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Importance of Microeconomics


In present time, microeconomics occupies a very important place in the study of economic theories. It has both theoretical as well as practical importance. The importance of microeconomics can be explained under the following headings.


1-To understand the functioning of the economy

Microeconomics helps to understand the functioning of the economy

It explains how the economic activities operate and also explains how the price of goods and services are determined in different market structures. It also tells us how the millions of producers and consumers make decisions about the allocation of resources among the millions of goods and services and by which functioning of the economy can be understood.


2-To formulate economic policy

Microeconomics helps to formulate economic policies. It is microeconomics which helps to design price policy, taxation policy and other policies in an economy. It is also helpful to design trade policy, exchange policy etc.


3-Helpful to study human behaviour

Microeconomics is very useful to study human behaviour. Various laws of microeconomics like Law of Diminishing Marginal Utility, Law of Substitution, Indifference Curve etc. help to study human behaviour and predict consumers behaviour in different market structures.


4-Efficient allocation of resources

Microeconomics is helpful in the efficient allocation of resources. As we know that resources are limited in relation to our requirements. So these resources are to be allocated efficiently to maximize benefit in both production & consumption. It is the law of substitution which gives ideas on how to maximize satisfaction with limited resources. Similarly optimum combination of inputs tells us how to maximize profit with limited resources. One can get this knowledge from the study of microeconomics.


5-Helpful in formulation of sectoral policies

An economy consists of several sectors such as industry, trade, tourism and others. It is very important to understand all these sectors before an appropriate policy is designed for them. It is microeconomics which provides a useful tool/idea to the government for making sectoral decisions and policy.


6-Useful in business decision making

Microeconomics is also very much useful in business decision making. It helps the business executives in optimum allocation of resources, in pricing, cost analysis, production decision, prediction of future demand or sales etc. The role of business decision making can be explained as follows.


6.1-Demand analysis & forecasting

Microeconomics is very helpful to analyze and forecast future demand for a product. Demand for a product depends on many factors like, the price of the product, the price of related goods, income of the consumer, taste, preference & fashion of the consumer etc. On the basis of these determinants of  demand, business firms forecast future demand and present sale of the product.


6.2-Cost analysis

Microeconomics helps to analyze different types of costs of production, factors determining cost of production and methods of minimizing cost of production. On the basis of this analysis, business firms can estimate the cost of production before making production decisions.


6.3-Price determination

One of the important functions of a firm is to determine the price of the product. The determination of the price of the product depends on the factors like demand, supply, price of related goods, nature of competition, elasticity of demand etc. which we study in microeconomics. So it is very useful in price determination as well.


6.4-Optimal production decision

Production decision is concerned with the choice of technique of  production. Business firms always face the problem of suitable technique of production because of limited resources, skills, and knowledge. Microeconomics  deals with different alternative techniques of production which helps to find out optimal production decisions.


6.5-Optimal resource utilization

All the resources are limited in relation to their requirements. Microeconomics deals with how these resources are allocated efficiently in the production of goods and services. It also helps to decide what to produce, how to produce and for whom to produce.



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