INTRODUCTION

• The term “Economics” in English language has its

origin in the Greek words “Okiou” (Household) and
“nomos” (management). “Economics is a science
which studies man’s economic behaviour concerned
with bringing about a balance between multiple
wants and limited means in such a manner that
maximum satisfaction can be obtained.”
 MICRO ECONOMICS
The term “MICRO” is derived from the Greek word
“MIKROS”. It means little or millionth part. In
micro economics, we analyze the economic
behaviour of small individual units such as
individual consumer or individual producer or
groups of individual units such as various industries
and market. Thus, micro economics means study of
economic behaviour of individual economic units.
Adam Smith is father of micro economics.
 Definitions
• 1) K.E. Boulding : “Micro Economics is the study of
particular firm, particular household, individual price,
wage, income, individual industry and particular
commodity.”
• 2) Sameulson : “Micro Economics deals with the
behaviour of individual elements in the economy such
as determination of the price of a single product or the
behaviour of a single consumer or business firm.”
• 3) P. Lerner : “Micro Economics consist of looking at
the economy through a microscope, as it were to see
how million of cells in the body economy –the
individuals or household as consumers and the
individuals or firms as producer-play there part in the
working of the whole economic organism.”
 FEATURES OF MICRO ECONOMICS
• 1) Small part or small component of national
economy : The word micro means small. Micro
economics studies small part of national economy.

• 2) Individualistic approach : It does not study the

whole economy. It studies only units. It studies the
economic behaviour of individual producer, consumer
and resource owner. The study of micro economics
deals with particular, thus its approach is individualistic.

• 3) Slicing method : The entire economy is split up in

various micro parts. This makes the study of economy
convenient i.e., sliced into small components to
simplify the study of economy.
• 4) Microscopic vision : Micro economics puts more
attention on the functioning of small segments of the
economy. Hence, it is the study of a ‘tree’ (micro) and
not ‘forest’ (macro).

• 5) Worm’s eye view : As individual aspect is studied,

the study reflects the worm’s eye view i.e., it is the
study of a specific component of the economy.

• 6) Price theory : Micro economics is also referred to as

‘price theory’ or ‘value theory’. The core of micro
economic theory is pricing of product and pricing of
factor.

• 7) Assumptions : “other “things remaining same” is

always associated with micro economic analysis. The
study is based on assumptions.
• 8) Marginal analysis : The tool used by micro economic
theory is ‘marginal analysis. [marginal means addition
contribution made by one extra unit .] E.g. Marginal utility,
marginal cost, etc.
• 9) Classical support : Traditional or classical approach is
micro approach. The classical economists believed that the
conclusions of micro economics can be extended to solve
macro economic problems.
• 10) Partial equilibrium : Equilibrium of a part is partial
equilibrium. It is the technique used by micro economics to
study the equilibrium position of an individual, a firm, an
industry or a market. It assumes other things remaining
same.
 ASSUMPTIONS OF MICRO ECONOMICS
• 1) Other things remaining same : Micro economic
principles are based on many assumptions. When
relationship between two variables is studied, the
other related variables are held constant. This helps
to concentrate on the two variables only.
• 2) Economic man : This term implies that every
individual under consideration behave in an
economically rational manner, i.e., a rational
consumer tries to maximize his level of satisfaction
and an individual producer tries to maximize his
profit.
• 3) Mobile resources : There are no rigid restrictions imposed on
mobility of economic units e.g. labour is free to enter that occupation
which fetches the highest price. The capitalist are free to invest their
funds in production activities which appear to be most profitable.

• 4) Free flow of information : Micro economic analysis assumes free

flow of complete and reliable information about market conditions
and varied opportunities.

• 5) Diminishing returns : Production over a period of time is subjected

to diminishing returns. Micro economic analysis assumes the
prevalence of the law of diminishing marginal utility.

• 6) Full employment : Micro economic analysis assumes that there is

full employment in the economy.
SCOPE OF MICRO ECONOMICS
 The fields covered by micro economics are as below:-
• 1) Theory of product/commodity pricing: The market
forces of demand and supply determines the price of
individual commodities. So demand analysis(individual
consumer behaviour) and supply analysis (individual
producer behaviour) is done with the help of micro
economics
• 2) Theory of factor pricing: The factor that contribute in
production process are land, labour, capital and
entrepreneur. They get reward in the form of rent, wages,
interest and profit respectively. Micro economics deal in
resolving such reward.Micro economics explains how rent
for land, wages of laborers, interest on capital and profit of
an entrepreneur are fixed.
• 3) Theory of economic welfare: what to produce ?
, when to produce ? , how to produce?, and for
whom to produce ?, are such question that are
answered by microeconomics which deal with
efficient allocation of resources. In short micro
economics is a guiding tool for utilizing scarce
resources of economy to maximize public welfare
MERITS / IMPORTANCE OF MICRO ECONOMICS
• 1) Working of free market economy : Micro economics helps to
understand the working of free market economy, with its millions of
consumers and producers. Micro economic theory is the basic
language of economics.

• 2) To understand the behaviour : Microeconomics helps to

understand the behaviour of an individual, consumer or producer.
Household (consumer) aims at gaining maximum satisfaction and
firm (producer) aims at gaining maximum profit.

• 3) Allocation of resources : Micro economics helps in allocating the

resources in various directions effectively. It explains how resources
are put to use on the basis of demand and supply.
• 4) Economic policies : various economic policies and
economic plans are formulated with the use
microeconomics to promote all round economic
development .e.g. Taxation policy (progressive taxation)
by the government is based on marginal utility analysis
• 5) Price determination : The most important decisions
regarding the determination of prices are taken with
the help of micro economic theories on the basis of
demand and supply.
• 6) Business planning : Micro economic concepts like
costs, demand forecasting, etc. are useful for firms to
take rational decisions regarding what, when and how
much to produce, etc.
DEMERITS (LIMITATIONS) OF
MICRO ECONOMICS
• 1) Unrealistic Assumption : What is true in case of
individual units may not be true in case of aggregates
.eg: Saving may be good for individual but not from the
point of growth of the community. In that case the
effective demand will be reduced and employment
retarded.

• 2) Other things equal : Microeconomics assumes

“Other things equal”, which are rarely same. It also
assumes “full employment “. But in reality full
employment rarely exists.

• 3) Collective functioning : Microeconomics throws no

light on collective functioning of the economy.
• 4) Economic policies : Important problem of public
finance, monetary and fiscal policies, etc .are
beyond the preview of microeconomics.

• 5) Guidance to the government : It fails to offer

guidance to the government in formulation of
appropriate policies for development of the
country.

• 6) Free enterprise: Micro economic theory assumes

‘Free enterprise But at present we find Government
interference in almost all economic activities.
 Factors affecting micro-economics
• 1 ) Suppliers

• 2) Intermediaries

• 3) Customers

• 4) Competitors

• 5) Public