Importance of Microeconomics in Business Decision Making
Introduction to Microeconomics | Microeconomics
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Microeconomics plays an important role in business decision making.It helps the business managers in making production plan and trade decisions.It provides an analytical tool to examine market mechanism and helps business firms to take decision about their production and pricing policies.Following are the points that represents the importance of microeconomics in business decision making.
- Optimal resource utilization: Microeconomics tells how the productive resources are allocated in the production of various goods and services as the productive resources are scarce in the economy. It also helps to find out,what to produce, how much to produce and for whom to produce.
- Demand analysis: Microeconomic analysis helps the business firms to forecast the demand for their product.As we know ,the demand for the firm’s product would change in response to change in price of the firm’s product ,prices of other goods ,which may be substitute or complementary,consumer’s income ,his tastes and fashion ,his expectations about future changes in price ,changes in the age composition of population ,change in total population etc.
- Cost analysis: Cost analysis is an important area of microeconomics .There are many theories to explain different condition of cost in microeconomics such as fixed cost and variable cost,average cost and marginal cost,short-run cost and long-run cost. These all help the business manager to compare cost of production of different periods and thereby to evolve suitable policies in controlling costs and deriving suitable profits.
- Optimal production decision: The production decision is concerned with proper product mix.What factors are to be combined in what manner to produce a given product ? Microeconomics deals with different production techniques that help to find out the optimal production decision.
- Pricing policy: Pricing of the product is the chief function of a firm. This depends upon the cost of production and at the same time price of substitutes and the nature of competition. Price affects profits which in turn determine the existence and the growth of the firm.The microeconomic analysis provides the business manager a thorough knowledge of the theories of production and pricing in order to make sure that the firm gets profits continuously.
Thus ,the role of microeconomics is both positive and normative .It not only tells us how the economy operates but also how it should be operated to promote general welfare.