Sunday, February 5, 2017

Scope and subject matter of Micro Economics

         Micro Economics basically deals with
         i)        Theory of product pricing
         ii)       Theory, of factor pricing (Microtheory of distribution) .
         iii)      Theory of economic welfare

1.       Product Pricing
The theory of product pricing explains how the relative prices of cotton cloth, rice, car and thousands of other commodities are determined.

Price of a commodity depends upon the forces of demand and supply. Therefore, analysis of demand and supply side is necessary in order to explain the process of determination of price.

Study of demand side covers the analysis of consumer's behavior and study of supply side, covers the analysis of conditions of production, cost and behaviour of firm & industry.

So, theory of product pricing is subdivided into theory of demand & theory of production & cost.

2.       Factor Pricing
Theory of factor pricing i.e. Theory of distribution explains how wages (price for the use of labour) rent (payment for the use of land), interest (Price for the use of capital), profits (the reward for the entrepreneur are determined.

3.       Theory of welfare
Theory of welfare basically deals with efficiency in the allocaton of resources. Efficiency in the allocation of resources is attained when it results in maximization of satisfaction of people. Economic efficiency involves three efficiencies :

i)        Efficiency m production - Efficiency in production means producing maximum possible amount of goods, from the given amount of resources.

ii)       Efficiency in consumption - Efficiency in consumption means distribution of produced goods & services among the people for, consumption, in such away as to maximize total satisfaction of society.

iii)      Efficiency in the direction of production i.e. overall economic efficiency - Efficiency in the direction of production means production of those goods which are most desired by the people.

Micro economic theory shows under what conditions these efficiencies are achieved.

We may conclude that Micro Economics is mainly concerned with price theory and allocation of resources. It seeks, to examine the following basic economic questions:

         a)       What goods are produced with and in what quantities?
         b)       Who will produce them & how ?
         c)       To whom & how the wealth so produced shall be distributed?
         d)       How shall resources be allocated to production & consumption in efficient manner?

All these questions are in the domain of Micro Economics. Above discussion on subject matter of Micro Economics explains the scope of it.

The study of Micro Economics is mainly confined to price, theory, and resource allocation. It does not study the aggregates relating to whole economy. This approach does not stud national economic problems such as unemployment, poverty, inequality of income etc. Theory of growth, theory of business fluctuation, monetary and fiscal policies etc. are beyond the limit of Micro Economics, so it's scope is limited, compared to that of Macro Economics.