Question

Explain any four points of importance of microeconomics.

Explain the importance of Microeconomics.

State the importance of microeconomics.

Answer 1

Importance of Microeconomics:

1. Price Determination: Microeconomics explains how the prices of different products and various factors of production are determined.
2. Free Market Economy: Microeconomics helps in understanding the working of a free market economy. A free market economy is an economy where the economic decisions regarding the production of goods, such as ‘What to produce? How much to produce? How to produce? etc.’ are taken at individual levels. There is no intervention by the Government or any other agency.
3. Foreign Trade: Microeconomics helps in explaining various aspects of foreign trade, like the effects of tariffs on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a particular country, etc.
4. Economic Model Building: Microeconomics helps in understanding various complex economic situations with the help of economic models. It has made a valuable contribution to economics by developing various terms, concepts, terminologies, tools of economic analysis, etc. Economic models are built using various economic variables.
5. Business Decisions: Microeconomic theories are helpful to businessmen in taking crucial business decisions. These decisions are related to the determination of the cost of production, the determination of prices of goods, the maximization of output and profit, etc.
6. Useful to Government: It is useful to the government in framing economic policies such as taxation policy, public expenditure policy, price policy, etc. These policies help the government to attain its goals of efficient allocation of resources and promoting the economic welfare of the society.
7. Basis of Welfare Economics: Microeconomics explains how the best results can be obtained through the optimum utilisation of resources and their best allocation. It also studies how taxes affect social welfare.