WHAT IS MICROECONOMICS?

Microeconomics is a branch of economics that studies the behaviour of individual units such as households, individuals and enterprises within the economy. Microeconomics is distinct with the study of Macroeconomics, which studies the economy as a whole entity. Microeconomics uses demand and supply as tools of analysis to study the decisions of individual entities in the economy.

What does microeconomics study

Microeconomics studies how prices are determined in the marketplace. Manufacturers and customers initiate forces that we term them as supply and demand accordingly and it is their interaction within the marketplace that devises the price mechanism. It is also known as Price Theory as it deals with the determination of price of commodities and factors.

Importance of microeconomics

Microeconomics has both theoretical and practical importance. It helps in formulating economic policies which enhance productive efficiency and results in greater social welfare. Microeconomics explains the working of a capitalist economy where individual units are free to take their own decision. It describes how, in a free enterprise economy, individual units attain equilibrium position. It also helps the government in formulating correct price policies. It helps in efficient employment of resources by the entrepreneurs. A business economist can make conditional predictions and business forecasts with microeconomic studies. It is used to explain gains from trade, disequilibrium in the balance of payment position and determination of international exchange rate.

Limitations of microeconomics

The major limitation of microeconomics is it fails to explain the functioning of an economy as a whole. It cannot explain unemployment, poverty, illiteracy and other problems prevailing in the country.