MICRO ECONOMICS, IT'S SCOPE, AND IMPORTSNCE

Definition and scope of micro economics, importance, where used etc

1. MICRO ECONOMICS
Introduction
Microeconomics is the branch of economics that studies the economic behavior
and decision-making of individual economic units, such as households, firms, and
industries, focusing on how they allocate scarce resources to satisfy wants and
needs. Its scope includes the theory of demand and supply, price determination, the
theory of production and costs, factor markets (wages, rent, interest, profit), and
welfare economics, all analyzed at the individual or market level.  
Definition
Microeconomics, also known as price theory, is concerned with how individuals
and firms make choices in markets. It provides a theoretical framework for
understanding: 
How limited resources are allocated. 
How individuals respond to changes in economic factors like prices and
income. 
The price mechanism that coordinates the decisions of buyers and sellers. 
The foundational concepts of   supply and demand , which determine
market prices and quantities. 
Definitions of Microeconomics by Economists
1.Prof. A. P. Lerner:
“Microeconomics consists of looking at the economy through a microscope
to analyze the behavior of individual units like a household or a firm.”
Prof. K. E. Boulding:
“Microeconomics is the study of particular firms, particular households,
individual prices, wages, incomes, individual industries, and particular

2. commodities.”
Prof. R. G. Lipsey:
“Microeconomics studies the behavior of individual decision-making units
such as consumers, resource owners, and firms.”
Prof. Edwin Mansfield:
“Microeconomics deals with the behavior of individual economic units. It
examines how they make decisions and how these decisions interact to form
larger economic outcomes.”
Scope of Microeconomics
Microeconomics is the branch of economics that deals with the study of individual
economic units—such as consumers, firms, and industries—and their interactions
in the market. It focuses on how decisions are made by these small units to allocate
limited resources efficiently.
The scope of microeconomics can be understood under the following main areas:
1. Theory of Consumer Behaviour and Demand
This area of microeconomics studies how individual consumers make decisions
about what goods and services to buy and in what quantities, given their limited
income and the prices of goods.
It covers:
Utility analysis: how consumers derive satisfaction (utility) from
consumption.
Indifference curve analysis: consumer equilibrium through marginal rate of
substitution.
Law of demand and elasticity: how quantity demanded responds to
changes in price, income, and other factors.

3. Example: Why demand for tea increases when coffee becomes expensive.
2. Theory of Production and Supply
This part studies how producers or firms decide on the quantity of goods to
produce using various inputs such as labor, land, and capital, and how they aim to
minimize costs and maximize profits.
It includes:
Production function – relation between input and output.
Law of variable proportions and returns to scale.
Supply theory – how producers respond to price changes.
Example: How a bakery decides to increase bread production when market price
rises.
3. Theory of Price Determination
Microeconomics analyses how the interaction of demand and supply determines
the price of a particular good or service in the market.
It also explains how prices adjust to changes in market conditions.
Example: The price of onions rises sharply when supply falls due to poor harvests.
4. Theory of Costs and Revenue
Firms operate to earn profits, and understanding cost and revenue behavior is
crucial for them.
This area covers:
Short-run and long-run cost curves
Average, marginal, and total costs
Revenue concepts – average revenue, marginal revenue, and total revenue
Break-even analysis

4. Example: A manufacturing firm analyzes its cost to decide whether to expand
production.
5. Theory of Factor Pricing
This branch studies how the prices of various factors of production (land, labor,
capital, and entrepreneurship) are determined in their respective markets.
It includes:
Rent theory (for land)
Wage theory (for labor)
Interest theory (for capital)
Profit theory (for entrepreneurship)
Example: Why skilled workers are paid higher wages than unskilled ones.
6. Theory of Market Structures
Microeconomics studies the nature of different types of markets and how they
affect pricing and output decisions.
The main market forms include:
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Each structure has different price-output behavior and degrees of competition.
Example: A monopoly like a railway service sets its price higher due to lack of
competition.
7. Welfare Economics

5. This branch examines how resources can be allocated to maximize social welfare.
It evaluates whether the allocation of resources is efficient and equitable.
It deals with:
Pareto efficiency (optimal allocation)
Consumer and producer surplus
Market failures and externalities
Example: Government intervention to control pollution improves social welfare.
8. Role of Government and Market Failure
Although microeconomics generally assumes free markets, it also studies cases
where markets fail to allocate resources efficiently. In such cases, government
intervention becomes necessary.
Examples of market failures include:
Public goods
Externalities (like pollution)
Imperfect competition
Information asymmetry
Example: Government imposes pollution taxes to reduce negative externalities.