Micro economics is a branch of economics which is concerned with the analysis of the behaviour of an individual economic unit or variable. Micro economics plays a vital role in the study of modern economic theory. It is important in the following ways as described below:
Price Determination: It explain how prices of individual commodities are determined and how rewards of factors of productions are determined and distributed.
Business Decision Making: Micro economic theory help businessman to determine their price policy, maximum level of output and achievement of maximum productivity from factors combination.
Business and Production planning: Micro economic policy helps in preparing and planning of business policy, expansion of business and making investment decisions to achieve maximum output and peoductivity.
To understand the working of the economy:
It helps us in understanding the working of a free enterprise economy. It gives us an idea about how major economic decisions are taken in a market economy.
Helpful in the efficient employment of resources:
It suggests economizing, that is how efficiently the scarce available resources can be utilized in production process in an economy.
Helps in International Trade:
Micro economics is used to explain gains from internal trade, external trade, foreign exchange, balance of payment, disequilibrium and in the determination of exchange rate.
Basis of welfare economics:
The entire structure of micro economics has been built on the basis of price theory which is an important constituent of micro economics. It suggests the conditions of efficiency and explains how it can be achieved. It helps in improving the standard of living of population.
Helpful in understanding the consequences of taxation:
Imposition of tax leads to reallocation of resources from one place to another. Micro economics explains how imposition of different types of direct and indirect taxes lead to attainment of social welfare.
Tool for evaluating economic policies:
It helps the states and central government to frame economic policies like price policy, taxation policy etc. It also explains the condition of efficiency in production and consumption.
Construction and use of models:
Micro economics construct and uses simple models in order to understand the actual economic phenomenon. It uses abstract models to explain the economic phenomenon.