Advantage and Disadvantage of Microeconomics

Advantage and Disadvantage of Microeconomics very important so in this post we are learn about the Use, Importance, Advantage, Limitation or Disadvantage of the Microeconomics which is very useful for the all economics 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 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 public and private sector.

The analysis of individual industries, wages and salary determination, individual taxes, international trade all rests on micro-economic foundations.

Similarly, most of the government activities can be analyzed with same concepts applied to private sector.

As for example, price determination by 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 possible course of action, measures the expected benefits and costs of each course of action.

The rational behavior leads to best use of resources. Micro- economics teaches to make best use of resources.

Micro- economics 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 improved decision-making in the area of demand analysis, optimal production decision, pricing decisions to maximize profit. It guides businessmen to determine the price of different goods and factors of production.

The use of micro-economics in business decision-making can be further elaborated as follows:

(a) Optimal resource allocation

Micro-economics is useful in 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 the productive resources are allocated 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 a 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 appropriate price to achieve its objectives. Micro-economics provides the basis for analyzing and solving the pricing problems.

It provides knowledge as to how the price of products is determined. The theory of demand, 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.

As for example, when orange becomes scarce, price rises. 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 normative theory.

As for example, when orange becomes scarce, price should increase, so that consumer will use less orange and switch or to other fruits. (Otherwise they will have to wait in queue.) Micro- economics is both positive and normative science.

5. Examine conditions of economic welfare

The normative price theory is called welfare economics. Welfare economics studies welfare of the people as producers and consumers It suggests possible ways of improving 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 government to formulate different economic policies for the welfare of the people. It gives tools and foundations for analysis of economic policy.

The economic policy influences the economy. It causes changes in allocation of resources The public policy relates to tax, loans, subsidy, price etc. 

An important tool is benefit cost analysis, which is used widely in public policy decisions. Micro-economics assists government to make 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 different taxes, benefits from international trade, correct balance of trade and payments Micro-economics can be used in contemporary micro-economic problems such as issues facing consumers, effect of government policy, control of pollution, programs to alleviate poverty, fair trade pricing etc.

Limitations / Disadvantages of Microeconomics

Micro-economics has following Limitations/Disadvantage:

1. May not be true in aggregates

The use of the conclusions of the equilibrium of small units or the partial equilibrium in case of the economy as a whole provides wrong conclusion.

Because, what is true in case of one unit may not be true in 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.

2. Assumption of full employment unrealistic

Micro-economics assumes ‘ceteris paribus’ and ‘full employment’. But this is an unrealistic assumption.

According to J.M. Keynes, the society has unemployment rather than full employment. He observed, “To assume full employment is to assume our difficulties away.”

3. Concentration on small parts

Micro-economics concentrates on small parts of the total economy. For example, it studies only about 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.

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