BASIC PROBLEMS IN MICRO ECONOMICS

CLASSIFICATION OF ECONOMICS

       There are two types of Economics:

(1) THEORETICAL ECONOMICS.

(2) APPLIED ECONOMICS.

      THEORETICAL ECONOMICS: In general, economics is a science which studies the economic activities of the people in their social life. These activities have been focused by economists through inductive and deductive methods to arrive at economic theories/principles and economic laws. These theories and laws have been put together to make theoretical economic. Theoretical economics provides us the tools which can be used to analyze the economic problems of the people.

       Theoretical Economics or Economic theory has two parts:

(A) MICRO ECONOMICS.

(B) MACRO ECONOMICS.

(A) MICRO ECONOMICS: Micro means millionth part of a thing. Therefore in micro economics we study the small segments of an economy or in other words, we take up the individual decision-making units of an economy in micro economics. For example we analyze the demand of a product or of an individual and the equilibrium price of product rather than discussing the aggregate demand of economy and the general price / reward of a factor of production, analyzes of an individual firm or industry, the consumption pattern of a person, choice of technique and different market situations etc. micro economics is generally called the price theory.

In Micro Economics, following topics are brought under discussion.

1) CONSUMER BEHAVIOR: The foremost topic that we study in Micro-Economics is the consumer’s behavior. Under this topic, different consumption theories explain as to how a consumer maximize his total utility or satisfaction his monetary resources on different consumer goods.

2) PRICE DETERMINATION: It explains as to how the interaction of demand and supply determine the price of different products. Hence, we also study the role of price mechanism in a free enterprise economy for the allocation of resources, determination of investment direction consumption pattern etc.

3) NATIONAL INCOME DISTRIBUTION: Under this topic the distribution of national income among different factors of production in the form of wages, rent, interest and profits is studied.

IMPORTANCE OF MICRO ECONOMICS

     We can realize the importance of the study of Micro-Economics from the following points.

1) UTILITY MAXIMINATION.

2) RESOURCES ALLOCATION.

3) INCOME DISTRIBUTION.

4) PRICE DETERMINATION.

5) OPTIMIZATION.

6) WELFARE POLICIES.

MERITS AND DEMERITS / LIMITIONS OF MICRO-ECONOMICS

MERITS:

1) GUIDANCE FOR CONSUMERS: It enables the consumers to allocate their income on different goods in such a way that total utility is maximized; thus helping them to avoid the wastage of resources.

2) GUIDANCE FOR PRODUCERS: It enables entrepreneurs to achieve the optimum combination of factors production and thereby it enables them to maximize their profits or at least minimize their losses. When the rewards of factors of production are determined in accordance with their marginal productivity, the chances of their exploitation are minimized. Thus it enables laborers as well to achieve suitable rewards for their productive services.

3) CO-ORDINATION BETWEEN SMALL UNITS OF ECONOMY: It also provide guidance for small segments of an economy to bear them well coordinated with each other. Moreover, the study of Micro-Economics is essential to achieve the best outcome of Macro Economics policies.

DEMERITS / LIMITATION

1) ECONOMMIC INSTABILITY: When every single firm is allowed to operate freely open economy, it would naturally go for self interest; even at the cost of national interest. Thus it would disrupt the cohesion between different productive units which will ultimately force the economy i.e. the economy which keeps on fluctuating with booms and depression.

2) EXPLOITION OF CONSUMERS: Inspite of proper guidance for the consumers the real life situation reveals that they are exploited. This happens with the rising rate of inflation in an economy. With the pace of inflation, on one head, wealth keeps on concentrating in a few hands while, on the other hand, consumers are deprived of their purchasing power. The natural inequality of income distribution in a free enterprise economy leads to exploitation of consumers.

3) EXPLOITATION OF LABOURERS: Entrepreneurs exploit their labourers by keeping their wage rate low or even lower than their marginal productivity. This happens in three ways;

    (i)  By forcing labourers to work for more hours than required under labour laws.

    (ii) By installing automatic and computerized plants to increase the marginal productivity of labour which is not followed by increase in their wage rate.

       (iii) By setting up production units in remote areas to employ labour at notoriously low wage rate.

4) ABSENCE OF LARGE SCALE PRODUCTION: Micro economic encourages setting up of small units for growth of economy. This could possibly be achieve more efficiently by initiating and encouraging large scale production.

BASIC PROBLEMS IN MICRO ECONOMICS

             

       Classical economists uphold the opinion that there is always full employment in the economy of a country under Laissez-faire capitalism. This  is so because price mechanism or the interaction of the force of demand and supply automatically rationalize the allocation of resources. The basic economic problems with come up to be automatically settled through the role of price mechanism are as under:

       1) HOW ARE THE PRODUCTIVE RESOURCES ALLOCAED?

       2) HOW IS THE LEVEL OF PRODUCTION DETERMINED?

      3) HOW IS NATIONAL PRODUCT DISTRIBUTED?

     4) HOW IS THE PRODUCTIVE CAPACITY OF THE ECONOMY MAINTAINED / DEVELOPED?