Question

Explain the scope of microeconomics

Answer 1

Micro-economics is a branch of modern economics. Micro-economics deals with a small part of the national economy. It studies the individual economic units such as individual consumer, individual producer, individual firm, the price of a particular commodity or a factor etc.

The scope of micro-economics can be explained with the following points:

1. Theory of Product Pricing

The price of an individual commodity is determined by the market forces of demand and supply. Micro-economics is concerned with demand analysis i.e. individual consumer behaviour and supply analysis i.e. individual producer behaviour. The theory of product pricing explains how the price of a commodity is determined.

2. Therory of Factor Pricing

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.

3. Theory of Economic Welfare

Theory of Economic Welfare basically deals with the efficiency in allocation of resources. Efficiency in the allocation of resources is attained when it results in maximization of satisfaction of people. Economic efficiency involves three efficiencies:

1. Efficiency in production: Efficiency in production means producing maximum possible amount of goods and services from the given amount of resources.
2. Efficiency in consumption: Efficiency in consumption means distribution of produced goods and services among the people for consumption in such a way as to maximize total satisfaction of the society.
3. Overall economic efficiency: Overall efficiency means the production of those goods which are most desired by people. Micro-economic theories show under what conditions these efficiencies are achieved. Thus, we can conclude that the scope of Micro-economics is limited to price theory (factor pricing and product pricing) and allocation of resources. It does not study the aggregates relating to the whole economy.