1.The role of Microeconomics

Microeconomics studies the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets.

Microeconomics has a role in society as well as in the economy of a region. This field of study allows economists to determine not only the patterns of consumers, businesses, and other organizations that are spending money but also the factors that are affecting spending habits and production decisions. Microeconomics involves studying the concepts and ideas that establish supply and demand in a particular market and the way that consumers and businesses alike prioritize their spending.

A major role of microeconomics is to recognize the way that prices for goods and services are established in a given market. The process involves identifying the impact that supply and demand have on the way that items are produced. When there is a disconnect between the amount of supply and the interest stemming from buyers, there is an inefficiency in the market. The application of microeconomics should ultimately reveal where and how the market imbalance occurred.

2. T he Subject Matter of Microeconomics

Microeconomics studies the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets.

Goods means physical, tangible objects used to satisfy people’s wants and needs. The term ‘goods’ should be contrasted with the term ‘services’, which captures the intangible satisfaction of wants and needs. (As compared to food items and clothes, which are examples of goods, we can think of the tasks that doctors and teachers perform for us as examples of services.)

We also can differ:

– economic good (scarce good) - the quantity demanded exceeds the quantity supplied at a zero price.

– free good - the quantity supplied exceeds the quantity demanded at a zero price.

– economic bad - people are willing to pay to avoid the item.

By individual, we mean an individual decision making unit. A decision making unit can be a single person or a group like a household, a firm or any other organisation.

3. The use and limitation of Microeconomic theory

The study of Microeconomics gives us useful insight into operational aspects of an economy at the micro or individual level. The study of Microeconomic theory can help us in deciding upon the best resource allocation process for the maximisation of social welfare. The study of Microeconomic theory also helps in demand forecasting, deciding the economic policies of the government, price determination under various market situations etc. However there are certain shortcomings of the Microeconomic theory as well.

The limitations of Microeconomics are as follows:

Microeconomic theory assumes full employment in an economy. This assumption is unrealistic in the real markets. No economy or economic system in the world has witnessed or experienced the full employment scenario till date.

Microeconomic theory assumes of a 'Lassiez Faire' economic system. This means an economic system having 'No government intervention'. However, when we look around us, we realize that all economic systems across the world including the capitalist economies experience government intervention into the economic systems on a very regular basis.

Most Microeconomic theories are based on the static assumption of 'Ceteris Paribus' which means 'Other things being equal'. Again, this assumption of ceteris paribus, is unrealistic in the real markets.

Microeconomic theory sometimes leads to generalization of individual behaviour and this may not always be true or correct.

Microeconomics is only a part study of a economy and thus it does not help us much in understanding any economic system as a whole.