Advantage and Disadvantage of Microeconomics very important so in this post, we are learning about the Use, Importance, Advantage, Limitation, or Disadvantage of Microeconomics which is very useful for all economic people or general people also.
Use / Importance or Advantages of Microeconomics
Micro-economics has many theoretical and practical niches. Due to this, even the Neo-classical economists had concentrated on micro-economics. Although Keynes popularized, the importance of micro-economics has not declined.
The importance of micro-economics can be analyzed on the imports macro-economics basis of the following headings:
1. Understand the working of the economy
The knowledge of micro-economics is indispensable to know the working of the economy. The economy consists of the public and private sectors.
The analysis of individual industries, wages, and salary determination, individual taxes, international trade all rests on microeconomic foundations.
Similarly, most of the government activities can be analyzed with the same concepts applied to the private sector.
For example, price determination by the post office, cost of national defense, etc are analyzed by using micro-economics.
2. Efficient allocation of resources
Micro-economics assumes that consumers and producers act rationally. The producer surveys the possible courses of action measures the expected benefits and costs of each course of action.
Rational behavior leads to the best use of resources. Microeconomics teaches to make the best use of resources.
Microeconomics says how resources are allocated in the production of goods and services. It says which commodity is to produce, how much to produce and why to produce.
3. Useful in business decision-making
Micro-economics is applied to analyses problems faced by business executives. The price theory in the service of business executives is known as managerial economics.
It contributes to improved decision-making in the area of demand analysis, optimal production decisions, pricing decisions to maximize profit. It guides businessmen to determine the price of different goods and factors of production.
The use of microeconomics in business decision-making can be further elaborated as follows:
(a) Optimal resource allocation
Micro-economics is useful in an optimal allocation of resources The resources or factors of production are always scarce and limited with the business firm.
Hence they will have to make the optimal allocation of resources. Micro-economics tells how productive resources are allocated to the production of numerous goods and services.
It, informs – which goods to be produced, how much to d why to produce. Likewise, it informs how to distribute the produced goods and services among people for consumption.
(b) Optimal production decision
The business firm can produce goods with different alternative techniques. They have to continuously face the problem of the technique to be chosen. Because the resources like labor and capital are l maximum profit.
Micro-economics helps to solve these problems. “Micro-economics works as a powerful modern tool of managerial decision making in the solutions of such problems.” limited. O n the contrary. their objective is to earn.
(c) Pricing policy
The firms will have to face the problem of pricing their products. The firm should be able to fix the appropriate price to achieve its objectives. Micro-economics provides the basis for analyzing and solving pricing problems.
It provides knowledge as to how the price of products is determined. The theory of demand, the elasticity of demand, and other theories of consumer behavior guide a firm in making production and pricing decisions.
4. Study of human behavior
Micro-economics studies many forms of human behavior. The law of diminishing utility, equip-marginal utility, indifference curve theory all study human behavior.
Economic theory can be used simply to describe the economic phenomenon. Such descriptive theory is called positive economics.
For example, when orange becomes scarce, the price rises. The positive theory says one causes another. The scarcity of orange is the cause and price rise is the effect.
Economic theory can also be used to say what should happen. When the theory prescribes policy action, it is called a normative theory.
For example, when orange becomes scarce, the price should increase, so that consumers will use less orange and switch or to other fruits. (Otherwise, they will have to wait in a queue.) Microeconomics is both positive and normative science.
5. Examine conditions of economic welfare
The normative price theory is called welfare economics. Welfare economics studies the welfare of the people as producers and consumers It suggests possible ways of improving the welfare of people.
It helps to avoid waste and bring more social welfare. It defines and analyses the rules of economic efficiency.
6. Formulation of public policies
Micro-economics helps the government to formulate different economic policies for the welfare of the people. It gives tools and foundations for the analysis of economic policy.
The economic policy influences the economy. It causes changes in the allocation of resources The public policy relates to tax, loans, subsidy, price, etc.
An important tool is a benefit-cost analysis, which is used widely in public policy decisions. Micro-economics assists government to make the best use of scarce resources.
7. Solution of contemporary microeconomic problems
Price theory is also used in practical aspects of economics such as public finance, international trade.
It helps to analyses the effect of different taxes, benefits from international trade, the correct balance of trade, and payments Microeconomics can be used in contemporary microeconomic problems such as issues facing consumers, the effect of government policy, control of pollution, programs to alleviate poverty, fair trade pricing, etc.
Limitations / Disadvantages of Microeconomics
Micro-economics has the following Limitations/Disadvantage:
1. Excessive Generalisation
Despite the immense importance of macroeconomics, there is the danger of excessive generalization from individual experience to the system as a whole.
If an individual withdraws his deposits from the bank, there is no harm in it, but if all the persons rushed to withdraw deposits, the bank would perhaps collapse.
2. May is not true in aggregates
The use of the conclusions of the equilibrium of small units or the partial equilibrium in the case of the economy as a whole provides the wrong conclusion.
Because what is true in the case of one unit may not be true in the case of aggregates.
For example, individual saving is good since it promotes individual economic prosperity.
But if all people save, the effective demand is reduced. This, in turn, reduces the employment opportunity.
3. Assumption of full employment unrealistic
Micro-economics assumes ‘ceteris paribus’ and ‘full employment’. But this is an unrealistic assumption.
According to J.M. Keynes, society has unemployment rather than full employment. He observed, “To assume full employment is to assume our difficulties away.”
4. Concentration on small parts
Micro-economics concentrates on small parts of the total economy. For example, it studies only individual demand individual price, and so on.
Micro-economics does not give knowledge about the working of the whole economy. The knowledge of the economy as a whole is also equally important to the men.
5. Heterogeneous Elements
It may, however, be remembered that macroeconomics deals with such aggregates as aggregate consumption, saving, investment, and income, all composed of heterogeneous quantities.
Money is the only measuring rod. But the value of money itself keeps on changing, rendering economic aggregates immeasurable and incomparable in real terms.
As such, the sum or average of heterogeneous individual quantities loses their significance for accurate economic analysis and economic policy.
6. Differences within Aggregates
Under this approach, one is likely to overlook the differences within aggregates.
For example, during the first decade of planning in India (from 1951-1961) the national income increased by 42%; this, however, doesn’t mean that the income of all the constituents, i.e., the wage earners or salaried persons increased by as much as that of entrepreneurs or businessmen.
Hence, it takes no account of differences within aggregates.