Uses and Importance of Micro Economics

Microeconomics is deeply related to the economic behavior of the each individual sector. It occupies an important role in individual activities in both theoretical and practical sectors. Microeconomics was used as a “Single Tool” to observe social economic behavior for many centuries, if we neglect some exceptions. According to Prof. Watson, “It has many uses. The greatest of these is depth in understanding of how a free private enterprise economy operates.” The importance of microeconomics can be analyzed on the basis of following heading.

1)   To understand the working of economy:

It is microeconomics that tells us how a free market economy with its millions of consumers and producers work to decide about the allocation of productive resources among thousands of goods and services. It explains about the common economic facts like how price is determined? How wage rate and factor cost determined? Why there is wage differentiation in two classes of labor? Why price of two commodities of same type varies? How to mobilize the productive resources? Etc. Thus it tries to solve every problem related to individual consumers and firms. Same way microeconomics also explains about the role of government to regulate the free market activities for the sake of benefit of consumer and producers.

2)   Appropriate resource allocation:

A rational consumer always tries to maximize his satisfaction paying lowest price as possible. On the other hand a rational producer seeks such opportunities where he can get optimum price of his commodity and he likes to find the least cost combination of factors. Consumers and producers both know the resources are scare and they should use resources in alternative ways. So the microeconomics always try to find out that point where both consumer and producer get their optimum level of satisfaction.

3)   Study of human behavior:

Economics is deeply related to daily human economic activities. It studies many forms of human behavior. Microeconomics tells us how a person selects any particular commodity, what makes him to prefer that commodity among many commodities, how a person will be ready to pay particular amount for that commodity and its units. It also explains about the various laws of consumer like law of diminishing marginal utility, consumers, surplus, ordinal utility analysis etc.

4)   Formulation and implementation of economic policies:

Government should take the ultimate responsibility of any economic activity of a country. Government should create a good legal economic environment for the economic agents, consumer and producer. For the consumer shake they should get the goods and services in appropriate price and for the producers shake they should get the appropriate profit to continue their business. In this background, government has to formulate and implement the proper economic policy.

5)   Useful in business decision making:

During the production, distribution and post distribution, producers face various types of problems in their business. The business executives should solve those problems by making good policy and decision. The price theory in the service of business executive is known as managerial economics. The good business policy and decision one side raises the demand for commodities and other side reduces the cost of production. In the modern age, good business decision in microeconomics includes the optimal resource allocation, selection of optimal production cost, appropriate pricing policy and creating faith of consumer on own commodity for long time.

6)   Adoption of welfare economics:

Microeconomics classifies the market into perfect and imperfect competition. Imperfect competition includes the monopoly, duopoly, oligopoly, and monopolistic etc types. Such types of imperfect market lead to some competitive high price of commodities and hence lower level of welfare of people and society and it also exhibits the loss of economic efficiency. It has been realized by experience that less the competition in markets higher the inefficiency. Microeconomics shows how imperfect competition misallocate the resources and therefore loss of efficiency and hence welfare. To solve all such types of problems microeconomics ensure the efficiency and welfare by preferring the concept of perfect competition market in economy.

7)   Solution for contemporary short run problems:

Microeconomics deeply analyze about the consumer behavior and producers behaviors. During the production distribution a firm faces various types of problems like tax policy of government, international trade and relations, challenge from competitors, problems of efficient human resource and technology etc. To solve such types of contemporary problems microeconomics provides the appropriate solutions such as how to face to consumers, effect of government policy, managing the pollution, fear trade pricing, selection of right human resource and technology etc.

8)   Other importance:

Microeconomics studies the whole market activities by separating the subject matter into various small parts. For example microeconomics deals with demand analysis, production analysis, cost analysis, theory of product pricing, factor pricing, theory of welfare economics etc. So concept of all those part make valuable to the microeconomics

One thought on “Uses and Importance of Micro Economics”

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