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Introduction to Microeconomics – Reference Notes for Short Questions | Economics

Introduction to Microeconomics

Microeconomics is defined as the branch of economics that deals with the action of individuals and small groups of individuals of an economy. These small groups of individuals may be households,firms, and industries consisting of several firms.

Microeconomics is also called the slicing method because:
Microeconomics is also called ‘slicing method’ because it splits up the entire economy into smaller parts for the purpose of intensive study.

Microeconomics is also called price theory because:
Microeconomics is also called price theory because it deals with the determination of the price of goods and services.It studies how prices of a particular commodity like paddy is determined; how wages, interest,rent profit are determined.

The principle variables of microeconomics:
The principal variables of microeconomics are individual income, individual expenditure, demand and supply of an individual product, relative prices, cost of production of individual firms,etc.

Scope of microeconomics:
The scope of microeconomics are as follows:

  • Theory of demand
  • Theory of production
  • Theory of product pricing
  • Theory of factor pricing
  • Theory of welfare economics
  • Different types of microeconomics analysis:

The different types of microeconomics analysis are as follows:

  • Micro static
  • Comparative micro static
  • Microdynamics

Economic theory:
An economic theory is defined as a model along with the specified and empirical economic variables, concepts and facts used to explain and predict changes.

Elements of well-defined economic theory.
The elements of well-defined economic theory are as follows:

  • Definition
  • Assumptions
  • Predictions
  • Test

Economic resources:
Economic resources refer to the services of various types of labor, capital equipment, land, and entrepreneurship. Since the supply of these resources is limited or scarce,they command a price(i.e they are economic resources.

Scarcity in economics always refers to relative scarcity. Anything is said to be scare if its demand exceeds corresponding supply ie. Anything having a finite supply is called the scare thing.

Why do central problems arise in an economy:
The central economic problems arise out of two basic facts. ie; Human wants for goods and services are unlimited and Resources to produce those goods and services are limited or scarce.

Allocation of resource:
Allocation of resources is the basic problem related to the efficient utilization of resources for the production of different goods and services. It is concerned with what to produce, how to produce and for whom to produce.

Micro Static:
Microstatic is the study of the static relationships between different microeconomic variables.It deals with the final equilibrium condition which does not involve any variation in the time element.

Comparative Micro Static:
Comparative Micro Static is the comparative study of different equilibrium positions at different points of time.It simply compares the initial equilibrium position with the final position of equilibrium.

Micro Dynamics:
Micro Economics is the study of the process through which the final position of equilibrium is reached through a series of adjustments over a series of time.

Functions of Microeconomics Theory:
The functions of Microeconomics Theory are as follows:

  • To analyze the behavior of individual economic entities.
  • To provide tools for business decision-making.
  • To provide a basis for product pricing.
  • To provide tools to formulate economic policies.

Four importance of Microeconomics:
The four importance of microeconomics are as follows:

  • Helpful to understand the workings of the economy.
  • Helpful to formulate economic policies.
  • Helpful to study human behaviors.
  • Helpful in business decision-making.

Limitations of microeconomics:
The following are the limitations of microeconomics:

  • Microeconomics is static in nature.
  • The conclusion drawn from microeconomics may be wrong from society’s point of view.
  • It has limited scope.
  • It ignores the role of the government.

Four principles of economics:
The following are the four principles of economics:

  • People face tradeoffs
  • The cost of something is what you give up to get it.
  • Rational people think at the margin.
  • People respond to incentives.

Normative economics:
Normative economics is that which studies things as they should be. It is related to the criteria of ‘What ought to be’ or what should be done. For example, it suggests to us what should be done to solve the problem of inflation.

Positive economics:
Positive economics is that which studies things as they happen in reality. It explains what is, what was, and what will be. It studies the cause-and-effect relationship between economic phenomena. For example, the law of demand studies the causes and effect of relationship between price and demand for a commodity.

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