 8

  Difference between Microeconomics and Macroeconomics
Parameters Microeconomics Macroeconomics
Meaning It may be defined as that branch of It may be defined as that branch of
economics which studies the economics which studies the
economic behaviour of the individual behaviour of not one particular unit,
unit, may be a particular household or but of all the units taken together.
a particular firm. Also known as Aggregative
Economics.
Pioneer Dr. Alfred Marshall’s magnum opus, John Maynard Keynes’ work, “General
“Principles of Economics”, published Theory of Employment, Interest and
in 1890, is considered as a leading Money” published in 1936, is a
work on microeconomics. leading work on macroeconomics.
Study It studies microeconomics variables It studies macroeconomics variables
like Consumer behaviour, Individual like GDP, CPI/WPI, Inflation etc.
demand, individual supply, individual
production cost etc.
Example Study of income and expenditure of Study of overall production, overall
an individual person or of an saving, overall consumption and
individual firm is microeconomic overall investment in the economy is
study. macroeconomic study
Approach Its approach is Inductive method, Its approach is deductive method,
which means generalizations of which means deducing individual
individual traits to reflect community traits from the community traits.
traits.
Domain  Theory of Product Pricing  Theory of Income, Output and
 Theory of Factor Pricing Employment.
 Theory of Economic Welfare  Theory of Prices
 Theory of Economic Growth with
long-term growth of income,
output and employment.
 Macro theory of Distribution
Objective  Maximize Utility  Full Employment
 Maximize Profit  Price Stability
 Minimize Cost  Economic Growth
 Favourable balance of Payment
situation

Methodology It splits up the entire economy into It deals with great averages and
smaller parts for the purpose of aggregates of the system rather than
intensive study. This, sometimes, is with particular units in it. It splits up
referred to as the Slicing Method the economy into big lumps for the
purpose of study. This, sometimes, is
referred to as the Lumping Method
Limitations Analysis is based on certain Excessive obsession of lumping the
assumptions such as ceteris paribus, sectors together despite the fact that
and that of full employment in the they are not of homogeneous
economy. In reality, neither of them character
exists.

B.B.A/ B.B.A (H) | Semester I |Microeconomics | Prof. Harsha Satramani Page 9