INTRODUCTION

• The term “Economics” in English language has its

origin in the Greek words “Okiou” (Household) and
“nomos” (management). “Economics is a science
which studies man’s economic behaviour concerned
with bringing about a balance between multiple
wants and limited means in such a manner that
maximum satisfaction can be obtained.”
 MICRO ECONOMICS
The term “MICRO” is derived from the Greek word
“MIKROS”. It means little or millionth part. In
micro economics, we analyze the economic
behaviour of small individual units such as
individual consumer or individual producer or
groups of individual units such as various industries
and market. Thus, micro economics means study of
economic behaviour of individual economic units.
Adam Smith is father of micro economics.
 Definitions
• 1) K.E. Boulding : “Micro Economics is the study of
particular firm, particular household, individual price,
wage, income, individual industry and particular
commodity.”
• 2) Sameulson : “Micro Economics deals with the
behaviour of individual elements in the economy such
as determination of the price of a single product or the
behaviour of a single consumer or business firm.”
• 3) P. Lerner : “Micro Economics consist of looking at
the economy through a microscope, as it were to see
how million of cells in the body economy –the
individuals or household as consumers and the
individuals or firms as producer-play there part in the
working of the whole economic organism.”
 FEATURES OF MICRO ECONOMICS
• 1) Small part or small component of national
economy : The word micro means small. Micro
economics studies small part of national economy.

• 2) Individualistic approach : It does not study the

whole economy. It studies only units. It studies the
economic behaviour of individual producer, consumer
and resource owner. The study of micro economics
deals with particular, thus its approach is individualistic.

• 3) Slicing method : The entire economy is split up in

various micro parts. This makes the study of economy
convenient i.e., sliced into small components to
simplify the study of economy.
• 4) Microscopic vision : Micro economics puts more
attention on the functioning of small segments of the
economy. Hence, it is the study of a ‘tree’ (micro) and
not ‘forest’ (macro).

• 5) Worm’s eye view : As individual aspect is studied,

the study reflects the worm’s eye view i.e., it is the
study of a specific component of the economy.

• 6) Price theory : Micro economics is also referred to as

‘price theory’ or ‘value theory’. The core of micro
economic theory is pricing of product and pricing of
factor.

• 7) Assumptions : “other “things remaining same” is

always associated with micro economic analysis. The
study is based on assumptions.
• 8) Marginal analysis : The tool used by micro economic
theory is ‘marginal analysis. [marginal means addition
contribution made by one extra unit .] E.g. Marginal utility,
marginal cost, etc.
• 9) Classical support : Traditional or classical approach is
micro approach. The classical economists believed that the
conclusions of micro economics can be extended to solve
macro economic problems.
• 10) Partial equilibrium : Equilibrium of a part is partial
equilibrium. It is the technique used by micro economics to
study the equilibrium position of an individual, a firm, an
industry or a market. It assumes other things remaining
same.
MERITS / IMPORTANCE OF MICRO ECONOMICS
• 1) Working of free market economy : Micro economics helps to
understand the working of free market economy, with its millions of
consumers and producers. Micro economic theory is the basic
language of economics.

• 2) To understand the behaviour : Microeconomics helps to

understand the behaviour of an individual, consumer or producer.
Household (consumer) aims at gaining maximum satisfaction and
firm (producer) aims at gaining maximum profit.

• 3) Allocation of resources : Micro economics helps in allocating the

resources in various directions effectively. It explains how resources
are put to use on the basis of demand and supply.
• 4) Economic policies : various economic policies and
economic plans are formulated with the use
microeconomics to promote all round economic
development .e.g. Taxation policy (progressive taxation)
by the government is based on marginal utility analysis
• 5) Price determination : The most important decisions
regarding the determination of prices are taken with
the help of micro economic theories on the basis of
demand and supply.
• 6) Business planning : Micro economic concepts like
costs, demand forecasting, etc. are useful for firms to
take rational decisions regarding what, when and how
much to produce, etc.
DEMERITS (LIMITATIONS) OF
MICRO ECONOMICS
• 1) Unrealistic Assumption : What is true in case of
individual units may not be true in case of aggregates
.eg: Saving may be good for individual but not from the
point of growth of the community. In that case the
effective demand will be reduced and employment
retarded.

• 2) Other things equal : Microeconomics assumes

“Other things equal”, which are rarely same. It also
assumes “full employment “. But in reality full
employment rarely exists.

• 3) Collective functioning : Microeconomics throws no

light on collective functioning of the economy.
• 4) Economic policies : Important problem of public
finance, monetary and fiscal policies, etc are
required very broad knowledge , which is beyond
the preview of microeconomics.

• 5) Guidance to the government : It fails to offer

guidance to the government in formulation of
appropriate policies for development of the country
in all matters , It is very selective.

• 6) Free enterprise: Micro economic theory assumes

‘Free enterprise But at present we find Government
interference in almost all economic activities.
 Factor Affecting Micro economics
• 1) Suppliers : Suppliers include raw material
suppliers, and all the input providers. If the supply
was not in required quantity at right time,
automatically it affects the output, and finally the
business achieves losses in the market.
• 2) Intermediaries : The market intermediaries
include all the wholesalers, retailers. Financial
intermediaries include financiers, banks which
provide the loans to the business
organisations.
• 3) Customers : The customers are the dividers
of success or failure of every organization. The
customer is the person who purchases the
products from particular shop or company.
Therefore, the organisations prepare the
products to satisfy the customer tastes and
preferences.
• 4) Competitors : Every business organization
from the competitive world has many
competitors. The competitor facts are also
very important, which the business
organization have to consider.
• 5) Public : Public gives the permission
whether the plant should have to be
established. The public have the rights to
demand if any business organization
violates their rights and facilities.