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Nature and scope of Micro Economics

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  • Nature and scope of Micro Economics

    1. Nature and scope of Micro Economics

    Micro economics is that branch of economics which analyzes the market
    behavior of individual consumers and firms to understand the decisionmaking
    process of firms and households.
    Microeconomics deals with economics decisions made at individual level.
    The individual can be a consumer, the producer/firm, or a household.
    "Microeconomics deals with the decision making and market
    results of consumers and firms".
    In detail the microeconomics deals with decisions at
    1. Consumption: The consumer aims at maximizing consumer
    satisfaction, he has to optimize his performance within the
    limitations of income and prices
    2. Production: The producer has to coordinate inputs to produce
    goods so that the out put is maximized and the cost is
    minimized. The producer has to optimize, costs and factors.
    3. Exchange: The buyers and sellers meet at the market. They
    have conflicting interests. Depending on the market the prices
    are determined which fulfill the consumer objectives as well
    as the firm objectives.
    4. Distribution: Distribution deals with determinations of factor
    prices. It is important in the determinations of factor incomes/
    household incomes.
    Micro economic theories help in the designing the models of demand
    forecasting, consumer behavior models, pricing and determination of factor
    prices.
    Most micro economic theories are partial equilibriums which provide in
    depth details of a specific economic activity.
    Economic equilibrium
    Equilibrium is a state of rest where there is no urge to change. The
    equilibrium is attained by a set of two or more economic forces.
    At equilibrium, the objectives of economic activity are achieved.
    Dr.Ranga Sai
    First Year BMM Semester I, Economics (w.e.f. June 2009) 6
    • Consumer equilibrium – consumer satisfaction is maximized;
    • Producers’ equilibrium – the cost are minimized
    • Market equilibrium – the price and quantity are so determined that are
    acceptable to both buyers and sellers.
    Economic equilibrium is not permanent. The equilibrium is valid as long as
    the factors determining it remain unchanged. Any change in any one of the
    factor, the equilibrium will undergo a change.
    Static equilibrium: In economics static equilibrium refers to rigid models
    which do not accept more or changing variables. Subject to the given
    set of variables, the equilibrium is attained. Such equilibrium may not
    have large policy applications;
    e.g. circular flow of incomes- it explains the relationship between various
    economic activities
    Dynamic equilibrium: It is an advanced economic model which gives
    relationships between several economic variables and can also
    accommodate change. Such economic models have large application in
    policy making
    e.g. input-output matrix of national income accounting provide relationships
    as well as determinants at each level of economic activity. The output
    of one sector becomes the input for the other sector. This is an
    advanced model of explaining circular flow of incomes. .
    Attached Files
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