The Scope of Microeconomics Micro-economics studies small, individual units. This is obvious from the aforementioned definitions.
As opined by H. Craig Peterson and W. Cris Lewis “Micro-economics focuses on the behavior of the individual actors on the economic stage: firms and individuals and their interactions in markets.”
Likewise, in the words of E.K. Browning and J.M. Browning “Micro-economics is the branch of economics based on the economic behavior of ‘small’ economic units: Consumers, workers, savers, business managers, firms, individual industries and markets, and so on”.
Scope of Microeconomics
The study of individual units or individual consumers, individual firms or their small group form the scope of micro-economics. Broadly speaking, the scope of microeconomics covers the following topic.
- Theory of demand
- Theory of production and costs
- Theory of product pricing
- Theory of factor pricing
- Theory of economic welfare
Theory of demand
The goods are produced due to the consumer’s demand. Hence in micro-economics, at first the theory of demand or the theory of customer behavior is studied.
This includes the meaning, types law, and determinants of demand, elasticity of demand, law of diminishing utility, law of equity-marginal utility, indifference curve revealed preference theory and so on. Besides, the practical importance of these theories is also included in micro-economics.
Theory of production and costs
One of the important branches of economics is production and cost theory. The theory of production consists of the factors of production, concepts of different types of product and the theories like the law of variable proportions, laws of returns to scale, least-cost combinations of inputs and so on.
Similarly, the theory of costs consists of the different concepts of cost, nature of short-run and long-run costs, etc. It also includes linear programming, a mathematical technique of cost-minimization or output maximization.
Theory of product pricing
Since micro-economics studies the determination of prices of goods and services, it is also known as price theory. The relative price of different goods is determined under different market situations.
The market situations may be perfect competition, monopoly monopolistic competition, oligopoly and so on. Micro-economics studies the process of pricing of goods in these markets.
The theory of factor pricing includes the study of the costs, revenue, profit, position of loss and the behavior regarding profit maximization or cost minimization. Hence, the theory of product pricing is also known as the theory of the firm.
Theory of factor pricing
The theory of factor pricing is another important branch of micro-economics. The theory of factor pricing is also called the theory of distribution. The goods are produced with the joint efforts of land, labor, capital, and entrepreneur. These are called factors of production.
The rewards of these factors are called rent, wages, interest, and profit respectively. In factor pricing the determination of rents wages, interest and profit is studied. There are different traditional and modern theories regarding the determination of the rewards of factors of production.
Theory of economic welfare
The theory of economic welfare is also known as welfare economics. Welfare economics is an important branch of micro- economics. The normative price theory is called welfare economics. The subject matter of welfare economics includes the potential measures of maintaining economic prosperity of men as consumers and producers and to improve that prosperity or welfare.
One of the important functions of welfare economics is to define and analyze the law of economic efficiency. The economy is said to be efficient when the number of goods and services are produced so as to yield maximum satisfaction to the consumers.
The economic efficiency is the subject matter of economics. Welfare economics is an important branch of micro economics. Hence, micro-economics is intimately related to economic efficiency or welfare.
A.P. Lerner has rightly remarked, “In micro economics, we are more concerned with the avoidance or elimination waste.” Micro-economics identifies the conditions of efficiency a suggests measures to avoid inefficiency. This helps to improve economic condition of people of the